**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

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

**EXCHANGE      ACT OF 1934**

**For      the quarterly period ended March 31, 2006**

**001-11663**
** **

**(Commission      File Number)**

**COMMUNITY      BANKS, INC**
**.      **

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

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

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

**(717)      920-1698**

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

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

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

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

**Number      of shares outstanding as of April 30, 2006**

| **CAPITAL                STOCK-COMMON** | **23,832,000**                          |
|-----------------------------------------|-----------------------------------------|
| **(Title                of Class)**     | **(Outstanding                Shares)** |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**FORM      10-Q**

**INDEX      **

| **PART                I - Financial Information** | **Page**                                                                                               |
|---------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                              |                                                                                                   |   |
| Item                1.                            | Financial                Statements                                                                    |   |
|                                              |                                                                                                   |   |
|                                              | Consolidated                Interim Balance                Sheets                                      | 3 |
|                                              | Consolidated                Interim Statements of                Income                                | 4 |
|                                              | Consolidated                Interim Statements of Changes in Stockholders’                Equity | 5 |
|                                              | Consolidated                Interim Statements of Cash                Flows                            | 6 |
|                                              | Notes                to Consolidated Interim Financial                Statements                       | 7                -                12 |
|                                              |                                                                                                   |   |
| Item                2.                            | Management’s                Discussion and Analysis of Financial Condition                and    |   |
|                                              | Results                of Operations                                                                   | 13                - 24 |
|                                              |                                                                                                   |   |
| Item                3.                            | Quantitative                and Qualitative Disclosures About Market                Risk               | 25 |
|                                              |                                                                                                   |   |
| Item                4.                            | Controls                and Procedures                                                                 | 26 |
|                                              |                                                                                                   |   |
|                                              |                                                                                                   |   |
| **PART                II - Other Information**    |                                                                                                   |
|                                              |                                                                                                   |   |
| Item                1.                            | Legal                Proceedings                                                                       | 27 |
|                                              |                                                                                                   |   |
| Item                1A.                           | Risk                Factors                                                                            | 27 |
|                                              |                                                                                                   |   |
| Item                2.                            | Unregistered                Sales of Equity Securities and Use of                Proceeds              | 27 |
|                                              |                                                                                                   |   |
| Item                3.                            | Defaults                Upon Senior                Securities                                          | 27 |
|                                              |                                                                                                   |   |
| Item                4.                            | Submission                of Matters to a Vote of Security                Holders                      | 27 |
|                                              |                                                                                                   |   |
| Item                5.                            | Other                Information                                                                       | 27 |
|                                              |                                                                                                   |   |
| Item                6.                            | Exhibits                                                                                               | 28 |
|                                              |                                                                                                   |   |
|                                              |                                                                                                   |   |
| **SIGNATURES**                                    | 29                                                                                                     |
|                                              |                                                                                                   |   |

----

**PART      I - FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM BALANCE SHEETS**

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

|                                                                                                                        |   | **March                31,** |      | **December                31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|---------------------------------|--------|
|                                                                                                                        |   | **2006**                     |      | **2005**                        |   |
| **ASSETS**                                                                                                                  |   | **(Unaudited)**              |      |                            |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| Cash                and due from banks                                                                                      |   | $                            | 74,297    |                            | $      | 76,820 |   |
| Federal                funds sold                                                                                           |   |                         | 9,279     |                            |   | --- |   |
| Cash                and cash equivalents                                                                                    |   |                         | 83,576    |                            |   | 76,820 |   |
| Interest-bearing                deposits in other banks                                                                     |   |                         | 75,870    |                            |   | 4,423 |   |
| Investment                securities, available for sale                                                                    |   |                         | 565,741   |                            |   | 605,555 |   |
| Investment                securities, held to maturity (fair value approximates                $22,615 and $22,563)         |   |                         | 23,040    |                            |   | 23,030 |   |
| Loans,                net of allowance for loan losses of $23,310 and $22,965                                               |   |                         | 2,263,510 |                            |   | 2,214,100 |   |
| Premises                and equipment, net                                                                                  |   |                         | 43,380    |                            |   | 43,283 |   |
| Goodwill                and other intangible assets                                                                         |   |                         | 258,359   |                            |   | 259,080 |   |
| Accrued                interest receivable and other assets                                                                 |   |                         | 108,086   |                            |   | 106,139 |   |
| Total                assets                                                                                                 |   | $                            | 3,421,562 |                            | $      | 3,332,430 |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| **LIABILITIES**                                                                                                             |   |                         |      |                            |   |   |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| Deposits                                                                                                                    |   |                         |      |                            |   |   |   |
| Non-interest                bearing                                                                                         |   | $                            | 364,030   |                            | $      | 375,835 |   |
| Interest                bearing                                                                                             |   |                         | 2,009,835 |                            |   | 1,918,532 |   |
| Total                deposits                                                                                               |   |                         | 2,373,865 |                            |   | 2,294,367 |   |
| Short-term                borrowings                                                                                        |   |                         | 55,005    |                            |   | 87,253 |   |
| Long-term                debt                                                                                               |   |                         | 443,275   |                            |   | 430,719 |   |
| Subordinated                debt                                                                                            |   |                         | 51,548    |                            |   | 30,928 |   |
| Accrued                interest payable and other liabilities                                                               |   |                         | 22,282    |                            |   | 12,490 |   |
| Total                liabilities                                                                                            |   |                         | 2,945,975 |                            |   | 2,855,757 |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| **STOCKHOLDERS’                EQUITY**                                                                               |   |                         |      |                            |   |   |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| Preferred                stock, no par value; 500,000 shares                                                                |   |                         |      |                            |   |   |   |
| authorized;                no shares issued and outstanding                                                                 |   |                         | ---       |                            |   | --- |   |
| Common                stock, $5.00 par value; 50,000,000 shares                                                             |   |                         |      |                            |   |   |   |
| authorized;                24,478,000 and 23,314,000 shares issued                                                          |   |                         | 122,392   |                            |   | 116,572 |   |
| Surplus                                                                                                                     |   |                         | 372,178   |                            |   | 347,827 |   |
| Retained                Earnings                                                                                            |   |                         | 2,420     |                            |   | 27,031 |   |
| Accumulated                other comprehensive loss, net of tax                                                             |   |                         | (4,368    | )                               |   | (3,779 | ) |
| Treasury                stock; 647,000 and 399,000 shares, at cost                                                          |   |                         | (17,035   | )                               |   | (10,978 | ) |
| Total                stockholders’ equity                                                                             |   |                         | 475,587   |                            |   | 476,673 |   |
| Total                liabilities and stockholders’ equity                                                             |   | $                            | 3,421,562 |                            | $      | 3,332,430 |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM STATEMENTS OF      INCOME**

**(Unaudited)**

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

|                                                               |   | **Three                Months Ended** |   |
|--------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                               |   | **March                31,**          |   |
|                                                               |   | **2006**                              |   | **2005** |   |
| **INTEREST                INCOME:**                                |   |                                  |   |   |   |   |   |
| Loans,                including fees                               |   | $                                     | 39,101 |   | $ | 19,058 |   |
| Investment                securities:                              |   |                                  |   |   |   |   |   |
| Taxable                                                            |   |                                  | 4,413  |   |   | 4,249 |   |
| Tax                exempt                                          |   |                                  | 2,368  |   |   | 2,184 |   |
| Dividends                                                          |   |                                  | 614    |   |   | 541 |   |
| Other                                                              |   |                                  | 393    |   |   | 151 |   |
| Total                interest income                               |   |                                  | 46,889 |   |   | 26,183 |   |
|                                                               |   |                                  |   |   |   |   |   |
| **INTEREST                EXPENSE:**                               |   |                                  |   |   |   |   |   |
| Deposits                                                           |   |                                  | 13,421 |   |   | 6,060 |   |
| Short-term                borrowings                               |   |                                  | 696    |   |   | 157 |   |
| Long-term                debt                                      |   |                                  | 5,111  |   |   | 4,817 |   |
| Subordinated                debt                                   |   |                                  | 797    |   |   | 459 |   |
| Total                interest expense                              |   |                                  | 20,025 |   |   | 11,493 |   |
| Net                interest income                                 |   |                                  | 26,864 |   |   | 14,690 |   |
| Provision                for loan losses                           |   |                                  | 500    |   |   | 550 |   |
| Net                interest income after provision for loan losses |   |                                  | 26,364 |   |   | 14,140 |   |
|                                                               |   |                                  |   |   |   |   |   |
| **NON-INTEREST                INCOME:**                            |   |                                  |   |   |   |   |   |
| Investment                management and trust services            |   |                                  | 1,013  |   |   | 414 |   |
| Service                charges on deposit accounts                 |   |                                  | 2,531  |   |   | 1,793 |   |
| Other                service charges, commissions and fees         |   |                                  | 1,700  |   |   | 1,010 |   |
| Insurance                premium income and commissions            |   |                                  | 928    |   |   | 902 |   |
| Mortgage                banking activities                         |   |                                  | 468    |   |   | 515 |   |
| Earnings                on investment in life insurance            |   |                                  | 656    |   |   | 399 |   |
| Investment                security gains                           |   |                                  | 283    |   |   | 51 |   |
| Other                                                              |   |                                  | 805    |   |   | 126 |   |
| Total                non-interest income                           |   |                                  | 8,384  |   |   | 5,210 |   |
|                                                               |   |                                  |   |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                          |   |                                  |   |   |   |   |   |
| Salaries                and employee benefits                      |   |                                  | 11,418 |   |   | 7,293 |   |
| Net                occupancy                                       |   |                                  | 3,512  |   |   | 2,148 |   |
| Marketing                expense                                   |   |                                  | 575    |   |   | 445 |   |
| Telecommunications                expense                          |   |                                  | 551    |   |   | 304 |   |
| Amortization                of intangibles                         |   |                                  | 654    |   |   | 44 |   |
| Other                                                              |   |                                  | 3,823  |   |   | 2,425 |   |
| Total                non-interest expenses                         |   |                                  | 20,533 |   |   | 12,659 |   |
|                                                               |   |                                  |   |   |   |   |   |
| Income                before income taxes                          |   |                                  | 14,215 |   |   | 6,691 |   |
| Income                taxes                                        |   |                                  | 3,646  |   |   | 1,204 |   |
| Net                income                                          |   | $                                     | 10,569 |   | $ | 5,487 |   |
|                                                               |   |                                  |   |   |   |   |   |
| **CONSOLIDATED                PER SHARE DATA**                     |   |                                  |   |   |   |   |   |
| Basic                earnings per share                            |   | $                                     | 0.44   |   | $ | 0.43 |   |
| Diluted                earnings per share                          |   | $                                     | 0.44   |   | $ | 0.42 |   |
| Dividends                declared                                  |   | $                                     | 0.19   |   | $ | 0.16 |   |
|                                                               |   |                                  |   |   |   |   |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**For      the Three Months Ended March 31, 2006 and 2005**

**(Unaudited:      Dollars in Thousands)**

|                                                                                                                        |   | **Outstanding** |   | **Common** |   |        |   | **Retained** |    | **Accumulated****Other****Comprehensive** |   | **Treasury** |   | **Total**  |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------|--------|-------------|--------|--------------|---------|-------------------------------------------|--------|--------------|--------|------------|--------|
|                                                                                                                        |   | **Shares**      |   | **Stock**  |   | **Surplus** |   | **Earnings** |    | **Income                (Loss)**          |   | **Stock**    |   | **Equity** |   |
| **Balance,                January 1, 2005**                                                                                 |   |            | 12,236 |       | $      | 62,107      |   | $            | 73,304  |                                      | $      | 18,134       |   | $          | 3,211  |   | $ | (4,415 | ) | $ | 152,341 |   |
| Comprehensive                income (loss):                                                                                 |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   | 5,487        |   |       |   |   |   |   |   |   | 5,487 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (5,471 | ) |   |   |   |   | (5,471 | ) |
| Change                in unfunded pension liability, net of tax                                                             |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (90    | ) |   |   |   |   | (90 | ) |
| Total                comprehensive income (loss)                                                                            |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   | (74 | ) |
| Cash                dividends ($0.16 per share)                                                                             |   |            |   |       |   |        |   |         |    |                                      |   | (2,093       | )      |       |   |   |   |   |   |   | (2,093 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 76     |       |   | (4          | )      |         |    |                                      |   | (299         | )      |       |   |   |   | 1,817 |   |   | 1,514 |   |
| Tax                benefits from employee stock transactions                                                                |   |            |   |       |   |        |   |         | 70      |                                      |   |         |   |       |   |   |   |   |   |   | 70 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                March 31, 2005**                                                                                  |   |            | 12,312 |       | $      | 62,103      |   | $            | 73,374  |                                      | $      | 21,229       |   | $          | (2,350 | ) | $ | (2,598 | ) | $ | 151,758 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                January 1, 2006**                                                                                 |   |            | 22,915 |       | $      | 116,572     |   | $            | 347,827 |                                      | $      | 27,031       |   | $          | (3,779 | ) | $ | (10,978 | ) | $ | 476,673 |   |
| Comprehensive                income (loss):                                                                                 |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   | 10,569       |   |       |   |   |   |   |   |   | 10,569 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (589   | ) |   |   |   |   | (589 | ) |
| Total                comprehensive income                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   | 9,980 |   |
| Cash                dividends ($0.19 per share)                                                                             |   |            |   |       |   |        |   |         |    |                                      |   | (4,545       | )      |       |   |   |   |   |   |   | (4,545 | ) |
| 5%                stock dividend                                                                                            |   |            | 1,133  |       |   | 5,820       |   |         | 24,162  |                                      |   | (29,982      | )      |       |   |   |   |   |   |   | --- |   |
| Purchases                of treasury stock                                                                                  |   |            | (264   | )          |   |        |   |         |    |                                      |   |         |   |       |   |   |   | (7,349 | ) |   | (7,349 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 47     |       |   |        |   |         |    |                                      |   | (653         | )      |       |   |   |   | 1,292 |   |   | 639 |   |
| Compensation                and tax benefits from employee stock transactions                                               |   |            |   |       |   |        |   |         | 189     |                                      |   |         |   |       |   |   |   |   |   |   | 189 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                March 31, 2006**                                                                                  |   |            | 23,831 |       | $      | 122,392     |   | $            | 372,178 |                                      | $      | 2,420        |   | $          | (4,368 | ) | $ | (17,035 | ) | $ | 475,587 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM STATEMENTS OF CASH      FLOWS**

**(Unaudited)**

**(Dollars      in thousands)**

|                                                                                                                        |   | **Three                Months Ended** |    |
|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                                                        |   | **March                31,**          |    |
|                                                                                                                        |   | **2006**                              |    | **2005** |   |
|                                                                                                                        |   |                                  |    |   |   |
| **Operating                Activities:**                                                                                    |   |                                  |    |   |   |   |   |
| Net                income                                                                                                   |   | $                                     | 10,569  |   | $ | 5,487 |   |
| Adjustments                to reconcile net income to net cash                                                              |   |                                  |    |   |   |   |   |
| provided                by operating activities:                                                                            |   |                                  |    |   |   |   |   |
| Provision                for loan losses                                                                                    |   |                                  | 500     |   |   | 550 |   |
| Depreciation                and amortization                                                                                |   |                                  | 1,817   |   |   | 840 |   |
| Stock                option expense                                                                                         |   |                                  | 118     |   |   | --- |   |
| Net                amortization of securities                                                                               |   |                                  | 144     |   |   | 281 |   |
| Realized                gains on sales of available-for-sale securities, net                                                |   |                                  | (283    | ) |   | (51 | ) |
| Loans                originated for sale                                                                                    |   |                                  | (1,335  | ) |   | (1,974 | ) |
| Proceeds                from sales of loans held for sale                                                                   |   |                                  | 711     |   |   | 1,115 |   |
| Gains                on loan sales                                                                                          |   |                                  | (14     | ) |   | (47 | ) |
| Earnings                on investment in life insurance                                                                     |   |                                  | (656    | ) |   | (399 | ) |
| Net                change in other assets                                                                                   |   |                                  | (407    | ) |   | (2,294 | ) |
| Net                change in accrued interest payable and other liabilities                                                 |   |                                  | 9,791   |   |   | 1,205 |   |
| Tax                benefits from employee stock transactions                                                                |   |                                  | ---     |   |   | 70 |   |
| Net                cash provided by operating activities                                                                    |   |                                  | 20,955  |   |   | 4,783 |   |
|                                                                                                                        |   |                                  |    |   |   |   |   |
| **Investing                Activities:**                                                                                    |   |                                  |    |   |   |   |   |
| Net                change in interest-bearing deposits in other banks                                                       |   |                                  | (71,447 | ) |   | 1,175 |   |
| Activity                in available-for-sale securities:                                                                   |   |                                  |    |   |   |   |   |
| Sales                                                                                                                       |   |                                  | 38,557  |   |   | 14,678 |   |
| Maturities,                prepayments and calls                                                                            |   |                                  | 13,030  |   |   | 16,773 |   |
| Purchases                                                                                                                   |   |                                  | (12,585 | ) |   | (11,722 | ) |
| Maturities,                prepayments and calls in investment securities held to                maturity                   |   |                                  | (8      | ) |   | --- |   |
| Net                increase in total loans                                                                                  |   |                                  | (49,726 | ) |   | (30,234 | ) |
| Additions                to premises and equipment                                                                          |   |                                  | (1,261  | ) |   | (755 | ) |
| Net                cash used in investing activities                                                                        |   |                                  | (83,440 | ) |   | (10,085 | ) |
|                                                                                                                        |   |                                  |    |   |   |   |   |
| **Financing                Activities:**                                                                                    |   |                                  |    |   |   |   |   |
| Net                increase in deposits                                                                                     |   |                                  | 79,498  |   |   | 42,713 |   |
| Net                change in short-term borrowings                                                                          |   |                                  | (32,249 | ) |   | (8,899 | ) |
| Proceeds                from issuance of long-term debt                                                                     |   |                                  | 75,620  |   |   | 25,000 |   |
| Repayment                of long-term debt                                                                                  |   |                                  | (42,444 | ) |   | (1,720 | ) |
| Cash                dividends and cash paid in lieu of fractional shares                                                    |   |                                  | (4,545  | ) |   | (2,093 | ) |
| Purchases                of treasury stock                                                                             |   |                                  | (7,349  | ) |   | --- |   |
|                    Tax benefits from employee stock transactions                                             |   |                                  | 71      |   |   | --- |   |
| Proceeds                from issuance of common stock                                                                       |   |                                  | 639     |   |   | 1,514 |   |
| Net                cash provided by financing activities                                                                    |   |                                  | 69,241  |   |   | 56,515 |   |
|                                                                                                                        |   |                                  |    |   |   |   |   |
| Net                change in cash and cash equivalents                                                                      |   |                                  | 6,756   |   |   | 51,213 |   |
|                                                                                                                        |   |                                  |    |   |   |   |   |
| Cash                and cash equivalents at beginning of period                                                             |   |                                  | 76,820  |   |   | 43,486 |   |
| Cash                and cash equivalents at end of period                                                                   |   | $                                     | 83,576  |   | $ | 94,699 |   |
|                                                                                                                        |   |                                  |    |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED INTERIM FINANCIAL      STATEMENTS**

**(Unaudited)**

**1.      **
**Summary      of Significant Accounting Policies**

***Basis      of Presentation***

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

***Earnings      Per Share -***

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

|                                                         |   | **Three                Months Ended****March                31,** |   |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                         |   | **2006**                                                          |   | **2005** |   |
| Net                income                                    |   | $                                                                 | 10,569 |   | $ | 5,487 |   |
|                                                         |   |                                                              |   |   |   |   |   |
| Weighted                average shares outstanding (basic)   |   |                                                              | 23,983 |   |   | 12,907 |   |
| Effect                of dilutive stock options              |   |                                                              | 229    |   |   | 285 |   |
| Weighted                average shares outstanding (diluted) |   |                                                              | 24,212 |   |   | 13,192 |   |
|                                                         |   |                                                              |   |   |   |   |   |
| Per                share information:                        |   |                                                              |   |   |   |   |   |
| Basic                earnings per share                      |   | $                                                                 | 0.44   |   | $ | 0.43 |   |
| Diluted                earnings per share                    |   |                                                              | 0.44   |   |   | 0.42 |   |

***Comprehensive      Income(Loss)***

|                                            |   | **Three                Months Ended****March                31,** |   |
|-------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                            |   | **2006**                                                          |   | **2005** |   |
| Unrealized                holding losses        |   |                                                              |   |   |   |   |   |
| on                available-for-sale securities |   | $                                                                 | (623   | ) | $ | (8,366 | ) |
| Reclassification                adjustments for |   |                                                              |   |   |   |   |   |
| gains                included in net income     |   |                                                              | (283   | ) |   | (51 | ) |
| Net                unrealized losses            |   |                                                              | (906   | ) |   | (8,417 | ) |
| Tax                effect                       |   |                                                              | 317    |   |   | 2,946 |   |
|                                            |   |                                                              |   |   |   |   |   |
| Net-of-tax                amount                |   |                                                              | (589   | ) |   | (5,471 | ) |
|                                            |   |                                                              |   |   |   |   |   |
| Unfunded                pension liability       |   |                                                              | ---    |   |   | (138 | ) |
| Tax                effect                       |   |                                                              | ---    |   |   | 48 |   |
|                                            |   |                                                              |   |   |   |   |   |
| Net-of-tax                amount                |   |                                                              | ---    |   |   | (90 | ) |
|                                            |   | $                                                                 | (589   | ) | $ | (5,561 | ) |

|                                                                |   | **March                31,****2006** |   | **December                31,****2005** |   |
|---------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------|--------|
| Net                unrealized loss on available-for-sale securities |   | $                                    | (3,226 | )                                       | $      | (2,320 | ) |
| Tax                effect                                           |   |                                 | 1,129  |                                    |   | 812 |   |
| Net-of-tax                amount                                    |   |                                 | (2,097 | )                                       |   | (1,508 | ) |
|                                                                |   |                                 |   |                                    |   |   |   |
| Unfunded                pension liability                           |   |                                 | (3,494 | )                                       |   | (3,494 | ) |
| Tax                effect                                           |   |                                 | 1,223  |                                    |   | 1,223 |   |
| Net-of-tax                amount                                    |   |                                 | (2,271 | )                                       |   | (2,271 | ) |
|                                                                |   |                                 |   |                                    |   |   |   |
| Accumulated                other comprehensive loss                 |   | $                                    | (4,368 | )                                       | $      | (3,779 | ) |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Recent      Accounting Pronouncements***

***SFAS      155***
**      - **

***SFAS      156***
**      - **

***Reclassifications***

**2.      **
**Acquisition:**
** **

| (in                thousands, except per share data) |   | **Three                Months Ended March 31, 2005** |   |
|------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                 |   |                                                 |   |   |
| Net                interest income                   |   | $                                                    | 24,794 |   |
| Other                income                          |   |                                                 | 8,174  |   |
| Net                income                            |   |                                                 | 9,210  |   |
| Diluted                earnings per common share     |   | $                                                    | 0.37   |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

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

|                                                          |   | **Three                Months Ended March 31,****2006** |   | **Year                Ended December 31, 2005** |   | **Three                Months Ended****March                31,****2005** |   |
|---------------------------------------------------------------|--------|---------------------------------------------------------|--------|-------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                                          |   |                                                    |   |                                            |   |                                                                      |   |   |   |   |
| Balance,                January 1                             |   | $                                                       | 22,965 |                                            | $      | 14,421                                                                    |   | $ | 14,421 |   |
| Provision                for loan losses                      |   |                                                    | 500    |                                            |   | 2,300                                                                     |   |   | 550 |   |
| Loan                charge-offs                               |   |                                                    | (314   | )                                               |   | (2,323                                                                    | )      |   | (460 | ) |
| Recoveries                                                    |   |                                                    | 159    |                                            |   | 1,499                                                                     |   |   | 243 |   |
| Allowance                established for acquired credit risk |   |                                                    | ---    |                                            |   | 7,068                                                                     |   |   | --- |   |
| Balance,                end of period                         |   | $                                                       | 23,310 |                                            | $      | 22,965                                                                    |   | $ | 14,754 |   |

|                                             |   | **March                31,****2006** |   | **December                31,****2005** |   | **March                31,****2005** |   |
|--------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|--------|
|                                             |   |                                 |   |                                    |   |                                 |   |   |   |   |
| Non-accrual                loans                 |   | $                                    | 10,102 |                                    | $      | 9,060                                |   | $ | 5,807 |   |
| Loans                renegotiated with borrowers |   |                                 | 110    |                                    |   | ---                                  |   |   | --- |   |
| Foreclosed                real estate            |   |                                 | 1,728  |                                    |   | 1,447                                |   |   | 1,935 |   |
| Total                non-performing assets       |   |                                 | 11,940 |                                    |   | 10,507                               |   |   | 7,742 |   |
| Accruing                loans 90 days past due   |   |                                 | 29     |                                    |   | 22                                   |   |   | --- |   |
| Total                risk elements               |   | $                                    | 11,969 |                                    | $      | 10,529                               |   | $ | 7,742 |   |

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

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

**5.      **
**Stock-Based      Plans:**

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

|                                                            |   | **Three                Months Ended March 31, 2005** |   |
|-----------------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                            |   |                                                 |   |   |
| Net                income, as reported                          |   | $                                                    | 5,487  |   |
| Deduct:                Total stock-based compensation           |   |                                                 |   |   |
| expense                determined under fair value based        |   |                                                 |   |   |
| method                for all awards, net of related tax effect |   |                                                 | (776   | ) |
| Pro                forma net income                             |   | $                                                    | 4,711  |   |
|                                                            |   |                                                 |   |   |
| Earnings                per share:                              |   |                                                 |   |   |
| Basic                - as reported                              |   | $                                                    | 0.43   |   |
| Basic                - pro forma                                |   | $                                                    | 0.36   |   |
|                                                            |   |                                                 |   |   |
| Diluted                - as reported                            |   | $                                                    | 0.42   |   |
| Diluted                - pro forma                              |   | $                                                    | 0.36   |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

|                                                   |   |  Shares                UnderOption                (000’s) |   | WeightedAverageExercise                Price |   |  Weighted-Average                Remaining Contractual Life |   |
|--------------------------------------------------------|--------|----------------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------------------------------|--------|
| Outstanding                options, December 31, 2005  |   |                                                                 | 1,110  |                                         | $      | 20.03                                                            |   |   |   |   |
| Granted                                                |   |                                                                 | 255    |                                         |   | 27.41                                                            |   |   |   |   |
| Exercised                                              |   |                                                                 | (37    | )                                            |   | 13.73                                                            |   |   |   |   |
| Outstanding                options, March 31, 2006     |   |                                                                 | 1,328  |                                         | $      | 21.62                                                            |   |   | 6.2                Years |   |
| Outstanding                exercisable, March 31, 2006 |   |                                                                 | 1,002  |                                         | $      | 20.30                                                            |   |   | 6.1                Years |   |

----

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

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

**OVERVIEW**

**PREAMBLE**

**Forward-Looking      Statements**

----

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

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

**Critical      Accounting Policies**

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

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

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

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

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

----

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

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

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

**GAAP      versus Non-GAAP**

**SUMMARY      OF FINANCIAL AND OPERATING RESULTS**

----

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

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

----

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

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

|                                                         |   |                              |      |
|--------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                         |   | Three                Months Ended |      |
| (Dollars                in thousands, except per share data) |   | March                31, 2006     |      | December                31, 2005 |   | March                31, 2005 |   |
|                                                         |   |                              |      |   |   |   |   |   |   |   |
| Net                operating (tangible) income               |   | $                                 | 10,994    |   | $ | 11,525 |   | $ | 5,523 |   |
| Average                tangible assets                       |   | $                                 | 3,124,522 |   | $ | 3,056,153 |   | $ | 1,978,090 |   |
| Average                tangible equity                       |   | $                                 | 221,552   |   | $ | 219,459 |   | $ | 151,366 |   |
| Operating                return on average tangible assets   |   |                              | 1.43      | % |   | 1.50 | % |   | 1.13 | % |
| Operating                return on average tangible equity   |   |                              | 20.12     | % |   | 20.83 | % |   | 14.80 | % |
| Tangible                book value at end of period          |   | $                                 | 9.19      |   | $ | 9.12 |   | $ | 11.35 |   |

**STATEMENT      OF CONDITION**

|                                                            |   | **March** **31,** |      | **Change** |   |
|-----------------------------------------------------------------|--------|------------------------|-----------|------------|--------|
|                                                            |   | **2006**               |      | **2005**   |   | Volume |   |  % |   |
| Cash                and due from banks                          |   | $                      | 59,253    |       | $      | 37,99435,187 |   | $ | 21,259 |   |   | 56 | % |
| Federal                funds sold and other                     |   |                   | 3,331     |       |   | 24,022 |   |   | (20,691 | ) |   | 86 | % |
| Investments                                                     |   |                   | 613,891   |       |   | 613,074 |   |   | 817 |   |   | --- |   |
| Loans                                                           |   |                   | 2,289,979 |       |   | 1,233,147 |   |   | 1,056,832 |   |   | 86 | % |
| Allowance                for loan losses                        |   |                   | 23,172    |       |   | 14,533 |   |   | 8,639 |   |   | 59 | % |
| Net                loans                                        |   |                   | 2,266,807 |       |   | 1,218,614 |   |   | 1,048,193 |   |   | 86 | % |
| Goodwill                and identifiable intangibles            |   |                   | 258,689   |       |   | 5,029 |   |   | 253,660 |   |   | NM* |   |
| Other                assets                                     |   |                   | 181,240   |       |   | 84,386 |   |   | 96,854 |   |   | 115 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Total                assets                                     |   | $                      | 3,383,211 |       | $      | 1,983,119 |   | $ | 1,400,092 |   |   | 71 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                deposits                     |   | $                      | 373,637   |       | $      | 183,048 |   | $ | 190,589 |   |   | 104 | % |
| Interest-bearing                deposits                        |   |                   | 1,928,261 |       |   | 1,143,712 |   |   | 784,549 |   |   | 69 | % |
| Short-term                borrowings                            |   |                   | 68,524    |       |   | 31,106 |   |   | 37,418 |   |   | 120 | % |
| Long-term                debt                                   |   |                   | 467,010   |       |   | 425,318 |   |   | 41,692 |   |   | 10 | % |
| Subordinated                debt                                |   |                   | 44,674    |       |   | 30,928 |   |   | 13,746 |   |   | 44 | % |
| Other                liabilities                                |   |                   | 22,598    |       |   | 12,612 |   |   | 9,986 |   |   | 79 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                |   |                   | 2,904,704 |       |   | 1,826,724 |   |   | 1,077,980 |   |   | 59 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity                       |   |                   | 478,507   |       |   | 156,395 |   |   | 322,112 |   |   | 206 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders’ equity |   | $                      | 3,383,211 |       | $      | 1,983,119 |   | $ | 1,400,092 |   |   | 71 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| *Not                meaningful                                  |   |                   |      |       |   |   |   |   |   |   |   |   |   |

----

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

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

|                                     |   |                                       |      |                                     |   | **Change** |   |
|------------------------------------------|--------|--------------------------------------------|-----------|------------------------------------------|--------|------------|--------|
| (in                  thousands)          |   | **First                  Quarter****2006** |      | **Fourth                  Quarter 2005** |   | **Amount** |   | **Annualized**** %** |   |
| Commercial                               |   | $                                          | 808,108   |                                     | $      | 766,532    |   | $ | 41,576 |   |   | 22 | % |
| Commercial                  real estate  |   |                                       | 799,505   |                                     |   | 779,459    |   |   | 20,046 |   |   | 10 | % |
| Residential                  real estate |   |                                       | 153,282   |                                     |   | 154,716    |   |   | (1,434 | ) |   | (4 | )% |
| Consumer                                 |   |                                       | 529,084   |                                     |   | 502,064    |   |   | 27,020 |   |   | 22 | % |
| Total                                    |   | $                                          | 2,289,979 |                                     | $      | 2,202,771  |   | $ | 87,208 |   |   | 16 | % |

|                                        |   |                                       |      |                                     |   | **Change** |   |
|---------------------------------------------|--------|--------------------------------------------|-----------|------------------------------------------|--------|------------|--------|
| (in                  thousands)             |   | **First                  Quarter****2006** |      | **Fourth                  Quarter 2005** |   | **Amount** |   | **Annualized**** %** |   |
| Demand                                      |   | $                                          | 373,637   |                                     | $      | 358,822    |   | $ | 14,815 |   |   | 17 | % |
| Savings                  & NOW accounts |   |                                       | 826,742   |                                     |   | 848,320    |   |   | (21,578 | ) |   | (10 | )% |
| Time                                        |   |                                       | 900,698   |                                     |   | 869,096    |   |   | 31,602 |   |   | 15 | % |
| Time                  $100,000 or more      |   |                                       | 200,821   |                                     |   | 186,514    |   |   | 14,307 |   |   | 31 | % |
|                                        |   | $                                          | 2,301,898 |                                     | $      | 2,262,752  |   | $ | 39,146 |   |   | 7 | % |

----

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

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

**RESULTS      OF OPERATIONS**

**Net      Interest Income**

|                                                                                    |   | **Net                Interest Margin - Quarter Ended** |   |                           |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                    |   |                                                   |   |                           |   |   |   |
| (dollars                in thousands)                                                   |   |                                                   |   | March                31, 2006  |   | March                31, 2005 |   |
|                                                                                    |   |                                                   |   | Average                Balance |   | FTE                Interest Income/ Expense |   | Average                Rate Earned/Paid |   | Average                Balance |   | FTE                Interest Income/ Expense |   | Average                Rate Earned/Paid |   |
| Federal                funds sold and interest-bearing                deposits in banks |   |                                                   |   |                           | $      | 34,885 |   | $ | 393 |   |   | 4.57 | % | $ | 24,022 |   | $ | 151 |   |   | 2.55 | % |
| Investment                securities                                                    |   |                                                   |   |                           |   | 613,891 |   |   | 8,901 |   |   | 5.88 | % |   | 613,074 |   |   | 8,354 |   |   | 5.53 | % |
| Loans                - commercial                                                       |   |                                                   |   |                           |   | 808,108 |   |   | 15,145 |   |   | 7.60 | % |   | 419,713 |   |   | 6,476 |   |   | 6.26 | % |
| -                commercial real estate                                                 |   |                                                   |   |                           |   | 799,505 |   |   | 13,605 |   |   | 6.90 | % |   | 362,149 |   |   | 5,593 |   |   | 6.26 | % |
| -                residential real estate                                                |   |                                                   |   |                           |   | 153,282 |   |   | 2,297 |   |   | 6.08 | % |   | 91,326 |   |   | 1,501 |   |   | 6.67 | % |
| -                consumer                                                               |   |                                                   |   |                           |   | 528,976 |   |   | 8,526 |   |   | 6.54 | % |   | 359,770 |   |   | 5,797 |   |   | 6.53 | % |
| Total                earning assets                                                     |   |                                                   |   |                           | $      | 2,938,647 |   | $ | 48,867 |   |   | 6.74 | % | $ | 1,870,054 |   | $ | 27,872 |   |   | 6.04 | % |
|                                                                                    |   |                                                   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      |   |                                                   |   |                           | $      | 826,742 |   | $ | 3,501 |   |   | 1.72 | % | $ | 501,945 |   | $ | 1,313 |   |   | 1.06 | % |
| -                time                                                                   |   |                                                   |   |                           |   | 1,101,519 |   |   | 9,920 |   |   | 3.65 | % |   | 641,767 |   |   | 4,747 |   |   | 3.00 | % |
| Short-term                borrowings                                                    |   |                                                   |   |                           |   | 68,524 |   |   | 696 |   |   | 4.12 | % |   | 31,106 |   |   | 157 |   |   | 2.05 | % |
| Long-term                debt                                                           |   |                                                   |   |                           |   | 467,010 |   |   | 5,111 |   |   | 4.44 | % |   | 425,318 |   |   | 4,817 |   |   | 4.59 | % |
| Subordinated                debt                                                        |   |                                                   |   |                           |   | 44,674 |   |   | 797 |   |   | 7.24 | % |   | 30,928 |   |   | 459 |   |   | 6.02 | % |
| Total                interest-bearing liabilities                                       |   |                                                   |   |                           | $      | 2,508,469 |   | $ | 20,025 |   |   | 3.24 | % | $ | 1,631,064 |   | $ | 11,493 |   |   | 2.86 | % |
|                                                                                    |   |                                                   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |                                                   |   |                           |   |   |   |   |   |   |   | 6.74 | % |   |   |   |   |   |   |   | 6.04 | % |
| Interest                expense to paying liabilities                                   |   |                                                   |   |                           |   |   |   |   |   |   |   | 3.24 | % |   |   |   |   |   |   |   | 2.86 | % |
|                                                                                    |   |                                                   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |                                                   |   |                           |   |   |   |   |   |   |   | 3.50 | % |   |   |   |   |   |   |   | 3.18 | % |
| Impact                of non-interest funds                                             |   |                                                   |   |                           |   |   |   |   |   |   |   | 0.48 | % |   |   |   |   |   |   |   | 0.37 | % |
| Net                interest margin                                                      |   |                                                   |   |                           |   |   |   | $ | 28,842 |   |   | 3.98 | % |   |   |   | $ | 16,379 |   |   | 3.55 | % |

----

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

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

|                                                                                    |   | **Net                Interest Margin - Quarter Ended** |   |                           |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                    |   |                                                   |   |                           |   |   |   |
| (dollars                in thousands)                                                   |   |                                                   |   | March                31, 2006  |   | December                31, 2005 |   |
|                                                                                    |   |                                                   |   | Average                Balance |   | FTE                Interest Income/ Expense |   | Average                Rate Earned/Paid |   | Average                Balance |   | FTE                Interest Income/ Expense |   | Average                Rate Earned/Paid |   |
| Federal                funds sold and interest-bearing                deposits in banks |   |                                                   |   |                           | $      | 34,885 |   | $ | 393 |   |   | 4.57 | % | $ | 33,057 |   | $ | 307 |   |   | 3.68 | % |
| Investment                securities                                                    |   |                                                   |   |                           |   | 613,891 |   |   | 8,901 |   |   | 5.88 | % |   | 630,256 |   |   | 9,068 |   |   | 5.71 | % |
| Loans                - commercial                                                       |   |                                                   |   |                           |   | 808,108 |   |   | 15,145 |   |   | 7.60 | % |   | 766,532 |   |   | 13,763 |   |   | 7.12 | % |
| -                commercial real estate                                                 |   |                                                   |   |                           |   | 799,505 |   |   | 13,605 |   |   | 6.90 | % |   | 779,459 |   |   | 13,299 |   |   | 6.77 | % |
| -                residential real estate                                                |   |                                                   |   |                           |   | 153,282 |   |   | 2,297 |   |   | 6.08 | % |   | 154,716 |   |   | 2,325 |   |   | 5.96 | % |
| -                consumer                                                               |   |                                                   |   |                           |   | 528,976 |   |   | 8,526 |   |   | 6.54 | % |   | 501,517 |   |   | 8,402 |   |   | 6.65 | % |
| Total                earning assets                                                     |   |                                                   |   |                           | $      | 2,938,647 |   | $ | 48,867 |   |   | 6.74 | % | $ | 2,865,537 |   | $ | 47,164 |   |   | 6.53 | % |
|                                                                                    |   |                                                   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      | $      | 826,742                                                |   | $                              | 3,501  |   |   | 1.72 | % | $ | 848,320 |   | $ | 3,423 |   |   | 1.60 | % |
| -                time                                                                   |   |                                                   |   |                           |   | 1,101,519 |   |   | 9,920 |   |   | 3.65 | % |   | 1,055,610 |   |   | 9,054 |   |   | 3.40 | % |
| Short-term                borrowings                                                    |   |                                                   |   |                           |   | 68,524 |   |   | 696 |   |   | 4.12 | % |   | 72,606 |   |   | 670 |   |   | 3.66 | % |
| Long-term                debt                                                           |   |                                                   |   |                           |   | 467,010 |   |   | 5,111 |   |   | 4.44 | % |   | 447,532 |   |   | 4,889 |   |   | 4.33 | % |
| Subordinated                debt                                                        |   |                                                   |   |                           |   | 44,674 |   |   | 797 |   |   | 7.24 | % |   | 30,928 |   |   | 557 |   |   | 7.15 | % |
| Total                interest-bearing liabilities                                       |   |                                                   |   |                           | $      | 2,508,469 |   | $ | 20,025 |   |   | 3.24 | % | $ | 2,454,996 |   | $ | 18,593 |   |   | 3.00 | % |
|                                                                                    |   |                                                   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |                                                   |   |                           |   |   |   |   |   |   |   | 6.74 | % |   |   |   |   |   |   |   | 6.53 | % |
| Interest                expense to paying liabilities                                   |   |                                                   |   |                           |   |   |   |   |   |   |   | 3.24 | % |   |   |   |   |   |   |   | 3.00 | % |
|                                                                                    |   |                                                   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |                                                   |   |                           |   |   |   |   |   |   |   | 3.50 | % |   |   |   |   |   |   |   | 3.53 | % |
| Impact                of non-interest funds                                             |   |                                                   |   |                           |   |   |   |   |   |   |   | 0.48 | % |   |   |   |   |   |   |   | 0.43 | % |
| Net                interest margin                                                      |   |                                                   |   |                           |   |   |   | $ | 28,842 |   |   | 3.98 | % |   |   |   | $ | 28,571 |   |   | 3.96 | % |

**Provision      for Loan Losses**

----

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

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

**Non-Interest      Income**

|                                                                          |   | **First                Quarter****2006** |   | **Fourth                Quarter****2005** |   | **Change** |   |
|-------------------------------------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|------------|--------|
| (in                thousands)                                                 |   |
| Investment                management and trust services                       |   | $                                        | 1,013  |                                      | $      | 951        |   | $ | 62 |   |
| Service                charges on deposit accounts                            |   |                                     | 2,531  |                                      |   | 2,793      |   |   | (262 | ) |
| Other                service charges, commissions and fees                    |   |                                     | 1,700  |                                      |   | 1,689      |   |   | 11 |   |
| Insurance                premium income and commissions                       |   |                                     | 928    |                                      |   | 743        |   |   | 185 |   |
| Mortgage                banking activities                                    |   |                                     | 468    |                                      |   | 631        |   |   | (163 | ) |
| Earnings                on investment in life insurance                       |   |                                     | 656    |                                      |   | 650        |   |   | 6 |   |
| Other                                                                         |   |                                     | 805    |                                      |   | 294        |   |   | 511 |   |
| Total                non-interest income, excluding investment security gains |   | $                                        | 8,101  |                                      | $      | 7,751      |   | $ | 350 |   |

**Non-Interest      Expenses**

----

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

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

|                                          |   | **First                Quarter****2006** |   | **Fourth                Quarter****2005** |   | **Change** |   |
|-----------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|------------|--------|
| (in                thousands)                 |   |
| Salaries                and employee benefits |   | $                                        | 11,418 |                                      | $      | 10,461     |   | $ | 957 |   |
| Net                occupancy                  |   |                                     | 3,512  |                                      |   | 3,567      |   |   | (55 | ) |
| Marketing                expense              |   |                                     | 575    |                                      |   | 597        |   |   | (22 | ) |
| Telecommunications                expense     |   |                                     | 551    |                                      |   | 489        |   |   | 62 |   |
| Amortization                of intangibles    |   |                                     | 654    |                                      |   | 696        |   |   | (42 | ) |
| Other                                         |   |                                     | 3,823  |                                      |   | 4,370      |   |   | (547 | ) |
| Total                non-interest expenses    |   | $                                        | 20,533 |                                      | $      | 20,180     |   | $ | 353 |   |

**Income      Taxes**

----

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

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

**CAPITAL**

|                                          |   | **March                31,****2006** |   | **Regulatory****Minimum** |   | **“Well****Capitalized”** |   |
|-----------------------------------------------|--------|--------------------------------------|--------|---------------------------|--------|---------------------------------------|--------|
| Leverage                ratio                 |   |                                 |   |                      |   |                                  |   |   |   |   |
| Community                Banks, Inc.          |   |                                 | 8.6    | %                         |   | 4                                     | %      |   | 5 | % |
| CommunityBanks                                |   |                                 | 8.2    | %                         |   | 4                                     | %      |   | 5 | % |
|                                          |   |                                 |   |                      |   |                                  |   |   |   |   |
| Tier                1 capital ratio           |   |                                 |   |                      |   |                                  |   |   |   |   |
| Community                Banks, Inc.          |   |                                 | 10.7   | %                         |   | 4                                     | %      |   | 6 | % |
| CommunityBanks                                |   |                                 | 10.1   | %                         |   | 4                                     | %      |   | 6 | % |
|                                          |   |                                 |   |                      |   |                                  |   |   |   |   |
| Total                risk-based capital ratio |   |                                 |   |                      |   |                                  |   |   |   |   |
| Community                Banks, Inc.          |   |                                 | 11.6   | %                         |   | 8                                     | %      |   | 10 | % |
| Community                Banks                |   |                                 | 11.0   | %                         |   | 8                                     | %      |   | 10 | % |

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

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

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

|                                                                        |   | **March                31, 2006** |      | **December                31, 2005** |   | **March                31, 2005** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------|-----------|--------------------------------------|--------|-----------------------------------|--------|
| **Quarterly                income statement data:**                         |   |                              |      |                                 |   |                              |   |
|                                                                        |   |                              |      |                                 |   |                              |   |
| **Net                income**                                               |   |                              |      |                                 |   |                              |   |   |   |   |
| Net                income                                                   |   | $                                 | 10,569    |                                 | $      | 10,961                            |   | $ | 5,487 |   |
| Amortization                of core deposit and other intangible assets (2) |   |                              | 425       |                                 |   | 564                               |   |   | 36 |   |
| Net                operating (tangible) income                              |   | $                                 | 10,994    |                                 | $      | 11,525                            |   | $ | 5,523 |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **Quarterly                balance sheet data:**                            |   |                              |      |                                 |   |                              |   |   |   |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **Average                assets**                                           |   |                              |      |                                 |   |                              |   |   |   |   |
| Average                assets                                               |   | $                                 | 3,383,211 |                                 | $      | 3,313,950                         |   | $ | 1,983,119 |   |
| Goodwill                                                                    |   |                              | (244,775  | )                                    |   | (243,203                          | )      |   | (3,570 | ) |
| Core                deposit and other intangible assets                     |   |                              | (13,914   | )                                    |   | (14,594                           | )      |   | (1,459 | ) |
| Average                tangible assets                                      |   | $                                 | 3,124,522 |                                 | $      | 3,056,153                         |   | $ | 1,978,090 |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **Operating                return on average tangible assets**              |   |                              | 1.43      | %                                    |   | 1.50                              | %      |   | 1.13 | % |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **Average                equity**                                           |   |                              |      |                                 |   |                              |   |   |   |   |
| Average                equity                                               |   | $                                 | 478,507   |                                 | $      | 475,514                           |   | $ | 156,395 |   |
| Goodwill                                                                    |   |                              | (244,775  | )                                    |   | (243,203                          | )      |   | (3,570 | ) |
| Core                deposit and other intangible assets                     |   |                              | (13,914   | )                                    |   | (14,594                           | )      |   | (1,459 | ) |
| Deferred                taxes                                               |   |                              | 1,734     |                                 |   | 1,742                             |   |   | --- |   |
| Average                tangible equity                                      |   | $                                 | 221,552   |                                 | $      | 219,459                           |   | $ | 151,366 |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **Operating                return on average tangible equity**              |   |                              | 20.12     | %                                    |   | 20.83                             | %      |   | 14.80 | % |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **At                end of quarter:**                                       |   |                              |      |                                 |   |                              |   |   |   |   |
| **Total                assets**                                             |   |                              |      |                                 |   |                              |   |   |   |   |
| Total                assets                                                 |   | $                                 | 3,421,562 |                                 | $      | 3,332,430                         |   | $ | 2,012,653 |   |
| Goodwill                                                                    |   |                              | (244,760  | )                                    |   | (244,827                          | )      |   | (3,570 | ) |
| Core                deposit and other intangible assets                     |   |                              | (13,599   | )                                    |   | (14,253                           | )      |   | (1,438 | ) |
| Total                tangible assets                                        |   | $                                 | 3,163,203 |                                 | $      | 3,073,350                         |   | $ | 2,007,645 |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **Total                equity**                                             |   |                              |      |                                 |   |                              |   |   |   |   |
| Total                equity                                                 |   | $                                 | 475,587   |                                 | $      | 476,673                           |   | $ | 151,758 |   |
| Goodwill                                                                    |   |                              | (244,760  | )                                    |   | (244,827                          | )      |   | (3,570 | ) |
| Core                deposit and other intangible assets                     |   |                              | (13,599   | )                                    |   | (14,253                           | )      |   | (1,438 | ) |
| Deferred                taxes                                               |   |                              | 1,854     |                                 |   | 1,734                             |   |   | --- |   |
| Total                tangible equity                                        |   | $                                 | 219,082   |                                 | $      | 219,327                           |   | $ | 146,750 |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| **Tangible                book value at end of period**                     |   | $                                 | 9.19      |                                 | $      | 9.12                              |   | $ | 11.35 |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
|                                                                        |   |                              |      |                                 |   |                              |   |   |   |   |
| (1)                Per share data reflect stock splits and stock dividends  |   |                              |      |                                 |
| (2)                Net of related tax effect                                |   |                              |      |                                 |   |                              |   |   |   |   |

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

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

| **Interest                Rate Sensitivity**             |   |             |      |               |   |                            |   |                              |    |      |   |
|----------------------------------------------------------|--------|------------------|-----------|--------------------|--------|---------------------------------|--------|-----------------------------------|---------|-----------|--------|
|  **Dollars                in thousands**            |   | **1-90****days** |      | **90-180****days** |   | **180-365                days** |   | **1                year or more** |    | **Total** |   |
|                                                     |   |             |      |               |   |                            |   |                              |    |      |   |
| **Assets**                                               |   |             |      |               |   |                            |   |                              |    |      |   |
| Federal                funds sold                        |   | $                | 9,279     |               | $      | ---                             |   | $                                 | ---     |      | $      | --- |   | $ | 9,279 |   |
| Interest-bearing                deposits in other banks  |   |             | 75,870    |               |   | ---                             |   |                              | ---     |      |   | --- |   |   | 75,870 |   |
| Investment                securities                     |   |             | 106,853   |               |   | 38,200                          |   |                              | 56,443  |      |   | 387,285 |   |   | 588,781 |   |
| Loans(1)                                                 |   |             | 839,861   |               |   | 97,161                          |   |                              | 189,635 |      |   | 1,160,163 |   |   | 2,286,820 |   |
| Earning                assets                            |   |             | 1,031,863 |               |   | 135,361                         |   |                              | 246,078 |      |   | 1,547,448 |   |   | 2,960,750 |   |
| Non-earning                assets                        |   |             | 642       |               |   | 582                             |   |                              | 1,161   |      |   | 458,427 |   |   | 460,812 |   |
| Total                assets                              |   | $                | 1,032,505 |               | $      | 135,943                         |   | $                                 | 247,239 |      | $      | 2,005,875 |   | $ | 3,421,562 |   |
| **Liabilities**                                          |   |             |      |               |   |                            |   |                              |    |      |   |   |   |   |   |   |
| Savings                                                  |   | $                | 298,250   |               | $      | ---                             |   | $                                 | ---     |      | $      | 517,481 |   | $ | 815,731 |   |
| Time                                                     |   |             | 149,453   |               |   | 187,760                         |   |                              | 234,074 |      |   | 402,183 |   |   | 973,470 |   |
| Time                in denominations of $100,000 or more |   |             | 41,717    |               |   | 39,728                          |   |                              | 53,061  |      |   | 86,128 |   |   | 220,634 |   |
| Short-term                borrowings                     |   |             | 55,005    |               |   | ---                             |   |                              | ---     |      |   | --- |   |   | 55,005 |   |
| Long-term                debt                            |   |             | 86,959    |               |   | 11,864                          |   |                              | 23,757  |      |   | 320,695 |   |   | 443,275 |   |
| Subordinated                debt                         |   |             | 23,196    |               |   | ---                             |   |                              | ---     |      |   | 28,352 |   |   | 51,548 |   |
| Interest                bearing liabilities              |   |             | 654,580   |               |   | 239,352                         |   |                              | 310,892 |      |   | 1,354,839 |   |   | 2,559,663 |   |
| Other                liabilities and equity              |   |             | 10,750    |               |   | 10,857                          |   |                              | 21,722  |      |   | 818,570 |   |   | 861,899 |   |
| Total                liabilities and equity              |   | $                | 665,330   |               | $      | 250,209                         |   | $                                 | 332,614 |      | $      | 2,173,409 |   | $ | 3,421,562 |   |

| **Interest                Sensitivity GAP**                                 |   |             |    |               |   |                |   |
|-----------------------------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------|--------|
| **Dollars                in thousands**                                     |   | **1-90****days** |    | **90-180****Days** |   | **180-365****days** |   |
|                                                                        |   |             |    |               |   |                |   |   |   |   |
| Periodic                                                                    |   | $                | 367,175 |               | $      | (114,266            | )      | $ | (85,375 | ) |
| Cumulative                                                                  |   |             |    |               |   | 252,909             |   |   | 167,534 |   |
| Cumulative                GAP as a percentageof                total assets |   |             | 10.7    | %                  |   | 7.4                 | %      |   | 4.9 | % |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

*Evaluation      of Disclosure Controls and Procedures. *

*Changes        in Internal Controls over Financial Reporting. *

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**PART      II - OTHER INFORMATION **

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

**Item      1A - Risk Factors**

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

|                                                         |   | **Shares****Purchased** |    | **Average                Price****Paid****Per                Share** |   | **Shares                Purchased****as                part of****Repurchase                Program** |   | **Capacity                to****Purchase****More                Shares** |    |
|--------------------------------------------------------------|--------|-------------------------|---------|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|---------|
|                                                         |   |                    |    |                                                                 |   |                                                                                                  |   |                                                                     |    |   |   |   |   |
| 01/1/06-01/31/06                                             |   |                    | ---     |                                                                 |   | ---                                                                                                   |   |                                                                     | ---     |   |   |   |   |
| 02/1/06-02/28/06                                             |   |                    | 150,000 |                                                                 | $      | 27.96                                                                                                 |   |                                                                     | 150,000 |   |   |   |   |
| 03/1/06-03/31/06                                             |   |                    | 113,700 |                                                                 | $      | 27.75                                                                                                 |   |                                                                     | 113,700 |   |   | 458,500* |   |
|                                                         |   |                    |    |                                                                 |   |                                                                                                  |   |                                                                     |    |   |   |   |   |
| *                adjusted for April, 2006, 5% stock dividend |   |                    |    |                                                                 |   |                                                                                                  |

**Item      3 - Defaults Upon Senior      Securities**

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

**Item      5 - Other Information**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**PART      II - OTHER INFORMATION**

**(continued)**

**Item      6 - Exhibits**

| 3.1  | Amended                and Restated Articles of Incorporation (Incorporated by reference                to                Exhibit 3.1, attached to Community’s Quarterly Report on Form 10-Q for the                quarter ended June 30, 2005, filed with the Commission on August                9,                2005)                                                                                                                                                                     |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  | Amended                By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K filed with the Commission on March                9, 2006)                                                                                                                                                                                                                                                                                        |
| 4    | Instruments                defining the rights of the holders of trust capital securities sold                by                Community in January, 2006, are not attached, as the amount of such                securities is less than 10% of the consolidated assets of Community                and                its subsidiaries, and the securities have not been registered. Community                agrees to provide copies of such instruments to the SEC upon                request. |
| 31.1 | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2 | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1 | Section                1350 Certification (Chief Executive Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2 | Section                1350 Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                    |

----

**SIGNATURES**

| Date   | May                10, 2006 |   | /s/    | Eddie                L. Dunklebarger     |
|--------|-----------------------------|--------|--------|------------------------------------------|
|   |                        |   |   | Eddie                L. Dunklebarger     |
|   |                        |   |   | Chairman                and President    |
|   |                        |   |   | (Chief                Executive Officer) |
|   |                        |   |   |                                     |
| Date   | May                10, 2006 |   | /s/    | Donald                F. Holt            |
|   |                        |   |   | Donald                F. Holt            |
|   |                        |   |   | Executive                Vice President  |
|   |                        |   |   | (Chief                Financial Officer) |

**EXHIBIT      INDEX**

| 3.1  | Amended                and Restated Articles of Incorporation (Incorporated by reference                to                Exhibit 3.1, attached to Community’s Quarterly Report on Form 10-Q for the                quarter ended June 30, 2005, filed with the Commission on August                9,                2005)                                                                                                                                                                     |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  | Amended                By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K filed with the Commission on March                9, 2006)                                                                                                                                                                                                                                                                                        |
| 4    | Instruments                defining the rights of the holders of trust capital securities sold                by                Community in January, 2006, are not attached, as the amount of such                securities is less than 10% of the consolidated assets of Community                and                its subsidiaries, and the securities have not been registered. Community                agrees to provide copies of such instruments to the SEC upon                request. |
| 31.1 | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2 | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1 | Section                1350 Certification (Chief Executive Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2 | Section                1350 Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                    |

----