----

----

**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 June 30, 2005**

**0-15786**
** **

**(Commission      File Number)**

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

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

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

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

**(717)      920-1698**

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

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

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

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

|   | **CAPITAL                STOCK-COMMON** |   | **23,283,000**                          |   |
|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|   | **(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                (Loss)                         | 4                                    |
| Consolidated                Interim Statements of Changes in                Stockholders’ Equity | 5                                    |
| Consolidated                Interim Statements of Cash                Flows                            | 6                                    |
| Notes                to Consolidated Interim Financial                Statements                       | 7                -                11 |
|                                                                                                   |                                 |
| Item                2. Management’s Discussion and Analysis of                Financial          |                                 |
| Condition                and Results of Operations                                                     | 12                - 21               |
|                                                                                                   |                                 |
| Item                3. Quantitative and Qualitative Disclosures                About Market Risk       | 22                                   |
|                                                                                                   |                                 |
| Item                4. Controls and Procedures                                                         | 23                                   |
|                                                                                                   |                                 |
|                                                                                                   |                                 |
| **PART                II - Other Information**                                                         |                                 |
|                                                                                                   |                                 |
| Item                1. Legal Proceedings                                                               | 24                                   |
|                                                                                                   |                                 |
| Item                2. Unregistered Sales of Equity Securities and                Use of Proceeds      | 24                                   |
|                                                                                                   |                                 |
| Item                3. Defaults Upon Senior                Securities                                  | 24                                   |
|                                                                                                   |                                 |
| Item                4. Submission of Matters to a Vote of Security                Holders              | 24                                   |
|                                                                                                   |                                 |
| Item                5. Other Information                                                               | 24                                   |
|                                                                                                   |                                 |
| Item                6. Exhibits                                                                        | 25                                   |
|                                                                                                   |                                 |
|                                                                                                   |                                 |
| **SIGNATURES**                                                                                         | 26                                   |
|                                                                                                   |                                 |

----

**PART      I - FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM BALANCE SHEETS**

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

|                                                                                                                        |   | **June                30,** |      | **December                31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|---------------------------------|--------|
|                                                                                                                        |   | **2005**                    |      | **2004**                        |   |
| **ASSETS**                                                                                                                  |   | **(Unaudited)**             |      |                            |   |
|                                                                                                                        |   |                        |      |                            |   |   |   |
| Cash                and due from banks                                                                                      |   | $                           | 41,202    |                            | $      | 43,486 |   |
| Interest-bearing                deposits in other banks                                                                     |   |                        | 13,102    |                            |   | 1,787 |   |
| Investment                securities, available for sale                                                                    |   |                        | 563,306   |                            |   | 619,110 |   |
| Loans                held for sale                                                                                          |   |                        | 1,517     |                            |   | 1,505 |   |
| Loans,                net of allowance for loan losses of $15,383 and $14,421                                               |   |                        | 1,269,305 |                            |   | 1,201,530 |   |
| Premises                and equipment, net                                                                                  |   |                        | 27,375    |                            |   | 26,369 |   |
| Accrued                interest receivable and other assets                                                                 |   |                        | 66,925    |                            |   | 61,012 |   |
| Total                assets                                                                                                 |   | $                           | 1,982,732 |                            | $      | 1,954,799 |   |
|                                                                                                                        |   |                        |      |                            |   |   |   |
| **LIABILITIES**                                                                                                             |   |                        |      |                            |   |   |   |
|                                                                                                                        |   |                        |      |                            |   |   |   |
| Deposits                                                                                                                    |   |                        |      |                            |   |   |   |
| Non-interest                bearing                                                                                         |   | $                           | 189,388   |                            | $      | 184,359 |   |
| Interest                bearing                                                                                             |   |                        | 1,193,478 |                            |   | 1,121,178 |   |
| Total                deposits                                                                                               |   |                        | 1,382,866 |                            |   | 1,305,537 |   |
| Short-term                borrowings                                                                                        |   |                        | 40,576    |                            |   | 47,116 |   |
| Long-term                debt                                                                                               |   |                        | 356,210   |                            |   | 404,662 |   |
| Subordinated                debt                                                                                            |   |                        | 30,928    |                            |   | 30,928 |   |
| Accrued                interest payable and other liabilities                                                               |   |                        | 18,570    |                            |   | 14,215 |   |
| Total                liabilities                                                                                            |   |                        | 1,829,150 |                            |   | 1,802,458 |   |
|                                                                                                                        |   |                        |      |                            |   |   |   |
| **STOCKHOLDERS’                EQUITY**                                                                               |   |                        |      |                            |   |   |   |
|                                                                                                                        |   |                        |      |                            |   |   |   |
| Preferred                stock, no par value; 500,000 shares                                                                |   |                        |      |                            |   |   |   |
| authorized;                no shares issued and outstanding                                                                 |   |                        | ---       |                            |   | --- |   |
| Common                stock-$5.00 par value; 50,000,000 shares                                                              |   |                        |      |                            |   |   |   |
| authorized;                12,421,000 shares issued                                                                         |   |                        | 62,103    |                            |   | 62,107 |   |
| Surplus                                                                                                                     |   |                        | 73,408    |                            |   | 73,304 |   |
| Retained                Earnings                                                                                            |   |                        | 17,505    |                            |   | 18,134 |   |
| Accumulated                other comprehensive income,                                                                      |   |                        |      |                            |   |   |   |
| net                of tax                                                                                                   |   |                        | 1,559     |                            |   | 3,211 |   |
| Treasury                stock; 42,000 and 185,000 shares, at cost                                                           |   |                        | (993      | )                               |   | (4,415 | ) |
| Total                stockholders’ equity                                                                             |   |                        | 153,582   |                            |   | 152,341 |   |
| Total                liabilities and stockholders’ equity                                                             |   | $                           | 1,982,732 |                            | $      | 1,954,799 |   |
|                                                                                                                        |   |                        |      |                            |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM STATEMENTS OF INCOME (LOSS)**

**(Unaudited)**

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

|                                                                                                                        |   | **Three                Months Ended** |   | **Six                Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                        |   | **June                30,**           |   | **June                30,**         |   |
|                                                                                                                        |   | **2005**                              |   | **2004**                            |   | **2005** |   | **2004** |   |
| **INTEREST                INCOME:**                                                                                         |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Loans,                including fees                                                                                        |   | $                                     | 19,987 |                                | $      | 16,996 |   | $ | 39,045 |   | $ | 33,654 |   |
| Investment                securities:                                                                                       |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                                     |   |                                  | 4,011  |                                |   | 5,091 |   |   | 8,260 |   |   | 9,653 |   |
| Tax                exempt                                                                                                   |   |                                  | 2,204  |                                |   | 2,258 |   |   | 4,388 |   |   | 4,453 |   |
| Dividends                                                                                                                   |   |                                  | 605    |                                |   | 511 |   |   | 1,146 |   |   | 1,063 |   |
| Other                                                                                                                       |   |                                  | 583    |                                |   | 26 |   |   | 734 |   |   | 39 |   |
| Total                interest income                                                                                        |   |                                  | 27,390 |                                |   | 24,882 |   |   | 53,573 |   |   | 48,862 |   |
|                                                                                                                        |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| **INTEREST                EXPENSE:**                                                                                        |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                    |   |                                  | 6,901  |                                |   | 5,675 |   |   | 12,961 |   |   | 11,133 |   |
| Short-term                borrowings                                                                                        |   |                                  | 200    |                                |   | 198 |   |   | 357 |   |   | 322 |   |
| Long-term                debt                                                                                               |   |                                  | 4,885  |                                |   | 4,428 |   |   | 9,702 |   |   | 9,009 |   |
| Subordinated                debt                                                                                            |   |                                  | 495    |                                |   | 377 |   |   | 954 |   |   | 755 |   |
| Total                interest expense                                                                                       |   |                                  | 12,481 |                                |   | 10,678 |   |   | 23,974 |   |   | 21,219 |   |
| Net                interest income                                                                                          |   |                                  | 14,909 |                                |   | 14,204 |   |   | 29,599 |   |   | 27,643 |   |
| Provision                for loan losses                                                                                    |   |                                  | 750    |                                |   | 750 |   |   | 1,300 |   |   | 1,600 |   |
| Net                interest income after provision for loan losses                                                          |   |                                  | 14,159 |                                |   | 13,454 |   |   | 28,299 |   |   | 26,043 |   |
|                                                                                                                        |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                INCOME:**                                                                                     |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Investment                management and trust services                                                                     |   |                                  | 531    |                                |   | 409 |   |   | 945 |   |   | 676 |   |
| Service                charges on deposit accounts                                                                          |   |                                  | 2,028  |                                |   | 1,707 |   |   | 3,821 |   |   | 3,112 |   |
| Other                service charges, commissions and fees                                                                  |   |                                  | 934    |                                |   | 775 |   |   | 1,944 |   |   | 1,677 |   |
| Investment                security gains                                                                                    |   |                                  | 167    |                                |   | 844 |   |   | 218 |   |   | 2,176 |   |
| Insurance                premium income and commissions                                                                     |   |                                  | 880    |                                |   | 1,025 |   |   | 1,782 |   |   | 1,679 |   |
| Mortgage                banking activities                                                                                  |   |                                  | 548    |                                |   | 828 |   |   | 1,063 |   |   | 1,455 |   |
| Earnings                on investment in life insurance                                                                     |   |                                  | 355    |                                |   | 412 |   |   | 754 |   |   | 777 |   |
| Other                                                                                                                       |   |                                  | 155    |                                |   | 156 |   |   | 281 |   |   | 227 |   |
| Total                non-interest income                                                                                    |   |                                  | 5,598  |                                |   | 6,156 |   |   | 10,808 |   |   | 11,779 |   |
|                                                                                                                        |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                                                                                   |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Salaries                and employee benefits                                                                               |   |                                  | 7,436  |                                |   | 7,041 |   |   | 14,729 |   |   | 13,876 |   |
| Net                occupancy                                                                                                |   |                                  | 2,199  |                                |   | 2,072 |   |   | 4,424 |   |   | 4,178 |   |
| Merger,                conversion and restructuring expenses                                                                |   |                                  | 7,957  |                                |   | --- |   |   | 7,957 |   |   | --- |   |
| Marketing                expense                                                                                            |   |                                  | 466    |                                |   | 869 |   |   | 911 |   |   | 1,289 |   |
| Telecommunications                expense                                                                                   |   |                                  | 257    |                                |   | 344 |   |   | 561 |   |   | 661 |   |
| Other                                                                                                                       |   |                                  | 2,831  |                                |   | 2,636 |   |   | 5,223 |   |   | 4,841 |   |
| Total                non-interest expenses                                                                                  |   |                                  | 21,146 |                                |   | 12,962 |   |   | 33,805 |   |   | 24,845 |   |
|                                                                                                                        |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Income                (loss) before income taxes                                                                            |   |                                  | (1,389 | )                                   |   | 6,648 |   |   | 5,302 |   |   | 12,977 |   |
| Income                taxes                                                                                                 |   |                                  | (250   | )                                   |   | 1,211 |   |   | 954 |   |   | 2,365 |   |
| Net                income (loss)                                                                                            |   | $                                     | (1,139 | )                                   | $      | 5,437 |   | $ | 4,348 |   | $ | 10,612 |   |
|                                                                                                                        |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                PER SHARE DATA**                                                                              |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Basic                earnings (loss) per share                                                                              |   | $                                     | (0.09  | )                                   | $      | 0.45 |   | $ | 0.35 |   | $ | 0.87 |   |
| Diluted                earnings (loss) per share                                                                            |   | $                                     | (0.09  | )                                   | $      | 0.43 |   | $ | 0.35 |   | $ | 0.84 |   |
| Dividends                declared                                                                                           |   | $                                     | 0.19   |                                | $      | 0.17 |   | $ | 0.36 |   | $ | 0.33 |   |
|                                                                                                                        |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |   |                                  |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**For      the Six Months Ended June 30, 2005 and 2004**

**(Unaudited:      Dollars in Thousands)**

|                                                                                                                        |   | **Outstanding** |   | **Common** |   |        |   | **Retained** |   | **Accumulated****Other****ComprehensiveIncome** |   | **Treasury** |   | **Total**  |    |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------|--------|-------------|--------|--------------|--------|-------------------------------------------------|--------|--------------|--------|------------|---------|
|                                                                                                                        |   | **Shares**      |   | **Stock**  |   | **Surplus** |   | **Earnings** |   | ** (Loss)**                                |   | **Stock**    |   | **Equity** |    |
| **Balance,                January 1, 2004**                                                                                 |   |            | 11,648 |       | $      | 59,256      |   | $            | 57,563 |                                            | $      | 24,297       |   | $          | 6,596   |   | $ | (4,306 | ) | $ | 143,406 |   |
| Comprehensive                income (loss):                                                                                 |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   |   |   |
| Net                income                                                                                                   |   |            |   |       |   |        |   |         |   |                                            |   | 10,612       |   |       |    |   |   |   |   |   | 10,612 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       | (12,203 | ) |   |   |   |   | (12,203 | ) |
| Total                comprehensive income (loss)                                                                            |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   | (1,591 | ) |
| Cash                dividends                                                                                               |   |            |   |       |   |        |   |         |   |                                            |   | (4,065       | )      |       |    |   |   |   |   |   | (4,065 | ) |
| 5%                stock dividend                                                                                            |   |            | 584    |       |   | 2,949       |   |         | 15,103 |                                            |   | (18,110      | )      |       |    |   |   |   |   |   | (58 | ) |
| Purchases                of treasury stock                                                                                  |   |            | (102   | )          |   |        |   |         |   |                                            |   |         |   |       |    |   |   | (3,036 | ) |   | (3,036 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 82     |       |   | (97         | )      |         |   |                                            |   | (1,432       | )      |       |    |   |   | 2,450 |   |   | 921 |   |
| Tax                benefits from employee stock transactions                                                                |   |            |   |       |   |        |   |         | 558    |                                            |   |         |   |       |    |   |   |   |   |   | 558 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   |   |   |
| **Balance,                June 30, 2004**                                                                                   |   |            | 12,212 |       | $      | 62,108      |   | $            | 73,224 |                                            | $      | 11,302       |   | $          | (5,607  | ) | $ | (4,892 | ) | $ | 136,135 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   |   |   |
| **Balance,                January 1, 2005**                                                                                 |   |            | 12,236 |       | $      | 62,107      |   | $            | 73,304 |                                            | $      | 18,134       |   | $          | 3,211   |   | $ | (4,415 | ) | $ | 152,341 |   |
| Comprehensive                income (loss):                                                                                 |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   |   |   |
| Net                income                                                                                                   |   |            |   |       |   |        |   |         |   |                                            |   | 4,348        |   |       |    |   |   |   |   |   | 4,348 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       | (1,562  | ) |   |   |   |   | (1,562 | ) |
| Change                in unfunded pension liability, net of tax                                                             |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       | (90     | ) |   |   |   |   | (90 | ) |
| Total                comprehensive income                                                                                   |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   | 2,696 |   |
| Cash                dividends                                                                                               |   |            |   |       |   |        |   |         |   |                                            |   | (4,444       | )      |       |    |   |   |   |   |   | (4,444 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 143    |       |   | (4          | )      |         |   |                                            |   | (533         | )      |       |    |   |   | 3,422 |   |   | 2,885 |   |
| Tax                benefits from employee stock transactions                                                                |   |            |   |       |   |        |   |         | 104    |                                            |   |         |   |       |    |   |   |   |   |   | 104 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   |   |   |
| **Balance,                June 30, 2005**                                                                                   |   |            | 12,379 |       | $      | 62,103      |   | $            | 73,408 |                                            | $      | 17,505       |   | $          | 1,559   |   | $ | (993 | ) | $ | 153,582 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   |   |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |   |                                            |   |         |   |       |    |   |   |   |   |   |   |   |
| 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)**

|                                                                                                                        |   | **Six                Months Ended** |    |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                                                        |   | **June                30,**         |    |
|                                                                                                                        |   | **2005**                            |    | **2004** |   |
|                                                                                                                        |   |                                |    |   |   |   |   |
| **Operating                Activities:**                                                                                    |   |                                |    |   |   |   |   |
| Net                income                                                                                                   |   | $                                   | 4,348   |   | $ | 10,612 |   |
| Adjustments                to reconcile net income to net cash                                                              |   |                                |    |   |   |   |   |
| provided                by operating activities:                                                                            |   |                                |    |   |   |   |   |
| Provision                for loan losses                                                                                    |   |                                | 1,300   |   |   | 1,600 |   |
| Depreciation                and amortization                                                                                |   |                                | 1,696   |   |   | 1,641 |   |
| Net                amortization of securities                                                                               |   |                                | 549     |   |   | 607 |   |
| Realized                gains on sales of available-for-sale securities, net                                                |   |                                | (218    | ) |   | (2,176 | ) |
| Loans                originated for sale                                                                                    |   |                                | (3,620  | ) |   | (6,601 | ) |
| Proceeds                from sales of loans held for sale                                                                   |   |                                | 3,713   |   |   | 12,297 |   |
| Gains                on loan sales                                                                                          |   |                                | (106    | ) |   | (277 | ) |
| Earnings                on investment in life insurance                                                                     |   |                                | (754    | ) |   | (777 | ) |
| Net                change in other assets                                                                                   |   |                                | (2,473  | ) |   | 2,650 |   |
| Net                change in accrued interest payable and other liabilities                                                 |   |                                | 4,218   |   |   | (3,175 | ) |
| Tax                benefits from employee stock transactions                                                                |   |                                | 104     |   |   | 558 |   |
| Net                cash provided by operating activities                                                                    |   |                                | 8,757   |   |   | 16,959 |   |
|                                                                                                                        |   |                                |    |   |   |   |   |
| **Investing                Activities:**                                                                                    |   |                                |    |   |   |   |   |
| Net                change in interest-bearing deposits in other banks                                                       |   |                                | (11,315 | ) |   | 498 |   |
| Activity                in available-for-sale securities:                                                                   |   |                                |    |   |   |   |   |
| Sales                                                                                                                       |   |                                | 39,178  |   |   | 69,049 |   |
| Maturities,                prepayments and calls                                                                            |   |                                | 32,769  |   |   | 83,196 |   |
| Purchases                                                                                                                   |   |                                | (18,928 | ) |   | (201,484 | ) |
| Net                increase in total loans                                                                                  |   |                                | (70,055 | ) |   | (83,780 | ) |
| Investment                in life insurance                                                                                 |   |                                | ---     |   |   | (5,000 | ) |
| Net                additions to premises and equipment                                                                      |   |                                | (3,468  | ) |   | (2,411 | ) |
| Other                                                                                                                       |   |                                | ---     |   |   | (282 | ) |
| Net                cash used by investing activities                                                                        |   |                                | (31,819 | ) |   | (140,214 | ) |
|                                                                                                                        |   |                                |    |   |   |   |   |
| **Financing                Activities:**                                                                                    |   |                                |    |   |   |   |   |
| Net                increase in deposits                                                                                     |   |                                | 77,329  |   |   | 66,685 |   |
| Net                change in short-term borrowings                                                                          |   |                                | (6,540  | ) |   | 57,711 |   |
| Proceeds                from issuance of long-term debt                                                                     |   |                                | 25,000  |   |   | --- |   |
| Repayment                of long-term debt                                                                                  |   |                                | (73,452 | ) |   | (13,356 | ) |
| Cash                dividends and cash paid in lieu of fractional shares                                                    |   |                                | (4,444  | ) |   | (4,123 | ) |
| Purchases                of treasury stock                                                                                  |   |                                | ---     |   |   | (3,036 | ) |
| Proceeds                from issuance of common stock                                                                       |   |                                | 2,885   |   |   | 921 |   |
| Net                cash provided by financing activities                                                                    |   |                                | 20,778  |   |   | 104,802 |   |
|                                                                                                                        |   |                                |    |   |   |   |   |
| Net                change in cash and cash equivalents                                                                      |   |                                | (2,284  | ) |   | (18,453 | ) |
|                                                                                                                        |   |                                |    |   |   |   |   |
| Cash                and cash equivalents at beginning of period                                                             |   |                                | 43,486  |   |   | 59,887 |   |
| Cash                and cash equivalents at end of period                                                                   |   | $                                   | 41,202  |   | $ | 41,434 |   |
|                                                                                                                        |   |                                |    |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED INTERIM FINANCIAL      STATEMENTS**

**(Unaudited)**

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

***Basis      of Presentation***

***Statement      of Cash Flows***

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

|                                                                                                                                                                                                  |   | **Three                Months Ended** |   | **Six                Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                                                                                                  |   | **June                30,**           |   | **June                30,**         |   |
|                                                                                                                                                                                                  |   | **2005**                              |   | **2004**                            |   | **2005** |   | **2004** |   |
|                                                                                                                                                                                                  |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Net                income (loss), as reported                                                                                                                                                         |   | $                                     | (1,139 | )                                   | $      | 5,437 |   | $ | 4,348 |   | $ | 10,612 |   |
| Deduct:                  Total stock-based compensation expense                  determined under fair value based method                  for all awards, net of related tax                  effect |   |                                  | 714    |                                |   | 322 |   |   | 1,490 |   |   | 644 |   |
|                                                                                                                                                                                                  |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Pro                forma net income (loss)                                                                                                                                                            |   | $                                     | (1,853 | )                                   | $      | 5,115 |   | $ | 2,858 |   | $ | 9,968 |   |
|                                                                                                                                                                                                  |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Earnings                (loss) per share:                                                                                                                                                             |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Basic                - as reported                                                                                                                                                                    |   | $                                     | (0.09  | )                                   | $      | 0.45 |   | $ | 0.35 |   | $ | 0.87 |   |
| Basic                - pro forma                                                                                                                                                                      |   |                                  | (0.15  | )                                   |   | 0.41 |   |   | 0.23 |   |   | 0.81 |   |
|                                                                                                                                                                                                  |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |
| Diluted                - as reported                                                                                                                                                                  |   | $                                     | (0.09  | )                                   | $      | 0.43 |   | $ | 0.35 |   | $ | 0.84 |   |
| Diluted                - pro forma                                                                                                                                                                    |   |                                  | (0.15  | )                                   |   | 0.41 |   |   | 0.23 |   |   | 0.79 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Earnings      Per Share -***

|                                                         |   | **Three                Months Ended****June                30,** |   | **Six                Months Ended****June                30,** |   |
|--------------------------------------------------------------|--------|------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                         |   | **2005**                                                         |   | **2004**                                                       |   | **2005** |   | **2004** |   |
|                                                         |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Net                income (loss)                             |   | $                                                                | (1,139 | )                                                              | $      | 5,437 |   | $ | 4,348 |   | $ | 10,612 |   |
|                                                         |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding (basic)   |   |                                                             | 12,370 |                                                           |   | 12,244 |   |   | 12,332 |   |   | 12,258 |   |
| Effect                of dilutive stock options              |   |                                                             | 239    |                                                           |   | 343 |   |   | 255 |   |   | 361 |   |
|                                                         |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding (diluted) |   |                                                             | 12,609 |                                                           |   | 12,587 |   |   | 12,587 |   |   | 12,619 |   |
|                                                         |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Per                share information:                        |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Basic                earnings (loss) per share               |   | $                                                                | (0.09  | )                                                              | $      | 0.45 |   | $ | 0.35 |   | $ | 0.87 |   |
| Diluted                earnings (loss) per share             |   |                                                             | (0.09  | )                                                              |   | 0.43 |   |   | 0.35 |   |   | 0.84 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Comprehensive      Income (Loss)***

|                                             |   | **Three                Months Ended****June                30,** |   | **Six                Months Ended****June                30,** |   |
|--------------------------------------------------|--------|------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                             |   | **2005**                                                         |   | **2004**                                                       |   | **2005** |   | **2004** |   |
|                                             |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Unrealized                holding gains (losses) |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| on                available-for-sale securities  |   | $                                                                | 6,181  |                                                           | $      | (24,096 | ) | $ | (2,185 | ) | $ | (16,598 | ) |
| Reclassification                adjustments for  |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| gains                included in net income      |   |                                                             | (167   | )                                                              |   | (844 | ) |   | (218 | ) |   | (2,176 | ) |
| Net                unrealized gains (losses)     |   |                                                             | 6,014  |                                                           |   | (24,940 | ) |   | (2,403 | ) |   | (18,774 | ) |
| Tax                effect                        |   |                                                             | (2,105 | )                                                              |   | 8,729 |   |   | 841 |   |   | 6,571 |   |
|                                             |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Net-of-tax                amount                 |   |                                                             | 3,909  |                                                           |   | (16,211 | ) |   | (1,562 | ) |   | (12,203 | ) |
|                                             |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Unfunded                pension liability        |   |                                                             | ---    |                                                           |   | --- |   |   | (138 | ) |   | --- |   |
| Tax                effect                        |   |                                                             | ---    |                                                           |   | --- |   |   | 48 |   |   | --- |   |
|                                             |   |                                                             |   |                                                           |   |   |   |   |   |   |   |   |   |
| Net-of-tax                amount                 |   |                                                             | ---    |                                                           |   | --- |   |   | (90 | ) |   | --- |   |
|                                             |   | $                                                                | 3,909  |                                                           | $      | (16,211 | ) | $ | (1,652 | ) | $ | (12,203 | ) |

|                                                                |   | **June                30,****2005** |   | **December                31,2004** |   |
|---------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
| Net                unrealized gain on available-for-sale securities |   | $                                   | 6,112  |                                | $      | 8,515 |   |
| Tax                effect                                           |   |                                | (2,139 | )                                   |   | (2,980 | ) |
| Net-of-tax                amount                                    |   |                                | 3,973  |                                |   | 5,535 |   |
|                                                                |   |                                |   |                                |   |   |   |
| Unfunded                pension liability                           |   |                                | (3,714 | )                                   |   | (3,576 | ) |
| Tax                effect                                           |   |                                | 1,300  |                                |   | 1,252 |   |
| Net-of-tax                amount                                    |   |                                | (2,414 | )                                   |   | (2,324 | ) |
|                                                                |   |                                |   |                                |   |   |   |
| Accumulated                other comprehensive income               |   | $                                   | 1,559  |                                | $      | 3,211 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Recent      Accounting Pronouncements***

***Reclassifications***

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

|                                     |   | **Six                Months Ended**** June                30,****2005** |   | **Year                Ended**** December                31,****2004** |   | **Six                Months Ended****June                30,****2004** |   |
|------------------------------------------|--------|------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                     |   |                                                                         |   |                                                                       |   |                                                                   |   |   |   |   |
| Balance,                January 1        |   | $                                                                            | 14,421 |                                                                       | $      | 13,178                                                                 |   | $ | 13,178 |   |
| Provision                for loan losses |   |                                                                         | 1,300  |                                                                       |   | 3,100                                                                  |   |   | 1,600 |   |
| Loan                charge-offs          |   |                                                                         | (899   | )                                                                          |   | (2,910                                                                 | )      |   | (1,202 | ) |
| Recoveries                               |   |                                                                         | 561    |                                                                       |   | 1,053                                                                  |   |   | 718 |   |
| Balance,                end of period    |   | $                                                                            | 15,383 |                                                                       | $      | 14,421                                                                 |   | $ | 14,294 |   |

|                                           |   | **June                30,****2005** |   | **December                31,**** 2004** |   | **June                30,****2004** |   |
|------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------------------|--------|-------------------------------------|--------|
|                                           |   |                                |   |                                          |   |                                |   |   |   |   |
| Non-accrual                loans               |   | $                                   | 6,896  |                                          | $      | 5,428                               |   | $ | 6,244 |   |
| Foreclosed                real estate          |   |                                | 2,444  |                                          |   | 2,094                               |   |   | 1,788 |   |
| Total                non-performing assets     |   |                                | 9,340  |                                          |   | 7,522                               |   |   | 8,032 |   |
| Accruing                loans 90 days past due |   |                                | ---    |                                          |   | ---                                 |   |   | 32 |   |
| Total                risk elements             |   | $                                   | 9,340  |                                          | $      | 7,522                               |   | $ | 8,064 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

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

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

**5.      **
**Subsequent      Event /**
** **
**Acquisition:**
** **

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES **

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

**Overview**

**Forward-Looking      Statements**

**Critical      Accounting Policies**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**SUMMARY      OF FINANCIAL RESULTS**

----

**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**

**Six      months ended June 30, 2005, compared to six months ended June 30,      2004**

**Net      Interest Income**

| **Net                Interest Margin - Year to Date**                                   |   |
|-----------------------------------------------------------------------------------------|--------|
|                                                                                    |   |   |   |   |   |
|                                                                                    |   | June                30, 2005 |   | June                30, 2004 |   |
|                                                                                    |   | Average                Balance |   | FTE                Interest Income/ Expense |   | Average                Rate Earned/Paid |   | Average                Balance |   | FTE                Interest Income/ Expense |   | Average                Rate Earned/Paid |   |
| Federal                funds sold and interest-bearing                deposits in banks |   | $ | 51,157 |   | $ | 734 |   |   | 2.89 | %     | $ | 9,179 |   | $ | 39 |   |   | 0.85 | % |
| Investment                securities                                                    |   |   | 598,051 |   |   | 16,589 |   |   | 5.59 | % |   | 686,825 |   |   | 17,966 |   |   | 5.26 | % |
| Loans                - commercial                                                       |   |   | 429,149 |   |   | 13,444 |   |   | 6.32 | % |   | 398,176 |   |   | 11,098 |   |   | 5.61 | % |
| -                commercial real estate                                                 |   |   | 366,943 |   |   | 11,481 |   |   | 6.31 | % |   | 292,703 |   |   | 8,783 |   |   | 6.03 | % |
| -                residential real estate                                                |   |   | 90,247 |   |   | 2,971 |   |   | 6.64 | % |   | 96,397 |   |   | 3,249 |   |   | 6.78 | % |
| -                consumer                                                               |   |   | 363,951 |   |   | 11,784 |   |   | 6.53 | % |   | 335,639 |   |   | 10,989 |   |   | 6.58 | % |
| Total                earning assets                                                     |   | $ | 1,899,498 |   | $ | 57,003 |   |   | 6.05 | % | $ | 1,818,919 |   | $ | 52,124 |   |   | 5.76 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      |   | $ | 514,316 |   | $ | 3,033 |   |   | 1.19 | % | $ | 486,839 |   | $ | 2,016 |   |   | 0.83 | % |
| -                time                                                                   |   |   | 653,761 |   |   | 9,928 |   |   | 3.06 | % |   | 625,433 |   |   | 9,117 |   |   | 2.93 | % |
| Short-term                borrowings                                                    |   |   | 33,958 |   |   | 357 |   |   | 2.12 | % |   | 67,677 |   |   | 322 |   |   | 0.96 | % |
| Long-term                debt                                                           |   |   | 424,642 |   |   | 9,702 |   |   | 4.61 | % |   | 388,952 |   |   | 9,009 |   |   | 4.66 | % |
| Subordinated                debt                                                        |   |   | 30,928 |   |   | 954 |   |   | 6.22 | % |   | 30,928 |   |   | 755 |   |   | 4.91 | % |
| Total                interest-bearing liabilities                                       |   | $ | 1,657,605 |   | $ | 23,974 |   |   | 2.92 | % | $ | 1,599,829 |   | $ | 21,219 |   |   | 2.67 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |   |   |   |   |   |   |   | 6.05 | % |   |   |   |   |   |   |   | 5.76 | % |
| Interest                expense to paying liabilities                                   |   |   |   |   |   |   |   |   | 2.92 | % |   |   |   |   |   |   |   | 2.67 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |   |   |   |   |   |   |   | 3.13 | % |   |   |   |   |   |   |   | 3.09 | % |
| Impact                of non-interest funds                                             |   |   |   |   |   |   |   |   | 0.38 | % |   |   |   |   |   |   |   | 0.33 | % |
| Net                interest margin                                                      |   |   |   |   | $ | 33,029 |   |   | 3.51 | % |   |   |   | $ | 30,905 |   |   | 3.42 | % |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**Provision      for Loan Losses**

**Non-Interest      Income**

----

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

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

**Non-Interest      Expenses**

----

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

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

**Income        Taxes**

**RESULTS        OF OPERATIONS**

**Quarter        ended June 30, 2005, compared to quarter ended June 30,        2004**

**Net        Interest Income**

|                                                                                            |   |                                                         |      |                                            |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-----------|-------------------------------------------------|--------|
|                                                                                            |   | **Net                    Interest Margin - Quarter to Date** |      |                                            |   |
| (dollars                    in thousands)                                                       |   | June                    30, 2005                             |      | June                    30, 2004                |   |
|                                                                                            |   | Average                    Balance                           |      | FTE                    Interest Income/ Expense |   | Average                    Rate Earned/Paid |   | Average                    Balance |   | FTE                    Interest Income/ Expense |   | Average                    Rate Earned/Paid |   |
| Federal                    funds sold and interest-bearing                    deposits in banks |   | $                                                            | 78,196    |                                            | $      | 583 |   |   | 2.99 | % | $ | 11,960 |   | $ | 26 |   |   | 0.87 | % |
| Investment                    securities                                                        |   |                                                         | 583,246   |                                            |   | 8,235 |   |   | 5.66 | % |   | 701,904 |   |   | 9,268 |   |   | 5.31 | % |
| Loans                    - commercial                                                           |   |                                                         | 438,396   |                                            |   | 6,968 |   |   | 6.38 | % |   | 402,566 |   |   | 5,516 |   |   | 5.51 | % |
| -                    commercial real estate                                                     |   |                                                         | 371,725   |                                            |   | 5,888 |   |   | 6.35 | % |   | 302,104 |   |   | 4,574 |   |   | 6.09 | % |
| -                    residential real estate                                                    |   |                                                         | 89,164    |                                            |   | 1,470 |   |   | 6.61 | % |   | 95,009 |   |   | 1,574 |   |   | 6.66 | % |
| -                    consumer                                                                   |   |                                                         | 368,107   |                                            |   | 5,987 |   |   | 6.52 | % |   | 340,942 |   |   | 5,563 |   |   | 6.56 | % |
| Total                    earning assets                                                         |   | $                                                            | 1,928,834 |                                            | $      | 29,131 |   |   | 6.06 | % | $ | 1,854,485 |   | $ | 26,521 |   |   | 5.75 | % |
|                                                                                            |   |                                                         |      |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                    - savings and NOW accounts                                          |   | $                                                            | 526,821   |                                            | $      | 1,720 |   |   | 1.31 | % | $ | 416,409 |   | $ | 1,127 |   |   | 0.88 | % |
| -                    time                                                                       |   |                                                         | 665,637   |                                            |   | 5,181 |   |   | 3.12 | % |   | 629,837 |   |   | 4,548 |   |   | 2.90 | % |
| Short-term                    borrowings                                                        |   |                                                         | 36,687    |                                            |   | 200 |   |   | 2.19 | % |   | 83,333 |   |   | 198 |   |   | 0.96 | % |
| Long-term                    debt                                                               |   |                                                         | 424,105   |                                            |   | 4,885 |   |   | 4.62 | % |   | 367,757 |   |   | 4,428 |   |   | 4.84 | % |
| Subordinated                    debt                                                            |   |                                                         | 30,928    |                                            |   | 495 |   |   | 6.42 | % |   | 30,928 |   |   | 377 |   |   | 4.90 | % |
| Total                    interest-bearing liabilities                                           |   | $                                                            | 1,684,178 |                                            | $      | 12,481 |   |   | 2.97 | %    | $ | 1,628,264 |   | $ | 10,678 |   |   | 2.64 | % |
|                                                                                            |   |                                                         |      |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                    income to earning assets                                            |   |                                                         |      |                                            |   |   |   |   | 6.06 | % |   |   |   |   |   |   |   | 5.75 | % |
| Interest                    expense to paying liabilities                                       |   |                                                         |      |                                            |   |   |   |   | 2.97 | % |   |   |   |   |   |   |   | 2.64 | % |
|                                                                                            |   |                                                         |      |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                    spread                                                              |   |                                                         |      |                                            |   |   |   |   | 3.09 | % |   |   |   |   |   |   |   | 3.11 | % |
| Impact                    of non-interest funds                                                 |   |                                                         |      |                                            |   |   |   |   | 0.37 | % |   |   |   |   |   |   |   | 0.33 | % |
| Net                    interest margin                                                          |   |                                                         |      |                                            | $      | 16,650 |   |   | 3.46 | % |   |   |   | $ | 15,843 |   |   | 3.44 | % |

----

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

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

**Provision        for Loan Losses**

**Non-Interest        Income**

----

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

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

**Non-Interest        Expenses**

**Income        Taxes**

**FINANCIAL        CONDITION**

|                                                              |   | **June** **30,** |      | **Change** |   |
|-------------------------------------------------------------------|--------|-----------------------|-----------|------------|--------|
|                                                              |   | **2005**              |      | **2004**   |   | Volume |   | % |   |
| Cash                  and due from banks                          |   | $                     | 34,878    |       | $      | 35,215 |   |   | (337 | ) |   | (1 | )% |
| Federal                  funds sold and other                     |   |                  | 51,157    |       |   | 9,179 |   |   | 41,978 |   |   | 457 | % |
| Investments                                                       |   |                  | 598,051   |       |   | 686,825 |   |   | (88,774 | ) |   | (13 | )% |
| Loans                  held for sale                              |   |                  | 2,092     |       |   | 4,151 |   |   | (2,059 | ) |   | (50 | )% |
| Loans                                                             |   |                  | 1,248,451 |       |   | 1,119,358 |   |   | 129,093 |   |   | 12 | % |
| Allowance                  for loan losses                        |   |                  | 14,862    |       |   | 13,828 |   |   | 1,034 |   |   | 8 | % |
| Net                  loans                                        |   |                  | 1,233,589 |       |   | 1,105,530 |   |   | 128,059 |   |   | 12 | % |
| Goodwill                  and identifiable intangibles            |   |                  | 5,009     |       |   | 4,800 |   |   | 209 |   |   | 4 | % |
| Other                  assets                                     |   |                  | 82,928    |       |   | 83,627 |   |   | (699 | ) |   | (1 | )% |
|                                                              |   |                  |      |       |   |   |   |   |   |   |   |   |   |
| Total                  assets                                     |   | $                     | 2,007,704 |       | $      | 1,929,327 |   | $ | 78,377 |   |   | 4 | % |
|                                                              |   |                  |      |       |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                  deposits                     |   | $                     | 183,427   |       | $      | 170,700 |   | $ | 12,727 |   |   | 7 | % |
| Interest-bearing                  deposits                        |   |                  | 1,168,076 |       |   | 1,112,272 |   |   | 55,804 |   |   | 5 | % |
| Short-term                  borrowings                            |   |                  | 33,958    |       |   | 67,677 |   |   | (33,719 | ) |   | (50 | )% |
| Long-term                  debt                                   |   |                  | 424,642   |       |   | 388,952 |   |   | 35,690 |   |   | 9 | % |
| Subordinated                  debt                                |   |                  | 30,928    |       |   | 30,928 |   |   | --- |   |   | --- |   |
| Other                  liabilities                                |   |                  | 13,677    |       |   | 13,980 |   |   | (303 | ) |   | (2 | )% |
|                                                              |   |                  |      |       |   |   |   |   |   |   |   |   |   |
| Total                  liabilities                                |   |                  | 1,854,708 |       |   | 1,784,509 |   |   | 70,199 |   |   | 4 | % |
|                                                              |   |                  |      |       |   |   |   |   |   |   |   |   |   |
| Stockholders’                  equity                       |   |                  | 152,996   |       |   | 144,818 |   |   | 8,178 |   |   | 6 | % |
|                                                              |   |                  |      |       |   |   |   |   |   |   |   |   |   |
| Total                  liabilities and stockholders’ equity |   | $                     | 2,007,704 |       | $      | 1,929,327 |   | $ | 78,377 |   |   | 4 | % |

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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)**

|                                     |   |     |      |     |   | **Change** |   |
|------------------------------------------|--------|----------|-----------|----------|--------|------------|--------|
|                                     |   | **2005** |      | **2004** |   | Amount     |   |  % |   |
| Commercial                               |   | $        | 429,149   |     | $      | 398,176    |   | $ | 30,973 |   |   | 8 | % |
| Commercial                  real estate  |   |     | 366,943   |     |   | 292,703    |   |   | 74,240 |   |   | 25 | % |
| Residential                  real estate |   |     | 90,247    |     |   | 96,397     |   |   | (6,150 | ) |   | (6 | )% |
| Consumer                                 |   |     | 362,112   |     |   | 332,082    |   |   | 30,030 |   |   | 9 | % |
| Total                                    |   | $        | 1,248,451 |     | $      | 1,119,358  |   |   | 129,093 |   |   | 12 | % |

|                                        |   |     |      |     |   | **Change** |   |
|---------------------------------------------|--------|----------|-----------|----------|--------|------------|--------|
|                                        |   | **2005** |      | **2004** |   | Amount     |   |  % |   |
| Demand                                      |   | $        | 183,427   |     | $      | 170,700    |   | $ | 12,727 |   |   | 7 | % |
| Savings                  & NOW accounts |   |     | 514,315   |     |   | 486,839    |   |   | 27,476 |   |   | 6 | % |
| Time                                        |   |     | 533,194   |     |   | 506,177    |   |   | 27,017 |   |   | 5 | % |
| Time                  $100,000 or more      |   |     | 120,567   |     |   | 119,256    |   |   | 1,311 |   |   | 1 | % |
|                                        |   | $        | 1,351,503 |     | $      | 1,282,972  |   | $ | 68,531 |   |   | 5 | % |

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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)**

**Capital**

|                                            |   | **June                  30,** |   | **Regulatory** |   | **“Well**        |   |
|-------------------------------------------------|--------|-------------------------------|--------|----------------|--------|------------------------|--------|
|                                            |   | **2005**                      |   | **Minimum**    |   | **Capitalized”** |   |
| Leverage                  ratio                 |   |                          |   |           |   |                   |   |
| Community                  Banks, Inc.          |   |                          | 8.6    | %              |   | 4                      | %      |   | n/a |   |
| Community                  Banks                |   |                          | 8.0    | %              |   | 4                      | %      |   | 5 | % |
|                                            |   |                          |   |           |   |                   |   |   |   |   |
| Tier                  1 capital ratio           |   |                          |   |           |   |                   |   |   |   |   |
| Community                  Banks, Inc.          |   |                          | 11.3   | %              |   | 4                      | %      |   | n/a |   |
| Community                  Banks                |   |                          | 10.5   | %              |   | 4                      | %      |   | 6 | % |
|                                            |   |                          |   |           |   |                   |   |   |   |   |
| Total                  risk-based capital ratio |   |                          |   |           |   |                   |   |   |   |   |
| Community                  Banks, Inc.          |   |                          | 12.3   | %              |   | 8                      | %      |   | n/a |   |
| Community                  Banks                |   |                          | 11.5   | %              |   | 8                      | %      |   | 10 | % |

----

**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**                                                 |   |             |    |               |   |                              |   |                                |    |      |   |   |   |   |   |   |
| Interest-bearing                  deposits in other banks  |   | $                | 13,102  |               | $      | ---                               |   | $                                   | ---     |      | $      | --- |   | $ | 13,102 |   |
| Loans                  held for sale                       |   |             | ---     |               |   | ---                               |   |                                | ---     |      |   | 1,517 |   |   | 1,517 |   |
| Investment                  securities                     |   |             | 94,072  |               |   | 16,301                            |   |                                | 50,458  |      |   | 402,475 |   |   | 563,306 |   |
| Loans(1)                                                   |   |             | 487,596 |               |   | 64,777                            |   |                                | 100,328 |      |   | 631,987 |   |   | 1,284,688 |   |
| Earning                  assets                            |   |             | 594,770 |               |   | 81,078                            |   |                                | 150,786 |      |   | 1,035,979 |   |   | 1,862,613 |   |
| Non-earning                  assets                        |   |             | ---     |               |   | ---                               |   |                                | ---     |      |   | 120,119 |   |   | 120,119 |   |
| Total                  assets                              |   | $                | 594,770 |               | $      | 81,078                            |   | $                                   | 150,786 |      | $      | 1,156,098 |   | $ | 1,982,732 |   |
| **Liabilities**                                            |   |             |    |               |   |                              |   |                                |    |      |   |   |   |   |   |   |
| Savings                                                    |   | $                | 192,652 |               | $      | ---                               |   | $                                   | ---     |      | $      | 328,898 |   | $ | 521,550 |   |
| Time                                                       |   |             | 71,659  |               |   | 59,982                            |   |                                | 108,858 |      |   | 300,150 |   |   | 540,649 |   |
| Time                  in denominations of $100,000 or more |   |             | 31,283  |               |   | 16,610                            |   |                                | 22,407  |      |   | 60,979 |   |   | 131,279 |   |
| Short-term                  borrowings                     |   |             | 40,576  |               |   | ---                               |   |                                | ---     |      |   | --- |   |   | 40,576 |   |
| Long-term                  debt                            |   |             | 1,744   |               |   | 26,757                            |   |                                | 3,551   |      |   | 324,158 |   |   | 356,210 |   |
| Subordinated                  debt                         |   |             | 23,196  |               |   | ---                               |   |                                | ---     |      |   | 7,732 |   |   | 30,928 |   |
| Interest                  bearing liabilities              |   |             | 361,110 |               |   | 103,349                           |   |                                | 134,816 |      |   | 1,021,917 |   |   | 1,621,192 |   |
| Other                  liabilities and equity              |   |             | 5,681   |               |   | 5,682                             |   |                                | 11,363  |      |   | 338,814 |   |   | 361,540 |   |
| Total                  liabilities and equity              |   | $                | 366,791 |               | $      | 109,031                           |   | $                                   | 146,179 |      | $      | 1,360,731 |   | $ | 1,982,732 |   |

| **Interest                  Sensitivity GAP**                                    |   |             |    |               |   |                              |   |                                |    |
|----------------------------------------------------------------------------------|--------|------------------|---------|--------------------|--------|-----------------------------------|--------|-------------------------------------|---------|
| **Dollars                  in thousands**                                        |   | **1-90****days** |    | **90-180****Days** |   | **180-365                  days** |   | **1                  year or more** |    |
|                                                                             |   |             |    |               |   |                              |   |                                |    |   |   |   |   |
| Periodic                                                                         |   | $                | 227,979 |               | $      | (27,953                           | )      | $                                   | 4,607   |   | $ | (204,633 | ) |
| Cumulative                                                                       |   |             |    |               |   | 200,026                           |   |                                | 204,633 |   |   | --- |   |
| Cumulative                  GAP as a percentage of                  total assets |   |             | 11.50   | %                  |   | 10.09                             | %      |                                | 10.32   | % |   | 0 | % |

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

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

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**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

**PART        II - OTHER INFORMATION **

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

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

**Item        3 - Defaults Upon Senior        Securities**

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

**Item        5 - Other Information**

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**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

**PART        II - OTHER INFORMATION**

**(continued)**

**Item        6 - Exhibits**

| 2    | Merger                  agreement between Community Banks, Inc. and PennRock Financial                  Services                  Corp., dated November 16, 2004 (Incorporated by reference to Exhibit                  10.1,                  attached to Community’s Current Report on Form 8-K, filed with the                  Commission on November 22, 2004)                                                                                                                                                                                                   |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | Amended                  and Restated Articles of Incorporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2  | Amended                  By-Laws (Incorporated by reference to Exhibit 3.2, attached to                  Community’s                  Quarterly Report on Form 10-Q for the quarter ended March 31, 2003,                  filed                  with the Commission on May 15, 2003)                                                                                                                                                                                                                                                                                |
| 4    | Instruments                  defining the rights of the holders of trust capital securities                  sold by                  Community in December 2002 and in December 2003 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   | August                  9, 2005 |   | /s/    | Eddie                  L. Dunklebarger     |
|--------|---------------------------------|--------|--------|--------------------------------------------|
|   |                            |   |   | Eddie                  L. Dunklebarger     |
|   |                            |   |   | Chairman                  and President    |
|   |                            |   |   | (Chief                  Executive Officer) |
|   |                            |   |   |                                       |
| Date   | August                  9, 2005 |   | /s/    | Donald                  F. Holt            |
|   |                            |   |   | Donald                  F. Holt            |
|   |                            |   |   | Executive                  Vice President  |
|   |                            |   |   | (Chief                  Financial Officer) |

**EXHIBIT        INDEX**

| 2    | Merger                    agreement between Community Banks, Inc. and PennRock Financial                    Services                    Corp., dated November 16, 2004 (Incorporated by reference to                    Exhibit 10.1,                    attached to Community’s Current Report on Form 8-K, filed with the                    Commission on November 22, 2004)                                                                                                                                                                                                           |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | Amended                    and Restated Articles of Incorporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2  | Amended                    By-Laws (Incorporated by reference to Exhibit 3.2, attached to                    Community’s                    Quarterly Report on Form 10-Q for the quarter ended March 31,                    2003, filed                    with the Commission on May 15, 2003)                                                                                                                                                                                                                                                                                          |
| 4    | Instruments                    defining the rights of the holders of trust capital securities                    sold by                    Community in December 2002 and in December 2003 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

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