UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                       PURSUANT TO SECTIONS 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

  |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                                  Act of 1934

                   For the Fiscal Year Ended December 31, 2006

                                       OR

     |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

              For the transition period from _________ to _________

                           Commission File No. 0-25766

                     Community Bank Shares of Indiana, Inc.
             (Exact Name of Registrant as Specified in its Charter)

                      Indiana                              35-1938254
          (State or Other Jurisdiction of               (I.R.S. Employer
          Incorporation or Organization)             Identification Number)

                101 West Spring Street, New Albany, Indiana 47150
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's telephone number, including area code: (812) 944-2224

          Securities Registered Pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
          Title of Each Class                Name of Each Exchange on Which Registered
          -------------------                -----------------------------------------
<S>                                                     <C>
Common Stock, par value $0.10 per share                 NASDAQ National Market
</TABLE>

           Securities Registered Pursuant to Section 12(g) of the Act:
                                      None

Indicate by checkmark if the  Registrant  is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. YES |_| NO |X|

Indicate  by  checkmark  if the  Registrant  is not  required  to file  requests
pursuant to Section 13 or 15(d) of the Act. YES |_| NO |X|

Indicate  by check  mark  whether  the  Registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant  was required to file such  reports) and (2) has been subject to such
requirements for the past 90 days. YES |X| NO |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

Indicate by check mark whether the Registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

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

<PAGE>

Indicate by check mark whether the  Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|

As of March 15, 2007,  the  aggregate  market value of the  Registrant's  common
stock held by  non-affiliates  of the  Registrant was  $70,475,914  based on the
closing sale price as reported on the National Association of Securities Dealers
Automated  Quotation System National Market System.  Shares of common stock held
by each officer,  director,  and holder of 10% or more of the outstanding common
stock of the  Registrant  have been excluded from this  calculation in that such
persons may be deemed to be affiliates.  This  determination of affiliate status
is not necessarily a conclusive determination for other purposes.

As of March 15, 2007, there were issued and outstanding  3,429,996 shares of the
Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  definitive Proxy Statement for its Annual Meeting
of  Stockholders  to be held on May 15,  2007 (the "2007 Proxy  Statement")  are
incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.


--------------------------------------------------------------------------------

                                       2
<PAGE>

                                    Form 10-K
                                      Index

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>                                                                                                     <C>
Part I:
    Item 1.  Business                                                                                    4
    Item 1A  Risk Factors                                                                                9
    Item 1B  Unresolved Staff Comments                                                                  12
    Item 2.  Properties                                                                                 13
    Item 3.  Legal Proceedings                                                                          14
    Item 4.  Submission of Matters to a Vote of Security Holders                                        14

Part II:
    Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities                                                          15
    Item 6.  Selected Financial Data                                                                    17
    Item 7.  Management's Discussion and Analysis of Financial Condition and
                Results of Operations                                                                   18
    Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                 32
    Item 8.  Financial Statements and Supplementary Data                                                34
    Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures      79
    Item 9A. Controls and Procedures                                                                    79
    Item 9B  Other Information

Part III:
    Item 10. Directors and Executive Officers of the Registrant                                         79
    Item 11. Executive Compensation                                                                     79
    Item 12. Security Ownership of Certain Beneficial Owners
                and Management and Related Stockholder Matters                                          79
    Item 13. Certain Relationships and Related Transactions                                             79
    Item 14. Principal Accountant Fees and Services                                                     79

Part IV:
    Item 15. Exhibits and Financial Statement Schedules                                                 80

Signatures                                                                                              82

Index of Exhibits                                                                                       83
</TABLE>


--------------------------------------------------------------------------------

                                       3
<PAGE>

Part I

Item 1. Business

General

Community Bank Shares of Indiana, Inc. (the "Company") is a bank holding company
headquartered  in  New  Albany,  Indiana.  The  Company's  wholly-owned  banking
subsidiaries are Your Community Bank, which changed its name effective  November
1, 2005, from Community Bank of Southern Indiana  ("YCB"),  and The Scott County
State Bank  ("SCSB"),  which was acquired on July 1, 2006 through the  Company's
acquisition  of The  Bancshares,  Inc (YCB  and  SCSB are at times  collectively
referred to herein as the "Banks").  Until  November 14, 2003,  the Company also
operated four bank offices in Jefferson and Nelson County,  Kentucky through its
wholly-owned banking subsidiary,  Community Bank of Kentucky,  Inc. ("CBKY"). On
November   14,  2003  CBKY  was  merged  with  and  into  YCB.   The  Banks  are
state-chartered  commercial  banks  headquartered  in New  Albany,  Indiana  and
Scottsburg,  Indiana,  respectively,  and  are  both  regulated  by the  Indiana
Department  of  Financial  Institutions.  YCB is also  regulated  by the Federal
Deposit  Insurance  Corporation and (with respect to its Kentucky  branches) the
Kentucky  Office of Financial  Institutions  while SCSB is also regulated by the
Federal Reserve.

YCB has three wholly-owned subsidiaries to manage its investment portfolio. CBSI
Holdings, Inc. and CBSI Investments,  Inc. are Nevada corporations which jointly
own CBSI  Investment  Portfolio  Management,  LLC,  a Nevada  limited  liability
corporation which holds and manages  investment  securities  previously owned by
the Bank.

YCB also has a Community Development Entity (CDE) subsidiary formed in July 2002
named CBSI  Development  Fund,  Inc. The CDE enables YCB to  participate  in the
federal New Markets Tax Credit (NMTC) Program.  The NMTC Program is administered
by the Community  Development  Financial  Institutions Fund of the United States
Treasury and is designed to promote  investment  in  low-income  communities  by
providing a tax credit over seven years for equity investments in CDE's.

In June 2004 and June 2006,  the Company  completed  placements of floating rate
subordinated debentures through two trusts formed by the Company, Community Bank
Shares (IN) Statutory  Trust I and Trust II  ("Trusts").  Because the Trusts are
not consolidated with the Company,  pursuant to FASB  Interpretation No. 46, the
Company's  financial  statements  reflect  the  subordinated  debt issued by the
Company to the Trusts.

The  Company  had total  assets  of $816.6  million,  total  deposits  of $549.9
million,  and stockholders' equity of $65.5 million as of December 31, 2006. The
Company's  principal  executive office is located at 101 West Spring Street, New
Albany,  Indiana  47150,  and the  telephone  number  at that  address  is (812)
944-2224.

Business Strategy

The  Company's  current  business  strategy  is  to  operate   well-capitalized,
profitable and independent  community banks with a significant presence in their
primary  market  areas.  The Company's  growth  strategy is focused on expansion
through organic growth within its market areas.  The Company offers business and
personal  banking services through a full range of deposit products that include
non-interest and interest-bearing checking accounts, ATM's, debit cards, savings
accounts,  money  market  accounts,   certificates  of  deposit  and  individual
retirement accounts. The Company's loan products include:  secured and unsecured
business  loans  of  various  terms  to  local   businesses   and   professional
organizations;  consumer loans including home equity lines of credit, automobile
and  recreational  vehicle,  credit  cards,  construction,  and loans secured by
deposit  accounts;  and residential real estate loans. In addition,  the Company
also offers non-deposit investment products such as stocks, bonds, mutual funds,
and annuities to customers  within its banking  market areas through a strategic
alliance with Smith Barney.

Internal Growth.  Management  believes the optimum way to grow the Company is by
attracting new loan and deposit  customers  within its existing  markets through
its  extensive  product  offering and  attentive  customer  service.  Management
believes  the  Company's   customers   seek  a  banking   relationship   with  a
service-oriented  community banking  institution and feels the Company's banking
centers have an atmosphere which  facilitates  personalized  service and a broad
range of product offerings to meet customers' needs.  However,  the Company will
consider acquisition opportunities that help advance its strategic objectives.

Branch  Expansion.  Management  continues to consider  opportunities  for branch
expansion  and  is  focusing  its  current  efforts  within  existing   markets.
Management  considers a variety of criteria when evaluating  potential branching
opportunities.  These include:  the market location of the potential  branch and
demographics  of  the  surrounding  communities;  the  investment  required  and
opportunity  costs;  staffing  needs;  and other  criteria  management  deems of
particular importance.

Lending Activities

Commercial  Business  Loans.  The Company  originates  non-real  estate  related
business loans to local small  businesses and professional  organizations.  This
type of commercial  loan has been offered at both variable rates and fixed rates
and can be unsecured or secured by general  business  assets such as  equipment,
accounts  receivable or inventory.  The Company has increased its origination of
commercial  business  loans over the last few years.  Such loans  generally have
shorter  terms and higher


--------------------------------------------------------------------------------

                                       4
<PAGE>

interest rates than commercial real estate loans.  However,  commercial business
loans also  involve a higher level of credit risk because of the type and nature
of the collateral.

Commercial  Real Estate Loans.  The Company's  commercial  real estate loans are
secured  by  improved  property  such as  offices,  small  business  facilities,
apartment  buildings,   nursing  homes,  warehouses  and  other  non-residential
buildings,  most of which are located in the Company's  primary  market area and
some of which  are to be used or  occupied  by the  borrowers.  Commercial  real
estate loans have been offered at adjustable  interest  rates and at fixed rates
with balloon provisions at the end of the term financing.  The Company continues
to originate  commercial real estate loans,  commercial real estate construction
loans and land loans.  Loans secured by commercial real estate generally involve
a greater degree of risk than  residential  mortgage loans and carry larger loan
balances.  This increased credit risk is a result of several factors,  including
the concentrations of principal in a limited number of loans and borrowers,  the
effects of general economic conditions on income producing  properties,  and the
increased  difficulty  of  evaluating  and  monitoring  these  types  of  loans.
Furthermore,  the repayment of loans secured by multifamily  and commercial real
estate is typically dependent upon the successful  operation of the related real
estate  project.  If the cash flow from the project is reduced,  the  borrower's
ability  to repay  the loan may be  impaired.  The  Company  has  increased  its
origination of multi-family residential or commercial real estate loans over the
last few years, but attempts to protect itself against the increased credit risk
associated  with these loans  through  its  underwriting  standards  and ongoing
monitoring processes.

Residential  Real Estate  Loans.  The  Company  originates  one-to-four  family,
owner-occupied,  residential  mortgage loans secured by property  located in the
Company's  market  area.  While the  Company  currently  sells a portion  of its
residential  real estate  loans into the  secondary  market,  the  Company  does
originate and retain a significant  amount of these loans in its own  portfolio.
The  majority  of the  Company's  residential  mortgage  loans  consist of loans
secured by  owner-occupied,  single  family  residences.  The Company  currently
offers residential  mortgage loans for terms up to thirty years, with adjustable
("ARM") or fixed interest rates. Origination of fixed-rate mortgage loans versus
ARM loans is monitored  continuously and is affected  significantly by the level
of market interest rates, customer preference,  and loan products offered by the
Company's competitors.  Therefore, even if management's strategy is to emphasize
ARM  loans,  market  conditions  may be such that  there is  greater  demand for
fixed-rate mortgage loans.

The  primary  purpose  of  offering  ARM  loans  is to make the  Company's  loan
portfolio more interest rate sensitive.  ARM loans, however, can carry increased
credit risk because during a period of rising interest rates the risk of default
on ARM loans may increase due to increases in borrowers' monthly payments.

The Company's  fixed-rate  mortgage  loans are amortized on a monthly basis with
principal  and  interest  due each month.  Residential  real estate  loans often
remain  outstanding for  significantly  shorter  periods than their  contractual
terms because borrowers may refinance or prepay loans at their option.

After the initial fixed rate period,  the Company's ARM loans  generally  adjust
annually with interest rate adjustment  limitations of two percentage points per
year and six percentage points over the life of the loan. The Company also makes
ARM loans with interest rates that adjust every one, three or five years.  Under
the Company's current practice, after the initial fixed rate period the interest
rate on ARM loans adjusts to the applicable  index plus a spread.  The Company's
policy is to qualify  borrowers  for  one-year  ARM loans  based on the  initial
interest rate plus the maximum annual rate increase.

The Company has used  different  indices for its ARM loans such as the  National
Average  Median  Cost of Funds,  the Sixth  District  Net Cost of Funds  Monthly
Index,  the National  Average  Contract Rate for Previously  Occupied Homes, the
average three year Treasury Bill Rate, and the Eleventh  District Cost of Funds.
Consequently,  the adjustments in the Company's  portfolio of ARM loans tend not
to reflect any one particular  change in any specific  interest rate index,  but
general interest rate trends overall.

Secondary market  regulations limit the amount that a bank may lend based on the
appraised value of real estate. Such regulations permit a maximum  loan-to-value
ratio of 95% percent for residential property and from 65-90% for all other real
estate related loans.

The Company  occasionally makes real estate loans with  loan-to-value  ratios in
excess of 80%. For the loans sold into the secondary market, individual investor
requirements  pertaining to private  mortgage  insurance apply. For the mortgage
real estate loans retained by the Company with  loan-to-value  ratios of 80-90%,
the  Company  may  require  the first 20% of the loan to be  covered  by private
mortgage  insurance.  For the mortgage real estate loans retained by the Company
with  loan-to-value  ratios of 90-95%,  the Company may require private mortgage
insurance  to cover the first 25-30% of the loan  amount.  The Company  requires
fire and casualty insurance, as well as title insurance or an opinion of counsel
regarding good title,  on all properties  securing real estate loans made by the
Company.

Construction  Loans. The Company originates loans to finance the construction of
owner-occupied  residential  property.  The Company makes  construction loans to
private  individuals for the purpose of constructing a personal  residence or to
local real estate builders and developers. Construction loans generally are made
with either adjustable or fixed-rate terms of up to 12 months. Loan proceeds are
disbursed in increments as construction  progresses and as inspections  warrant.
Construction  loans are structured to be converted to permanent loans at the end
of the  construction  period  or to be  terminated  upon  receipt  of  permanent
financing from another financial institution.

Consumer Loans. The principal types of consumer loans offered by the Company are
home equity lines of credit,  auto loans, home improvement  loans,  credit cards
and  loans  secured  by  deposit  accounts.  Home  equity  lines of  credit  are
predominately  made at rates which  adjust  periodically  and are indexed to the
prime rate. Some consumer loans are offered on a fixed-rate basis depending


--------------------------------------------------------------------------------

                                       5
<PAGE>

upon the  borrower's  preference.  The Company's home equity lines of credit are
generally  secured  by  the  borrower's   principal  residence  and  a  personal
guarantee.

The underwriting  standards employed by the Company for consumer loans include a
determination  of  the  applicant's  credit  history  and an  assessment  of the
prospective  borrower's ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by  verification  of gross monthly  income from primary  employment and from any
verifiable secondary income. The underwriting process also includes a comparison
of the value of the collateral in relation to the proposed loan amount.

Mortgage-Banking   Operations.   The  Company  originates  qualified  government
guaranteed  loans and  conventional  secondary  market loans which are generally
sold with the servicing released.  This arrangement provides necessary liquidity
to the  Company  while  providing  additional  loan  products  to the  Company's
customers.

Loan  Solicitation  and  Processing.  Loans are  originated  through a number of
sources  including  loan sales staff,  real estate  broker  referrals,  existing
customers,  borrowers,  builders,  attorneys and walk-in  customers.  Processing
procedures  are affected by the type of loan requested and whether the loan will
be funded by the Company or sold into the secondary market.

Mortgage  loans  that are sold into the  secondary  market are  submitted,  when
possible,  for Automated  Underwriting,  which allows for faster approval and an
expedited  closing.   The  Company's   responsibility  on  these  loans  is  the
fulfillment of the loan purchaser's requirements. These loans often have reduced
underwriting  features and may be made without an appraisal or credit  report at
the option of the  purchaser.  Loans  that are  reviewed  in a more  traditional
manner,  which are mostly loans held for the  Company's own  portfolio,  require
credit reports,  appraisals, and income verification before they are approved or
disapproved.  Private mortgage  insurance is generally  required on loans with a
ratio of loan to  appraised  value of  greater  than  eighty  percent.  Property
insurance and flood certifications are required on all real estate loans.

Installment  loan  documentation  varies by the type of  collateral  offered  to
secure the loan. In general, an application and credit report is required before
a loan is submitted for underwriting.  The underwriter  determines the necessity
of any additional  documentation,  such as income  verification  or appraisal of
collateral.  An  authorized  loan  officer  approves or declines  the loan after
review of all applicable loan  documentation  collected  during the underwriting
process.

Commercial  loans are  underwritten by the commercial loan officer who makes the
initial contact with the customer applying for credit. The underwriting of these
loans is reviewed after the fact by the Risk Management area for compliance with
the Company's general underwriting  standards. A loan exceeding the authority of
the  underwriting  loan officer  requires the approval of other  officers of the
Banks based upon individual  lending  authorities,  or the Board of Directors of
the Banks, depending on the loan amount.

Loan Commitments.  The Company issues loan origination  commitments to qualified
borrowers primarily for the construction and purchase of residential real estate
and commercial real estate.  Such  commitments are made with specified terms and
conditions for periods of thirty days for commercial real estate loans and sixty
days for residential real estate loans.

Employees

As of December 31, 2006, the Company  employed 241 employees,  207 full-time and
34 part-time. None of these employees are represented by a collective bargaining
group.  Neither the  Company  nor any  subsidiary  has ever  experienced  a work
stoppage.

Competition and Market Area Served

The banking business is highly competitive, and as such the Company competes not
only with other commercial  banks, but also with savings and loan  associations,
trust  companies  and credit  unions for  deposits  and loans,  as well as stock
brokerage firms,  insurance companies,  and other entities providing one or more
of the services and products offered by the Company. In addition to competition,
the  Company's  business  and  operating  results  are  affected  by the general
economic conditions prevalent in its market.

The Company's  primary market areas consist of Floyd,  Clark, and Scott counties
in Southern  Indiana and  Jefferson and Nelson  counties in Kentucky.  These are
four  (excluding  Scott  County)  of  the  thirteen   counties   comprising  the
Louisville,  Kentucky  Standard  Metropolitan  Statistical  Area,  which  has  a
population in excess of 1.2 million.  The aggregate  population of Floyd, Clark,
and Scott counties is  approximately  197,000 while the populations of Jefferson
and Nelson  Counties are  approximately  700,000 and 41,000,  respectively.  The
Company's  headquarters  are  located in New Albany,  Indiana,  a city of 37,000
located approximately three miles from the center of Louisville.

Nature of Company's Business

The business of the Company is not  seasonal.  The  Company's  business does not
depend upon a single customer,  or a few customers,  the loss of any one or more
of which  would have a  material  adverse  effect on the  Company.  No  material
portion of the  Company's  business  is subject to  renegotiation  of profits or
termination  of contracts or  subcontracts  at the election of any  governmental
entity.


--------------------------------------------------------------------------------

                                       6
<PAGE>

Regulation and Supervision

As a bank  holding  company,  the Company is  regulated  under the Bank  Holding
Company Act of 1956, as amended (the "Act"). The Act limits the business of bank
holding   companies  to  banking,   managing  or  controlling  banks  and  other
subsidiaries  authorized under the Act, performing certain servicing  activities
for subsidiaries and engaging in such other activities as the Board of Governors
of the Federal  Reserve  System  ("Federal  Reserve  Board") may determine to be
closely  related to banking.  The Company is  registered  with and is subject to
regulation by the Federal Reserve Board. Among other things, applicable statutes
and regulations require the Company to file an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Act and the
regulations  which  implement  the Act. The Federal  Reserve Board also conducts
examinations of the Company.

The Act provides that a bank holding  company must obtain the prior  approval of
the Federal  Reserve Board to acquire more than five percent of the voting stock
or  substantially  all the assets of any bank or bank holding  company.  The Act
also provides that, with certain exceptions,  a bank holding company may not (i)
engage in any activities  other than those of banking or managing or controlling
banks and other authorized  subsidiaries,  or (ii) own or control more than five
percent of the voting  shares of any company that is not a bank,  including  any
foreign company. A bank holding company is permitted, however, to acquire shares
of any company, the activities of which the Federal Reserve Board has determined
to be so closely related to banking or managing or controlling  banks as to be a
proper  incident  thereto.  A bank holding  company may also acquire shares of a
company  which  furnishes or performs  services  for a bank holding  company and
acquire  shares of the kinds  and in the  amounts  eligible  for  investment  by
national banking  associations.  In addition,  the Federal Reserve Act restricts
the Bank's extension of credit to the Company.

On  November  12,  1999,  Congress  enacted  the  Gramm-Leach-Bliley   Act.  The
Gramm-Leach-Bliley  Act permits bank holding  companies to qualify as "financial
holding  companies"  that may engage in a broad range of  financial  activities,
including underwriting,  dealing in and making a market in securities, insurance
underwriting  and agency  activities and merchant  banking.  The Federal Reserve
Board is authorized to expand the list of permissible financial activities.  The
Gramm-Leach-Bliley  Act  also  authorizes  banks  to  engage  through  financial
subsidiaries  in nearly all of the  activities  permitted for financial  holding
companies.  The Company has not elected the status of financial  holding company
and at this  time  has no plans  for  these  investments  or  broader  financial
activities.

As state-chartered  commercial banks, the Company's subsidiary banks are subject
to  examination,  supervision  and extensive  regulation by the Federal  Deposit
Insurance Corporation ("FDIC"), the Indiana Department of Financial Institutions
("DFI") and (with respect to YCB and its branch offices located in Kentucky) the
Kentucky  Office of  Financial  Institutions.  The Banks are  members of and own
stock in the Federal Home Loan Bank ("FHLB") of  Indianapolis,  and  Cincinnati.
The FHLB  institutions  located in  Indianapolis  and  Cincinnati are two of the
twelve  regional  banks in the FHLB  system.  The  Banks  are  also  subject  to
regulation by the Federal Reserve Board, which governs reserves to be maintained
against  deposits and regulates  certain other matters.  The extensive system of
banking  laws and  regulations  to which  the  Banks  are  subject  is  intended
primarily for the protection of the Company's customers and depositors,  and not
its shareholders.

The FDIC,  Federal  Reserve,  and DFI  regularly  examine  the Banks and prepare
reports  for  the  consideration  of  the  Banks'  Board  of  Directors  on  any
deficiencies  that they may find in the Banks'  operations.  The relationship of
the Banks with their  depositors  and  borrowers  also is  regulated  to a great
extent by both  federal and state laws,  especially  in such matters as the form
and  content of the Banks'  mortgage  documents  and  communication  of loan and
deposit rates to both existing and prospective customers. Financial institutions
in various  regions of the United  States have been called upon by  examiners to
write down assets to their fair market values and to establish  increased levels
of reserves, primarily as a result of perceived weaknesses in real estate values
and a more restrictive regulatory climate.

The investment and lending authority of a state-chartered  bank is prescribed by
state and  federal  laws and  regulations,  and such banks are  prohibited  from
engaging in any  activities  not permitted by such laws and  regulations.  These
laws and regulations  generally are applicable to all state chartered banks. The
Banks may not lend to a single or related  group of  borrowers  on an  unsecured
basis an amount in excess of the greater of  $500,000 or fifteen  percent of the
Banks  unimpaired  capital and surplus on a  disaggregated  basis. An additional
amount may be lent, equal to ten percent of unimpaired  capital and surplus,  if
such loan is  secured  by  readily  marketable  collateral,  which is defined to
include certain securities, but generally does not include real estate.

Federal Regulations

Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to
executive officers,  directors and principal stockholders.  Under Section 22(h),
loans to a director,  an  executive  officer  and to a greater  than ten percent
stockholder  of a bank,  and certain  affiliated  interests  of either,  may not
exceed,  together with all other outstanding loans to such person and affiliated
interests,  the  institution's  loans to one  borrower  limit (15% of the Bank's
unimpaired  capital and  surplus).  Section  22(h) also  requires  that loans to
directors,  executive  officers  and  principal  stockholders  be made on  terms
substantially  the same as offered in comparable  transactions  to other persons
and also  requires  prior board of  directors  approval  for certain  loans.  In
addition,  the aggregate  amount of extensions of credit to all insiders  cannot
exceed the institution's  unimpaired  capital and surplus.  At December 31, 2006
the Banks were in compliance with the above restrictions.

Safety and Soundness.  The Federal Deposit Insurance Act ("FDIA"), as amended by
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and
the  Riegle  Community  Development  and  Regulatory  Improvement  Act of  1994,
requires  the federal  bank  regulatory  agencies  to  prescribe  standards,  by
regulations  or  guidelines,  relating  to the  internal  controls,  information


--------------------------------------------------------------------------------

                                       7
<PAGE>

systems and internal audit systems,  loan  documentation,  credit  underwriting,
interest-rate-risk  exposure,  asset  growth,  asset  quality,  earnings,  stock
valuation and  compensation,  fees and benefits and such other  operational  and
managerial  standards  as the agencies  may deem  appropriate.  The federal bank
regulatory  agencies  adopted,  effective  August 9, 1995,  a set of  guidelines
prescribing safety and soundness  standards  pursuant to FDICIA, as amended.  In
general,  the guidelines  require,  among other things,  appropriate systems and
practices  to  identify  and manage  the risks and  exposures  specified  in the
guidelines.

The FDIC generally is authorized to take enforcement  action against a financial
institution that fails to meet its capital requirements; such action may include
restrictions on operations and banking  activities,  the imposition of a capital
directive,  a cease and desist order,  civil money penalties or harsher measures
such as the  appointment  of a receiver or  conservator  or a forced merger into
another   institution.   In  addition,   under  current  regulatory  policy,  an
institution  that fails to meet its  capital  requirements  is  prohibited  from
paying any dividends. Except under certain circumstances,  further disclosure of
final enforcement action by the FDIC is required.

Prompt  Corrective  Action.  Under  Section  38 of the FDIA,  as  amended by the
FDICIA, each federal banking agency was required to implement a system of prompt
corrective  action for  institutions  which it  regulates.  The federal  banking
agencies,  including the FDIC,  adopted  substantially  similar  regulations  to
implement  Section 38 of the FDIA,  effective as of December 19, 1992. Under the
regulations,  an  institution is deemed to be (i)  "well-capitalized"  if it has
total risk-based  capital of 10.0% or more, a Tier 1 risk-based capital ratio of
6.0% or more, a Tier 1 leverage capital ratio of 5.0% or more and is not subject
to any order or final capital  directive to meet and maintain a specific capital
level for any capital measure, (ii)  "adequately-capitalized"  if it has a total
risk-based  capital ratio of 8.0% or more, a Tier 1 risk-based  capital ratio of
4.0% or more and a Tier 1 leverage  capital  ratio of 4.0% or more  (3.0%  under
certain  circumstances) and does not meet the definition of  "well-capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier 1 risk-based  capital ratio that is less than 4.0% or a Tier 1
leverage   capital   ratio  that  is  less  than  4.0%  (  3.0%  under   certain
circumstances),   (iv)  "significantly  undercapitalized"  if  it  has  a  total
risk-based  capital  ratio that is less than 6.0%, a Tier 1  risk-based  capital
ratio  that is less than 3.0% or a Tier II  average  capital  ratio that is less
than 3.0%, and (v) "critically  undercapitalized"  if it has a ratio of tangible
equity to total  assets  that is equal to or less than  2.0%.  Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well-capitalized  institution as
adequately-capitalized and may require an adequately-capitalized  institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the  next  lower  category  (except  that  the  FDIC  may  not  reclassify  a
significantly  undercapitalized institution as critically undercapitalized).  At
December 31, 2006,  the Company and the Banks were deemed  well-capitalized  for
purposes of the above regulations.

Federal Home Loan Bank System. The Banks are members of the FHLB of Indianapolis
and  Cincinnati.  The  FHLB of  Indianapolis  and  Cincinnati  are two of the 12
regional  FHLB's that,  prior to the enactment of FIRREA,  were regulated by the
Federal Home Loan Bank Board (FHLBB). FIRREA separated the home financing credit
function of the FHLB's from the  regulatory  functions  of the FHLB's  regarding
savings  institutions and their insured deposits by transferring  oversight over
the FHLB's from the FHLBB to a new federal  agency,  the Federal Home  Financing
Board ("FHFB").

As members of the FHLB  system,  the Banks are required to purchase and maintain
stock in the  FHLB in an  amount  equal to the  greater  of one  percent  of its
aggregate unpaid residential  mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 1/20 (or such greater  fraction as
established  by the FHLB) of outstanding  FHLB  advances.  At December 31, 2006,
$7.3  million  of FHLB  stock  was  outstanding  for the  Banks,  which  were in
compliance  with  this  requirement.  In past  years,  the Banks  have  received
dividends on its FHLB stock.

Insurance  of  Accounts.  The Banks'  deposits  are insured up to  $100,000  per
insured  member  (as  defined by law and  regulation)  and,  except for  certain
deposits  assumed by YCB upon the merger of Heritage  Bank of  Southern  Indiana
into YCB in 2002  (which are  insured by the Bank  Insurance  Fund  (BIF)),  are
insured by the Savings  Association  Insurance  Fund (SAIF).  This  insurance is
backed by the full faith and credit of the United  States  Government.  The SAIF
and the BIF are both administered and managed by the FDIC. As insurer,  the FDIC
is authorized to conduct  examinations  of and to require  reporting by SAIF and
BIF insured  institutions.  It also may  prohibit any insured  institution  from
engaging in any activity the FDIC  determines  by  regulation or order to pose a
serious  threat to either  fund.  The FDIC also has the  authority  to  initiate
enforcement  actions against financial  institutions.  The annual assessment for
deposit  insurance  is based on a  risk-related  premium  system.  Each  insured
institution  is  assigned  to one of  three  capital  groups:  well-capitalized,
adequately-capitalized   or   undercapitalized.   Within  each  capital   group,
institutions are assigned to one of three subgroups (A, B, or C) on the basis of
supervisory  evaluations by the institution's  primary federal supervisor and if
applicable,  state  supervisor.  Assignment to one of the three capital  groups,
coupled with assignment to one of three  supervisory  subgroups,  will determine
which  of the nine  risk  classifications  is  appropriate  for an  institution.
Institutions  are  assessed   insurance  rates  based  on  their  assigned  risk
classifications.  The  well-capitalized,  subgroup "A" category institutions are
assessed  the  lowest  insurance  rate,  while  institutions   assigned  to  the
undercapitalized  subgroup "C" category are assessed the highest insurance rate.
As of  December  31,  2006 the  Banks  were  assigned  to the  well-capitalized,
subgroup "A" category and paid an annual  insurance  rate of 1.32 cents per $100
of deposits.

The  FDIC  may  terminate  the  deposit  insurance  of  any  insured  depository
institution if it determines,  after a hearing, that the institution has engaged
or is  engaging  in  unsafe or  unsound  practices,  is in an unsafe or  unsound
condition to continue operations or has violated any applicable law, regulation,
order or any condition imposed by an agreement with the FDIC.

The Federal  Reserve  System.  The Federal Reserve Board requires all depository
institutions  to  maintain  reserves  against  their  transaction  accounts  and
non-personal time deposits.  Cash on hand or on deposit with the Federal Reserve
Bank of $6.5 million and


--------------------------------------------------------------------------------

                                       8
<PAGE>

$4.1 million was required to meet regulatory  reserve and clearing  requirements
at year-end 2006 and 2005,  respectively.  These  balances do not earn interest.
Banks are authorized to borrow from the Federal Reserve Bank "discount  window,"
but Federal Reserve Board regulations  require banks to exhaust other reasonable
alternative sources of funds, including FHLB advances, before borrowing from the
Federal Reserve Bank.

Federal  Taxation.  For  federal  income  tax  purposes,  the  Company  and  its
subsidiaries  file a  consolidated  federal income tax return on a calendar year
basis.   Consolidated  returns  have  the  effect  of  eliminating  intercompany
distributions, including dividends, from the computation of consolidated taxable
income for the taxable year in which the distributions occur.

The Company  and its  subsidiaries  are  subject to the rules of federal  income
taxation generally applicable to corporations under the Internal Revenue Code of
1986, as amended (the "Code").

The Company's December 31, 2004 federal tax return is currently being audited by
the Internal  Revenue Service  ("IRS").  While the examination is on-going as of
the date of this filing, management does not anticipate a material impact on the
Company's financial statements once the examination is completed. Management has
also  evaluated  its tax  positions  in  association  with the  adoption of FASB
Interpretation  No.  48,  Accounting  for  Uncertainty  in  Income  Taxes  -  an
interpretation   of  FASB  Statement  No.  109  (FIN  48),  which  prescribes  a
recognition  threshold and  measurement  attribute  for a tax position  taken or
expected to be taken in a tax return  effective  for its fiscal  year  beginning
January 1, 2007. The Company has determined that the adoption of FIN 48 will not
have a material effect on the financial statements.

Indiana Taxation. The Company is subject to a franchise tax imposed by the State
of  Indiana.  The tax is  imposed at the rate of 8.5  percent  of the  Company's
adjusted gross income.  In computing  adjusted  gross income,  no deductions are
allowed for  municipal  interest,  U.S.  Government  interest  and  pre-1990 net
operating losses. In 2000, the Indiana financial institution tax law was amended
to treat  resident  financial  institutions  the same as  nonresident  financial
institutions by providing for  apportionment of Indiana income based on receipts
in Indiana.  This  revision  allowed for the  exclusion of receipts  from out of
state sources and federal government and agency obligations.

Currently, income from YCB's subsidiaries CBSI Holdings, Inc., CBSI Investments,
Inc. and CBSI Investment Portfolio Management, LLC is not subject to the Indiana
franchise tax.

The Company's  December 31, 2004,  2003,  and 2002 Indiana  state  franchise tax
return were audited in 2006. The Indiana Department of Revenue concluded that no
adjustments were necessary as a result of their audits.

Kentucky  Taxation.  The  Company is subject to a  franchise  tax imposed by the
Commonwealth of Kentucky on its operations in Kentucky.  The tax is imposed at a
rate of 1.1% on  taxable  net  capital,  which  equals  capital  stock  paid in,
surplus, undivided profits and capital reserves, net unrealized holding gains or
losses  on  available  for sale  securities,  and  cumulative  foreign  currency
translation adjustments less an amount equal to the same percentage of the total
as the book value of United States obligations and Kentucky obligations bears to
the book value of the total  assets of the  financial  institution.  A financial
institution  whose business activity is taxable within and without Kentucky must
apportion  its net capital  based on the three factor  apportionment  formula of
receipts,  property and payroll unless the Kentucky  Revenue Cabinet has granted
written permission to use another method.

Available Information.  The Company files annual reports on Form 10-K, quarterly
reports  on Form 10-Q,  current  reports on Form 8-K,  and  amendments  to those
reports with the Securities and Exchange  Commission ("SEC") pursuant to Section
13(a) or 15(d) of the  Securities  Exchange Act of 1934. The public may read and
copy any material the Company  files with the SEC at the SEC's Public  Reference
Room at 100 F Street, NE, Washington, DC 20549 and may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC  maintains an Internet  site that contains  reports,  proxy and  information
statements,  and other information  regarding  issuers that file  electronically
with the SEC on its website at www.sec.gov.  The Company makes available through
its  website,  www.yourcommunitybank.com,   its  annual  report  on  Form  10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K.

Item 1A. Risk Factors

There  are a number  of  factors,  including  those  specified  below,  that may
adversely  affect our  business,  financial  results or stock price.  Additional
risks that we currently do not know about or currently  view as  immaterial  may
also impair our  business or  adversely  impact our  financial  results or stock
price.

As used in this Item 1A of the Form 10-K,  the terms "we",  "us" and "our" refer
to  Community  Bank  Shares of Indiana,  Inc.,  an Indiana  corporation  and its
subsidiaries (unless the context clearly implies otherwise).


--------------------------------------------------------------------------------

                                       9
<PAGE>

Industry Risk Factors

Changes in the laws,  regulations  and  policies  governing  financial  services
companies  could  alter  our  business  environment  and  adversely  affect  our
operations.  The Board of Governors of the Federal Reserve System  regulates the
supply of money  and  credit in the  United  States.  Its  fiscal  and  monetary
policies  determine in a large part our cost of funds for lending and  investing
and the return that can be earned on those loans and investments,  both of which
affect  our net  interest  margin.  Federal  Reserve  Board  policies  can  also
materially affect the value of financial  instruments that we hold, such as debt
securities and mortgage servicing rights.

We, along with our subsidiaries,  are heavily regulated at the federal and state
levels.  This regulation is to protect  depositors,  federal  deposit  insurance
funds and the banking  system as a whole.  Congress and state  legislatures  and
federal and state  agencies  continually  review banking laws,  regulations  and
policies for possible  changes.  Changes in  statutes,  regulations  or policies
could affect us in substantial and unpredictable  ways,  including  limiting the
types of financial  services and products  that we offer and/or  increasing  the
ability of non-banks to offer  competing  financial  services and  products.  We
cannot predict whether any of this potential legislation will be enacted, and if
enacted,  the effect  that it or any  regulations  would  have on our  financial
condition or results of operations.

The financial services industry is highly competitive, and competitive pressures
could  intensify and adversely  affect our  financial  results.  We operate in a
highly competitive  industry that could become even more competitive as a result
of   legislative,   regulatory   and   technological   changes   and   continued
consolidation.  We  compete  with  other  commercial  banks,  savings  and  loan
associations,   mutual  savings  banks,  finance  companies,   mortgage  banking
companies,  credit unions and investment companies. In addition,  technology has
lowered  barriers to entry and made it possible for non-banks to offer  products
and services traditionally provided by banks. Many of our competitors have fewer
regulatory constraints and some have lower cost structures.  Also, the potential
need to adapt to industry changes in information technology systems, on which we
and  the  financial  services  industry  are  highly  dependent,  could  present
operational issues and require capital spending.

Changes in consumer  use of banks and changes in  consumer  spending  and saving
habits  could  adversely  affect our  financial  results.  Technology  and other
changes now allow many  consumers  to complete  financial  transactions  without
using banks.  For example,  consumers can pay bills and transfer  funds directly
without going through a bank. This "disintermediation"  could result in the loss
of fee income,  as well as the loss of customer  deposits  and income  generated
from those deposits. In addition, changes in consumer spending and saving habits
could adversely  affect our  operations,  and we may be unable to timely develop
competitive  new  products  and  services in response to these  changes that are
accepted by new and existing customers.

Risks  associated with  unpredictable  economic and political  conditions may be
amplified  as a result of our limited  market area.  Commercial  banks and other
financial  institutions are affected by economic and political conditions,  both
domestic and international,  and by governmental  monetary policies.  Conditions
such as inflation, value of the dollar, recession,  unemployment,  high interest
rates, short money supply,  scarce natural resources,  international  disorders,
terrorism   and  other  factors   beyond  our  control  may   adversely   affect
profitability.  In addition,  almost all of our primary business area is located
in Southern Indiana and Jefferson County,  Kentucky.  A significant  downturn in
this regional  economy may result in, among other things,  deterioration  in our
credit  quality  or a  reduced  demand  for  credit  and may harm the  financial
stability of our  customers.  Due to the regional  market area,  these  negative
conditions may have a more noticeable  effect on us than would be experienced by
an institution with a larger, more diverse market area.

Changes in the domestic  interest rate environment could reduce our net interest
income.  Interest rate volatility  could  significantly  harm our business.  Our
results of  operations  are affected by the monetary and fiscal  policies of the
federal government and the regulatory  policies of governmental  authorities.  A
significant  component  of  earnings  is  net  interest  income,  which  is  the
difference between the income from  interest-earning  assets, such as loans, and
the  expense of  interest-bearing  liabilities,  such as  deposits.  A change in
market interest rates could  adversely  affect earnings if market interest rates
change such that the interest we pay on deposits and borrowings increases faster
than the interest we collect on loans and investments.  Consequently, along with
other  financial  institutions  generally,  we are  sensitive  to interest  rate
fluctuations.

Company Risk Factors

Our allowance for loan losses may not be adequate to cover actual  losses.  Like
all financial institutions,  we maintain an allowance for loan losses to provide
for loan defaults and non-performance. Our allowance for loan losses is based on
our historical loss experience as well as an evaluation of the risks  associated
with  our  loan  portfolio,  including  the  size  and  composition  of the loan
portfolio,   loan  portfolio   performance,   current  economic  conditions  and
geographic  concentrations  within the portfolio.  Our allowance for loan losses
may not be adequate to cover actual loan losses,  and future provisions for loan
losses could materially and adversely affect its financial results.

We may suffer losses in our loan portfolio  despite our underwriting  practices.
Our results of operations are significantly affected by the ability of borrowers
to  repay  their  loans.  Lending  money  is an  essential  part of the  banking
business.  However,  borrowers  do not always  repay  their  loans.  The risk of
non-payment is  historically  small,  but if nonpayment  levels are greater than
anticipated,  our earnings and overall financial condition, as well as the value
of our common stock, could be adversely affected. No assurance can be given that
our  underwriting  practices or monitoring  procedures  and policies will reduce
certain  lending  risks.  Loan  losses  can cause  insolvency  and  failure of a
financial  institution and, in such an event, our stockholders  could lose their
entire  investment.  In  addition,  future  provisions  for  loan  losses  could
materially and adversely affect profitability.  Furthermore,  the application of
various federal and


--------------------------------------------------------------------------------

                                       10
<PAGE>

state laws,  including bankruptcy and insolvency laws, may limit the amount that
can be recovered on these loans.

Maintaining  or  increasing  our market share may depend on lowering  prices and
market acceptance of new products and services. Our success depends, in part, on
our ability to adapt our products and services to evolving  industry  standards.
There is increasing  pressure to provide  products and services at lower prices.
Lower prices can reduce our net interest  margin and revenues from our fee-based
products and services. In addition, the widespread adoption of new technologies,
including internet services,  could require us to make substantial  expenditures
to modify or adapt our existing  products and  services.  Also,  these and other
capital  investments  in our  businesses  may not  produce  expected  growth  in
earnings anticipated at the time of the expenditure.  We might not be successful
in introducing  new products and services,  achieving  market  acceptance of its
products and services, or developing and maintaining loyal customers.

Because the nature of the financial  services business involves a high volume of
transactions,  we face significant  operational  risks.  Operational risk is the
risk of loss resulting from our operations,  including,  but not limited to, the
risk of fraud by employees or persons  outside of the Company,  the execution of
unauthorized   transactions   by  employees,   errors  relating  to  transaction
processing  and  technology,   breaches  of  the  internal  control  system  and
compliance  requirements and business  continuation and disaster recovery.  This
risk of loss also  includes the  potential  legal  actions that could arise as a
result  of an  operational  deficiency  or as a  result  of  noncompliance  with
applicable   regulatory   standards,   adverse   business   decisions  or  their
implementation,  and customer attrition due to potential negative publicity.  In
the event of a breakdown in the internal control system,  improper  operation of
systems or improper  employee  actions,  we could suffer  financial  loss,  face
regulatory action and suffer damage to its reputation.

Our reported  financial  results depend on management's  selection of accounting
methods and certain  assumptions  and  estimates.  Our  accounting  policies and
methods are fundamental to how we record and report our financial  condition and
results of operations.  Our management  must exercise  judgment in selecting and
applying many of these accounting  policies and methods so they comply with GAAP
and reflect  management's  judgment of the most appropriate manner to report our
financial  condition  and  results.  In some cases,  management  must select the
accounting policy or method to apply from two or more alternatives, any of which
might be  reasonable  under the  circumstances  yet might result in us reporting
materially  different  results than would have been  reported  under a different
alternative.

Certain accounting  policies are critical to presenting our financial  condition
and results.  They require  management to make difficult,  subjective or complex
judgments about matters that are uncertain.  Materially  different amounts could
be  reported  under  different  conditions  or using  different  assumptions  or
estimates. These critical accounting policies include (without limitation):  the
allowance  for credit  losses;  the  valuation of goodwill and other  intangible
assets; and income taxes.

Changes  in  accounting   standards  could   materially   impact  our  financial
statements.  From time to time, the Financial  Accounting Standards Board (FASB)
changes  the  financial  accounting  and  reporting  standards  that  govern the
preparation  of our financial  statements.  These changes can be hard to predict
and can materially  impact how we record and report our financial  condition and
results of  operations.  In some  cases,  we could be required to apply a new or
revised standard retroactively, resulting in us restating prior period financial
statements.

Acquisitions  and the  addition of branch  facilities  may not  produce  revenue
enhancements  or  cost  savings  at  levels  or  within  timeframes   originally
anticipated and may result in unforeseen integration difficulties.  We regularly
explore  opportunities to establish branch facilities and acquire other banks or
financial  institutions.  New or acquired branch facilities and other facilities
may not be  profitable.  We may not be able  to  correctly  identify  profitable
locations  for new branches.  The costs to start up new branch  facilities or to
acquire existing branches, and the additional costs to operate these facilities,
may increase our noninterest expense and decrease earnings in the short term. It
may be  difficult  to  adequately  and  profitably  manage  growth  through  the
establishment of these branches.  In addition,  we can provide no assurance that
these  branch  sites will  successfully  attract  enough  deposits to offset the
expenses of operating these branch sites.  Any new or acquired  branches will be
subject  to  regulatory  approval,  and there can be no  assurance  that we will
succeed in securing such approvals.

We cannot  predict the number,  size or timing of  acquisitions.  Difficulty  in
integrating an acquired business or company may cause us not to realize expected
revenue  increases,  cost savings,  increases in geographic or product presence,
and/or other projected  benefits from the  acquisition.  The  integration  could
result  in  higher  than  expected  deposit  attrition  (run-off),  loss  of key
employees,  disruption of our business or the business of the acquired  company,
or  otherwise  adversely  affect our  ability  to  maintain  relationships  with
customers and employees or achieve the anticipated  benefits of the acquisition.
Also, the negative effect of any divestitures required by regulatory authorities
in acquisitions or business combinations may be greater than expected.

Our business could suffer if we fail to attract and retain skilled  people.  Our
success depends, in large part, on our ability to attract and retain key people.
Competition  can be intense for the best people in most  activities  in which we
engage. We may not be able to hire the best people or to keep them.

Significant legal actions could subject us to substantial uninsured liabilities.
We are from time to time  subject  to claims  related to our  operations.  These
claims and legal actions, including supervisory actions by our regulators, could
involve large monetary claims and significant  defense costs. To protect us from
the cost of these  claims,  we maintain  insurance  coverage in amounts and with
deductibles  that we believe are appropriate for our  operations.  However,  our
insurance  coverage  may not cover  all  claims  against  us or  continue  to be
available  to us at a  reasonable  cost.  As a  result,  we  may be  exposed  to
substantial uninsured  liabilities,  which could adversely affect our results of
operations and financial condition.


--------------------------------------------------------------------------------

                                       11
<PAGE>

We are  exposed  to risk of  environmental  liability  when  we  take  title  to
properties. In the course of our business, we may foreclose on and take title to
real estate. As a result, we could be subject to environmental  liabilities with
respect to these properties.  We may be held liable to a governmental  entity or
to third  parties  for  property  damage,  personal  injury,  investigation  and
clean-up  costs  incurred  by these  parties in  connection  with  environmental
contamination  or may be required to  investigate or clean up hazardous or toxic
substances  or  chemical  releases  at a  property.  The costs  associated  with
investigation or remediation activities could be substantial. In addition, if we
are the owner or former  owner of a  contaminated  site,  we may be  subject  to
common law claims by third  parties  based on damages and costs  resulting  from
environmental contamination emanating from the property. If we become subject to
significant  environmental  liabilities,  our financial condition and results of
operations could be adversely affected.

Our stock price can be volatile  and there is a limited  trading  market for our
stock. Our stock price can fluctuate widely in response to a variety of factors,
including:

      o     actual or anticipated variations in our quarterly operating results;

      o     recommendations  by securities  analysts;  acquisitions  or business
            combinations;

      o     operating  and  stock  price  performance  of other  companies  that
            investors deem comparable to us;

      o     new technology used or services offered by our competitors;

      o     news  reports  relating to trends,  concerns and other issues in the
            financial services industry; and

      o     changes in government regulations.

General market fluctuations, industry factors and general economic and political
conditions  and events,  including  terrorist  attacks,  economic  slowdowns  or
recessions,  interest rate changes, credit loss trends or currency fluctuations,
could  also  cause our  stock  price to  decrease  regardless  of our  operating
results.

In  addition,  there is a  limited  trading  market  for our  common  stock  and
shareholders  may not be able to resell  shares  at or above the price  paid for
them.  The price of the  common  stock  purchased  may  decrease  significantly.
Although  our common  stock is quoted on the  Nasdaq  Capital  Market  under the
symbol "CBIN",  trading activity in the stock historically has been sporadic.  A
public trading market having the desired  characteristics of liquidity and order
depends on the presence in the market of willing buyers and sellers at any given
time.  The  presence  of willing  buyers and sellers  depends on the  individual
decisions of investors and general economic conditions,  all of which are beyond
our control.

Our  historical  growth  rates  may  not be  sustainable.  We may not be able to
maintain  and manage  our  growth,  which may  adversely  affect our  results of
operations and financial  condition and the value of our common stock. We cannot
assure you that we will continue to be  successful  in increasing  the volume of
loans  and  deposits  at  acceptable  risk  levels  and upon  acceptable  terms.
Additionally,  we may not continue to be  successful in expanding our asset base
to a targeted size and managing the costs and  implementation  risks  associated
with our growth  strategy.  We cannot assure you that further  expansion will be
profitable or that our historical  rate of growth will continue to be sustained,
either through internal growth or otherwise,  or that capital will be maintained
sufficient to support continued growth.  Furthermore, if we grow too quickly and
are not able to control  costs and  maintain  asset  quality,  rapid growth also
could adversely affect our financial performance.

We rely on dividends from our  subsidiaries for our liquidity needs. Our holding
company status makes us dependent on dividends from our subsidiaries to meet our
obligations. We do not have any significant assets other than cash and the stock
of our subsidiaries.  Accordingly,  we depend on dividends from our subsidiaries
(and, in turn,  their  subsidiaries) to meet our obligations and obtain revenue.
Our  right to  participate  in any  distribution  of  earnings  or assets of our
subsidiaries  is subject to the prior claims of  creditors of our  subsidiaries.
Under  federal  and state law,  our  subsidiaries  are  limited in the amount of
dividends  they may pay to us without  prior  regulatory  approval.  Also,  bank
regulators have the authority to prohibit our subsidiaries from paying dividends
if the bank  regulators  determine  the  payment  would be an unsafe and unsound
banking practice.

Our ability to pay  dividends on our common stock is limited.  We cannot  assure
you that we will continue to pay dividends at our current  annual  dividend rate
or at all. In particular, the ability to pay dividends in the future will depend
upon, among other things, our future earnings and cash requirements.

Item 1B. Unresolved Staff Comments

This item of Form 10-K is inapplicable  to the Company  inasmuch as it is not an
accelerated  filer or large accelerated  filer, nor is it a well-known  seasoned
issuer.  Moreover,  the Company has received no written  communication  from the
staff of the SEC regarding its periodic or current  reporting under the Exchange
Act.


--------------------------------------------------------------------------------

                                       12
<PAGE>

Item 2. Properties

The Company conducts its business through its corporate  headquarters located in
New Albany,  Indiana. YCB operates a main office and ten branch offices in Clark
and Floyd  Counties,  Indiana,  and six branch  offices in Jefferson  and Nelson
Counties,  Kentucky.  SCSB  operates a main office and three  branch  offices in
Scott  County,  Indiana.  The  following  table sets forth  certain  information
concerning  the main offices and each branch  office at December  31, 2006.  The
Company's  aggregate  net book value of premises and equipment was $15.0 million
at December 31, 2006.

<TABLE>
<CAPTION>
Location                                                               Year Opened                Owned or Leased
--------                                                               -----------                ---------------
<S>                                                                        <C>                         <C>
Your Community Bank:
   101 West Spring Street - Main Office                                    1937                         Owned
   New Albany, IN 47150

   401 East Spring Street - Drive Thru for Main Office                     2001                         Owned
   New Albany, IN 47150

   2626 Charlestown Road                                                   1995                         Owned
   New Albany, IN 47150

   4328 Charlestown Road                                                   2004                        Leased
   New Albany, IN 47150

   480 New Albany Plaza                                                    1974                        Leased
   New Albany, IN 47130

   901 East Highway 131                                                    1981                         Owned
   Clarksville, IN 47130

   701 Highlander Point Drive                                              1990                         Owned
   Floyds Knobs, IN 47119

   102 Heritage Square                                                     1992                         Owned
   Sellersburg, IN 47172

   201 W. Court Avenue                                                     1996                         Owned
   Jeffersonville, IN4710

   5112 Highway 62                                                         1997                         Owned
   Jeffersonville, IN 47130

   2910 Grantline Road                                                     2002                        Leased
   New Albany, IN 47150

   400 Blankenbaker Parkway, Suite 100                                     2002                        Leased
   Louisville, KY 40243

   106A West John Rowan Boulevard. - Main Office                           1997                        Leased
   Bardstown, KY 40004

   119 East Stephen Foster Avenue                                          1972                         Owned
   Bardstown, KY 40004

   7101 Cedar Springs                                                      2002                        Leased
   Louisville, KY 40291

   4510 Shelbyville Road                                                   2003                        Leased
   Louisville, KY 40207

   13205 Magisterial Drive                                                 2006                        Leased
   Louisville, KY 40223
</TABLE>


--------------------------------------------------------------------------------

                                       13
<PAGE>

<TABLE>
<S>                                                                        <C>                          <C>
The Scott County State Bank:
   136 West McClain Avenue - Main Office                                   1890                         Owned
   Scottsburg, IN 47170

   125 West Wardell - Drive Thru                                           1981                         Owned
   Scottsburg, IN 47170

   1050 North Gardner                                                      1974                         Owned
   Scottsburg, IN 47170

   57 North Michael Drive                                                  1998                         Owned
   Scottsburg, IN 47170
</TABLE>

Item 3. Legal Proceedings

There are various claims and law suits in which the Company or its  subsidiaries
are  periodically  involved,  such as claims to enforce  liens,  foreclosure  or
condemnation  proceedings  on  properties  in which the Banks hold  mortgages or
security  interests,  claims involving the making and servicing of real property
loans and other  issues  incident  to the  Banks'  business.  In the  opinion of
management,  no material  loss is expected  from any of such  pending  claims or
lawsuits with the possible exception of the following matter.

YCB made loans to borrower MW Development Services,  LLC beginning in September,
2004, guaranteed by the borrower's two principals.  The loans were to enable the
borrower  to  purchase  real  estate  and  develop  it for  sale as  residential
subdivision  lots.  The loans are secured by first and second  mortgage liens in
favor of the Bank on the real property that was acquired.

The  development  project is  incomplete,  but there is no additional  borrowing
available  from YCB. The borrower  requested  additional  loan funds but did not
provide the  information  necessary  to support an  additional  loan.  The total
amount owed to the Bank on the loans was approximately $4,028,106 as of December
27, 2005 (including  principal and interest but not late fees or attorney fees).
The value of the  collateral  is unknown at present  because  the project is not
complete.  The loans are in default on grounds including the borrower's  failure
to pay  interest,  the filing of numerous  mechanics'  and material  men's liens
against  the  property  and  the  filing  by  the  lien  claimant,   D.F.  Crane
Construction  Corp.  ("Crane")  of a  foreclosure  action  on  its  lien  in the
Jefferson Circuit Court (Commonwealth of Kentucky). Along with the borrower, YCB
has been named as a defendant  in that action for the purpose of  asserting  its
lien position. YCB filed a cross-claim on the indebtedness against the borrower,
and the  borrower  cross-claimed  back against  YCB.  YCB then  asserted  claims
against the borrower's guarantors, who also asserted claims against YCB.

Crane's action and the cross-claim of another lien claimant each alleged that it
should be adjudicated a first lien but  originally did not otherwise  assert any
claims  or  seek  any  other  relief  against  YCB.  In the  borrowers'  and the
guarantors'  claim  against YCB,  they allege that YCB acted  improperly  in the
administration of the loans, on theories  including  contract and tort,  thereby
damaging the project.  This claim sought an undetermined  amount of damages from
YCB.

During  2006,  YCB  settled  its claims  against  the  borrower  and  guarantors
(retaining  the right to enforce the  mortgages  against the property) and their
claims  against YCB.  Also during  2006,  Crane  amended its  complaint to state
claims  against YCB.  Crane alleges causes of action against YCB based on claims
that YCB  misrepresented  or failed to disclose  matters  concerning this credit
facility  that caused Crane to extend more credit to the borrower  than it would
have done  otherwise.  Crane  alleges a damages claim against YCB in an unstated
amount and seeks the  subordination  of YCB's  mortgages  to Crane's lien claim,
which is in the  principal  amount of  $499,024.73  plus  interest  and fees the
amounts of which have not yet been determined. YCB has moved for judgment on its
mortgages. Crane opposed that motion based on its claim against YCB. The parties
are currently  awaiting a recommendation  on the motion by the Jefferson Circuit
Court Master Commissioner.

Item 4. Submission Of Matters To A Vote Of Security Holders

No matter was submitted to a vote of security holders,  through the solicitation
of proxies or otherwise, during the quarter ended December 31, 2006.


--------------------------------------------------------------------------------

                                       14
<PAGE>

Part II

Item 5. Market For Registrant's  Common Equity,  Related Stockholder Matters And
Issuer Purchases of Equity Securities

Market Information

The  Company's  common stock is traded on the Nasdaq  National  Market under the
symbol "CBIN". The quarterly range of low and high trade prices per share of the
Company's  common  stock for the  periods  indicated  as  reported on the Nasdaq
National Market,  as well as the per share dividend paid in each such quarter by
the Company on its common stock is shown below.

<TABLE>
<CAPTION>
                      2006                                                     2005
---------------------------------------------------       -----------------------------------------------
QUARTER ENDED            HIGH      LOW     DIVIDEND       QUARTER ENDED        HIGH      LOW     DIVIDEND
-------------            ----      ---     --------       -------------        ----      ---     --------
<S>                     <C>      <C>        <C>           <C>                 <C>      <C>        <C>
March 31                $23.63   $22.01     $ 0.16        March 31            $22.04   $21.00     $ 0.145
June 30                  23.40    21.05       0.16        June 30              32.00    20.85       0.145
September 30             22.65    21.41       0.16        September 30         25.23    21.28       0.145
December 31              23.00    22.10       0.16        December 31          25.00    22.34       0.145
</TABLE>

Holders

As of February 22, 2007 there were 892 holders of the Company's common stock.

Dividends

The Company intends to continue its historical practice of paying quarterly cash
dividends although there is no assurance that such dividends will continue to be
paid in the  future.  The payment of  dividends  in the future is  dependent  on
future income,  financial  position,  capital  requirements,  the discretion and
judgment of the Board of Directors,  and other considerations.  In addition, the
payment of dividends is subject to the regulatory restrictions described in Note
14 to the Company's consolidated financial statements.

Securities Authorized for Issuance under Equity Compensation Plans

The  following   table  sets  forth  certain   information   regarding   Company
compensation  plans under which equity  securities of the Company are authorized
for issuance.

<TABLE>
<CAPTION>
                                                                                               Number of Securities
                                          Number of Securities                                Remaining Available for
                                            to be Issued Upon          Weighted -Average       Future Issuance under
                                               Exercise of             Exercise Price of     equity compensation plans
                                          Outstanding Options,       Outstanding Options,      (excluding securities
          Plan Category                    Warrants and Rights        Warrants and Rights      reflected in column 1)
---------------------------------          -------------------        -------------------      ----------------------
<S>                                                     <C>               <C>                                  <C>
Equity compensation plans approved by
 security holders                                       289(1)            $       20.19                        502(2)
Equity compensation plans not approved
 by security holders                                     --                          --                         --
                                              -------------               -------------              -------------

Total                                                   223(1)            $       19.28                        575(2)
                                              =============               =============              =============
</TABLE>

(1)   Of the shares  reflected,  253,610  shares  have been  granted  unde r the
      Company's Stock Award Plan and 54,500  performance units have been granted
      under the Company's  Performance  Units Plan of which 35,425, or 65%, will
      be paid in shares  (see Note 12 of the  Company's  consolidated  financial
      statements for further information on the Company's 2003 Performance Units
      Plan).

(2)   Of the shares reflected,  262,550 shares are available to be awarded under
      the  Company's  Stock Award Plan and 239,575  shares are  available  to be
      awarded under the Company's Performance Units Plan.

Performance Graph

The following  performance graph and data included shall not be deemed filed for
purposes  of  Section 18 of the  Securities  Exchange  Act of 1934 or  otherwise
subject to the  liabilities of that section,  nor shall it be deemed  soliciting
material or subject to  Regulation  14A of the Exchange Act or  incorporated  by
reference in any filing under the  Exchange Act or the  Securities  Act of 1933,
except as shall be expressly set forth by specific reference in such filing.

The graph compares the  performance  of Community  Bank Shares of Indiana,  Inc.
common  stock to the  Russell  2000  index  and the SNL Bank $500 MM - $1 B Bank
index for the Company's  last five fiscal years.  The graph assumes the value of
the  investment  in Company  common stock and in each index was $100 at December
31, 2001 and that all dividends were reinvested.


--------------------------------------------------------------------------------

                                       15
<PAGE>

--------------------------------------------------------------------------------
                     Community Bank Shares of Indiana, Inc.
--------------------------------------------------------------------------------

                            Total Return Performance

 [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]

<TABLE>
<CAPTION>
                                                                     Period Ending
                                             -------------------------------------------------------------
Index                                        12/31/01   12/31/02   12/31/03  12/31/04   12/31/05  12/31/06
----------------------------------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>       <C>        <C>       <C>
CBIN                                           100.00     101.28     152.34    165.77     181.19    183.97
SNL Bank $500M-$1B Bank Index                  100.00     127.67     184.10    208.63     217.57    247.44
Russell 2000                                   100.00      79.52     117.09    138.55     144.86    171.47
</TABLE>

Source: SNL Financial, www.snl.com


--------------------------------------------------------------------------------

                                       16
<PAGE>

Item 6. Selected Financial Data

The following table sets forth the Company's  selected  historical  consolidated
financial information from 2002 through 2006. This information should be read in
conjunction  with the Consolidated  Financial  Statements and the related Notes.
Factors  affecting the  comparability of certain indicated periods are discussed
in "Management's  Discussion And Analysis Of Financial  Condition And Results Of
Operations."

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------------------
      (dollars in thousands, except per share data)            2006          2005          2004           2003          2002
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>           <C>           <C>           <C>
      Income Statement Data:
      Interest income ..................................     $ 46,033      $ 35,058      $ 27,786      $ 25,252      $ 25,052
      Interest expense .................................       25,995        17,344        12,796        11,675        13,354
      Net interest income ..............................       20,038        17,714        14,990        13,577        11,698
      Provision for loan losses ........................          262         1,750         1,105         1,274         1,144
      Non-interest income ..............................        4,794         4,865         3,271         3,684         3,160
      Non-interest expense .............................       19,116        16,155        13,903        13,104        10,938
      Income before taxes ..............................        5,454         4,674         3,253         2,883         2,776
      Net income .......................................        4,111         3,749         2,588         2,302         2,126
---------------------------------------------------------------------------------------------------------------------------------
      Balance Sheet Data:
      Total assets .....................................     $816,633      $665,008      $590,066      $521,315      $465,549
      Total securities .................................      121,311        98,835        90,152        83,143        92,374
      Total loans, net .................................      607,932       512,448       450,676       390,026       321,634
      Allowance for loan losses ........................        5,654         5,920         4,523         4,034         3,814
      Total deposits ...................................      549,918       464,836       411,306       341,315       289,830
      Short-term borrowings ............................       84,335        47,735        43,629        45,325        36,393
      FHLB advances ....................................       92,756        98,000        82,000        90,200        92,700
      Subordinated debenture ...........................       17,000         7,000         7,000            --            --
      Total shareholders' equity .......................       65,541        42,775        42,781        42,289        43,297
---------------------------------------------------------------------------------------------------------------------------------
      Per Share Data:
      Basic earnings per share* ........................     $   1.36      $   1.43      $   0.98      $   0.88      $   0.79
      Diluted earnings per share* ......................         1.35          1.41          0.97          0.87          0.79
      Book value* ......................................        19.06         16.42         16.27         16.13         16.44
      Cash dividends per share* ........................         0.64          0.58          0.54          0.53          0.53
---------------------------------------------------------------------------------------------------------------------------------
      Performance Ratios:
      Return on average assets .........................         0.55%         0.59%         0.47%         0.47%         0.47%
      Return on average equity .........................         7.73          8.68          6.10          5.37          4.91
      Net interest margin ..............................         2.85          2.98          2.89          2.95          2.78
      Efficiency ratio .................................        76.98         71.55         76.13         75.92         73.62
---------------------------------------------------------------------------------------------------------------------------------
      Asset quality ratios:
      Non-performing assets to total loans .............         0.98%         1.08%         0.37%         0.61%         1.17%
      Net loan charge-offs to average loans ............         0.22          0.07          0.15          0.29          0.12
      Allowance for loan losses to total loans .........         0.92          1.14          0.99          1.02          1.17
      Allowance for loan losses to
         non-performing loans ..........................          102           108           285           223           120
---------------------------------------------------------------------------------------------------------------------------------
      Capital ratios:
      Leverage ratio ...................................          8.1%          8.0%          8.7%          8.3%          9.0%
      Average stockholders' equity to
         average total assets ..........................          7.1           6.8           7.7           8.7           9.6
      Tier 1 risk-based capital ratio ..................         10.5           9.5          10.4          10.4          12.4
      Total risk-based capital ratio ...................         11.4          10.5          11.3          11.4          13.6
      Dividend payout ratio ............................         46.7          40.5          54.8          59.8          66.1
---------------------------------------------------------------------------------------------------------------------------------
      Other key data:
      End-of-period full-time equivalent
         employees .....................................          224           182           169           154           145
      Number of bank offices ...........................           21            16            16            15            14
</TABLE>

*     Years 2002 and 2003 have been restated to reflect 10% stock dividend paid
      on December 27, 2004


--------------------------------------------------------------------------------

                                       17
<PAGE>

Item 7. Management's  Discussion And Analysis Of Financial Condition And Results
of Operations

Overview

This section presents an analysis of the consolidated financial condition of the
Company and its wholly-owned  subsidiaries,  the Banks, at December 31, 2006 and
2005,  and the  consolidated  results of operations for each of the years in the
three year period ended  December 31, 2006.  The  information  contained in this
section  should  be  read  in  conjunction  with  the   consolidated   financial
statements,  notes to consolidated financial statements and other financial data
presented elsewhere in this annual report on Form 10-K.

The  Company  conducts  its  primary  business  through  the  Banks,  which  are
community-oriented  financial  institutions  offering  a  variety  of  financial
services  to its  local  communities.  The Banks are  engaged  primarily  in the
business of attracting deposits from the general public and using such funds for
the origination of: 1) commercial  business and real estate loans and 2) secured
consumer  loans such as home  equity  lines of  credit,  automobile  loans,  and
recreational  vehicle  loans.  Additionally,  YCB  originates and sells into the
secondary market mortgage loans for the purchase of single-family homes in Floyd
and Clark  counties,  Indiana,  and  Jefferson  and Nelson  counties,  Kentucky,
including surrounding communities. The Banks invest excess liquidity balances in
mortgage-backed, U.S. agency, state and municipal and corporate securities.

The  operating  results  of the  Company  depend  primarily  upon the Banks' net
interest   income,   which  is  the  difference   between   interest  earned  on
interest-earning  assets and interest incurred on interest-bearing  liabilities.
Interest-earning  assets  principally  consist of loans,  taxable and tax-exempt
securities,  and FHLB stock.  Interest-bearing  liabilities  principally include
deposits,  retail repurchase agreements,  federal funds purchased,  and advances
from the FHLB  Indianapolis and Cincinnati.  The net income of the Banks is also
affected by 1) provision  for loan losses,  2)  non-interest  income  (including
gains on sales of loans and  securities,  deposit  account  service  charges and
commission-based  income on non-deposit  investment  products),  3) non-interest
expenses  (including  compensation  and  benefits,  occupancy,  equipment,  data
processing  expenses,  marketing and  advertising,  and other expenses,  such as
audit, postage, printing, and telephone expenses), and 4) income tax expense.

Forward Looking Information

Statements  contained  within this report that are not  statements of historical
fact constitute  forward-looking statements within the meaning of Section 21E of
the  Securities  Exchange Act of 1934.  When used in this  discussion  the words
"anticipate,"  "project,"  "expect,"  "believe,"  and  similar  expressions  are
intended to identify forward-looking statements. The Company cautions that these
forward-looking  statements  are  subject  to  numerous  assumptions,  risks and
uncertainties,  all of which may change over time.  Actual  results could differ
materially from forward-looking statements.

In addition to factors  disclosed by the Company elsewhere in this annual report
on Form 10-K, the following factors, among others, could cause actual results to
differ materially from such  forward-looking  statements:  1) adverse changes in
economic  conditions  affecting  the  banking  industry  in  general  and,  more
specifically,  the market  areas in which the Company and its  subsidiary  Banks
operate,  2)  adverse  changes in the  legislative  and  regulatory  environment
affecting the Company and its subsidiary  Banks, 3) increased  competition  from
other financial and non-financial  institutions,  4) the impact of technological
advances on the banking  industry,  and 5) other risks  detailed at times in the
Company's filings with the Securities and Exchange Commission.  The Company does
not  assume an  obligation  to update or revise any  forward-looking  statements
subsequent to the date on which they are made.

Application of Critical Accounting Policies

The Company's  consolidated financial statements are prepared in accordance with
U.S.  generally  accepted  accounting  principles and follow  general  practices
within the financial services industry. The most significant accounting policies
followed by the Company are  presented in Note 1 to the  Consolidated  Financial
Statements.  These policies,  along with the disclosures  presented in the other
financial  statement notes and in this financial review,  provide information on
how significant  assets and  liabilities are valued in the financial  statements
and how those values are determined.  Based on the valuation techniques used and
the sensitivity of financial statement amounts to the methods,  assumptions, and
estimates underlying those amounts,  management has identified the determination
of the  allowance  for loan losses,  valuation of goodwill and other  intangible
assets and deferred tax assets to be the accounting  areas that require the most
subjective or complex  judgments,  and as such could be most subject to revision
as new information becomes available.

Allowance For Loan Losses

The  allowance  for loan  losses  represents  management's  estimate of probable
credit  losses  inherent in the loan  portfolio.  Determining  the amount of the
allowance for loan losses is considered a critical  accounting  estimate because
it requires  significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans,  estimated losses on
loans based on historical loss experience, and consideration of current economic
trends and  conditions,  all of which may be susceptible to significant  change.
The loan  portfolio also  represents the largest asset type on the  consolidated
balance sheet.  Note 1 to the Consolidated  Financial  Statements  describes the
methodology used to determine the allowance for loan losses, and a discussion of
the factors  driving  changes in the amount of the  allowance for loan losses is
included under "Asset Quality" below.


--------------------------------------------------------------------------------

                                       18
<PAGE>

Loans that  exhibit  probable  or  observed  credit  weaknesses  are  subject to
individual  review.  Where  appropriate,  amounts of allowances are allocated to
individual  loans based on  management's  estimate of the borrower's  ability to
repay the loan given the availability of collateral,  other sources of cash flow
and legal options available to the Company. Included in the review of individual
loans are those that are  impaired as provided in SFAS No. 114,  "Accounting  by
Creditors for Impairment of a Loan." The Company evaluates the collectibility of
both  principal  and  interest  when  assessing  the  need  for a loss  accrual.
Historical  loss rates are  applied  to other  loans not  subject  to  allowance
allocations. These historical loss rates may be adjusted for significant factors
that, in management's judgment,  reflect the impact of any current conditions on
loss recognition. Factors which management considers in the analysis include the
effects of the national and local economies,  trends in the nature and volume of
loans (delinquencies,  charge-offs and nonaccrual loans),  changes in mix, asset
quality  trends,  risk management and loan  administration,  changes in internal
lending  policies  and  credit  standards,  and  examination  results  from bank
regulatory agencies and the Company's internal credit examiners.

The Company has not substantively  changed any aspect to its overall approach in
the determination of the allowance for loan losses.  There have been no material
changes in  assumptions  or  estimation  techniques as compared to prior periods
that impacted the determination of the current period allowance.

Based on the procedures  discussed above,  management is of the opinion that the
allowance  of $5.7  million was  adequate to address  probable  incurred  credit
losses associated with the loan portfolio at December 31, 2006.

Goodwill and Other Intangible Assets

The  Company  recorded  $16.0  million  of  Goodwill  and $3.1  million of other
intangible  assets in 2006 in  association  with its  acquisition  of SCSB.  The
Company is  required  to  perform an annual  assessment  of  goodwill  and other
intangible  assets  to  determine   potential   impairment.   Also,   management
informally,  on an on-going basis,  reviews and analyzes certain transactions or
events that may indicate  potential  impairment of Goodwill and other intangible
assets  throughout  the  year.  The  analysis  and  determination  of  potential
impairment  and the  identification  of relevant  factors and events  indicating
potential  impairment  require a high degree of judgment  from  management.  The
Company will perform a formal assessment of Goodwill and other intangible assets
early in the 4th quarter of the 2007. No such events were  identified in 2006 to
cause us to believe that goodwill or intangible assets were impaired.

Deferred Tax Assets

The Company has a net deferred tax asset of approximately  $759,000. The Company
evaluates this asset on a quarterly basis. To the extent the Company believes it
is more likely than not that it will not be utilized, the Company will establish
a valuation  allowance to reduce its carrying amount to the amount it expects to
be realized.  At December  31, 2006, a valuation  allowance of $345,000 has been
established  against  the  outstanding  deferred  tax  asset.  Note  13  to  the
Consolidated  Financial  Statements  describes  the net deferred tax asset.  The
deferred  tax asset will be  utilized  as the  Company is  profitable  or as the
Company  carries back tax losses to periods in which it paid income  taxes.  The
estimate of the realizable amount of this asset is a critical accounting policy.

Highlights

The Company  reported net income of $4.1 million  during 2006 compared with $3.7
million for 2005,  an increase of 9.7%.  The increase in earnings was  primarily
due to the  acquisition of SCSB on July 1, 2006 which  contributed net income of
$1.0  million for the year and was offset by a decrease in  non-interest  income
due to a $228,000  gain,  net of related tax impacts,  on the  disposition of an
equity stock position held in a company that provides data  processing  services
to the banking  industry and by a $656,000  non-taxable  gain on life  insurance
benefit that impacted 2005 only. Also contributing to the increase in net income
was a decrease in the  provision  for loan losses of $1.5 million to $262,000 in
2006 from $1.8  million in 2005.  The  Company's  book  value per  common  share
increased  from  $16.42 per share at  December  31,  2005 to $19.06 per share at
December 31, 2006 due to the aforementioned acquisition of SCSB.


--------------------------------------------------------------------------------

                                       19
<PAGE>

The following table  summarizes  selected  financial  information  regarding the
Company's financial performance:

Table 1 - Summary

<TABLE>
<CAPTION>
                                                             For the Year Ended December 31,
(Dollars in thousands, except per share amounts)              2006        2005           2004
------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>           <C>
Net income ............................................   $   4,111    $   3,749     $   2,588
Basic earnings per share ..............................        1.36         1.43          0.98
Diluted earnings per share ............................        1.35         1.41          0.97

Return on average assets ..............................        0.55%        0.59%         0.47%
Return on average equity ..............................        7.73         8.68          6.10
</TABLE>

Total  assets grew 22.8% during 2006 to $816.6  million  from $665.0  million at
December 31, 2005  primarily as a result of the Company's  acquisition  of SCSB.
Excluding eliminations for inter-company  accounts,  total unconsolidated assets
of SCSB were $148.0  million as of December  31, 2006 and  included net loans of
$92.3 million while total deposits were $103.3 million,  including $22.8 million
of non-interest bearing deposits and FHLB advances were $10.3 million. Excluding
SCSB, net loans outstanding  increased marginally from $512.4 million in 2005 to
$515.7 million,  an increase of 0.6%.  Total deposits,  excluding SCSB decreased
from  $464.8  million  in 2005 to $446.6  million in 2006,  a decrease  of $18.2
million or 3.9% due  primarily to a reduction  in money  market  accounts as the
result of  management's  efforts to improve net interest  margin by reducing the
yield on these  accounts.  The  decrease in deposits  was offset by increases in
short-term  borrowings  from federal funds  purchased  which  increased to $32.7
million in 2006 from $0 in 2005 and an increase in line of credit  borrowings to
$3.5 million in 2006 from $0 in 2005.

Results of Operations

Net Interest Income

The Company's  principal  revenue  source is net interest  income.  Net interest
income is the difference  between  interest income on  interest-earning  assets,
such as loans and securities,  and the interest  expense on the liabilities used
to fund those assets,  such as  interest-bearing  deposits and  borrowings.  Net
interest  income is impacted by both  changes in the amount and  composition  of
interest-earning  assets and interest-bearing  liabilities as well as changes in
market interest rates.

Net interest income increased $2.3 million,  or 13.1%, to $20.0 million for 2006
compared  to $17.7  million in 2005.  The  increase  in net  interest  income is
primarily  attributable to the Company's  acquisition of SCSB which provided net
interest  income of $3.0 million in 2006.  Excluding  net  interest  income from
SCSB, net interest income decreased by $659,000 from 2005 and was impacted by an
increase in interest  expense  recognized on the  Company's  interest rate swaps
from $163,000 recognized during 2005 to $1.1 million in 2006 (See Note 15 to the
Consolidated  Financial  Statements).  The  Company's  net interest  rate spread
decreased  to 2.44% for 2006 from  2.66% in 2005,  and its net  interest  margin
decreased  to 2.85% for 2006 from 2.98% in 2005 due to the  increase in interest
expense  associated with the Company's  interest rate swaps.  The acquisition of
SCSB had a positive impact on the Company's  yields on  interest-bearing  assets
and liabilities. The average yield (on an annualized basis) for loans was 7.95%,
4.98% for investment securities,  and 7.16% for total interest earning assets of
SCSB while the  average  yield on  savings  accounts  was 1.12%,  4.98% for time
deposits  greater than $100,000,  3.70% for other time deposits,  5.15% for FHLB
advances, and 2.97% for total interest-bearing liabilities.

Average  interest-earning  assets increased 18.0% during 2006 to $702.2 million,
compared to a 14.8% increase during 2005. The increase in 2006 was primarily due
to the  acquisition  of SCSB;  excluding  SCSB,  growth in  earning  assets  was
minimal.  As a result of the acquisition,  the composition of the Company's loan
portfolio  mix changed  resulting in a higher  percentage  of  residential  real
estate and  consumer  loans than in 2005.  Average  loans grew $81.9  million or
16.6% to $575.1  million  in 2006,  while  the loan  yield  increased  to 7.01%,
compared  to 6.28% for 2005,  primarily  due to  several  prime  rate  increases
throughout  the year that raised yields on portfolio  loans indexed to the prime
rate, offset by $1.1 million of interest expense (when recorded,  netted against
loan  interest  income)  associated  with the  Company's  interest  rate  swaps.
Excluding the  acquisition  of SCSB, the Company's loan growth slowed in 2006 as
compared to 2005, as management focused on improving the net interest margin. In
2007, the Company  anticipates  measured growth within its loan portfolio due to
increased deposit product offerings targeted towards small businesses and a more
focused marketing and sales strategy.

Average  interest-bearing  liabilities grew $93.8 million to $630.7 million,  an
increase  of 17.5% from  2005,  while the cost of  interest-bearing  liabilities
increased  to  4.12%  for 2006  from  3.23% in 2005.  The  increase  in  average
interest-bearing  liabilities  was primarily  attributable to the acquisition of
SCSB which  accounted  for $90.7  million in growth  from 2005 in  addition to a
$10,000,000 placement of trust preferred securities in June 2006 (see Note 10 of
the Company's consolidated financial statements),  and an increase in short-term
borrowings of $36.6  million.  The increase in short-term  borrowings was mostly
comprised  of  federal  funds  purchased  of $32.7  million  to meet  short-term
liquidity  needs due to maturing FHLB advances and $3.5 million of borrowings on
the  Company's  line of credit to fund a portion of the  acquisition  SCSB along
with the associated costs.

While there can be no  assurance as to the  tangible  long-term  impact that the
current  interest rate  environment  will have on the Company's future levels of
net interest income and net interest margin, it is presently anticipated,  given
the pricing  sensitivity and


                                       20
<PAGE>

asset/liability  mix of the  Company's  balance  sheet,  that the  Company's net
interest margin should remain stable for 2007 when compared with 2006.

For 2005, net interest  income  increased $2.7 million or 18.0% to $17.7 million
compared  to $15.0  million in 2004.  The  Company's  net  interest  rate spread
increased  to 2.66% for 2005 from  2.61% in 2004,  and its net  interest  margin
increased to 2.98% for 2005 from 2.89% in 2004. In addition, net interest income
was impacted by the $163,000 of interest  expense  recognized  on the  Company's
interest  rate swaps  during  2005,  compared to interest  income of $777,000 of
interest income recognized during 2004.

Table  2  provides  detailed  information  as  to  average  balances,   interest
income/expense, and rates by major balance sheet category for 2004 through 2006.

Table 2 - Average Balance Sheets and Rates for Years Ended 2006, 2005 and 2004

<TABLE>
<CAPTION>
                                                         2006                         2005                           2004
                                             --------------------------  ----------------------------   ----------------------------
                                              Average           Average   Average             Average    Average             Average
(Dollars in thousands)                        Balance  Interest  Rate     Balance   Interest    Rate     Balance   Interest   Rate
                                             --------------------------  ----------------------------   ----------------------------
<S>                                          <C>        <C>       <C>    <C>         <C>         <C>    <C>         <C>        <C>
ASSETS

Earning assets:
    Interest-bearing deposits with banks .   $   4,365  $   132   3.02%  $   2,614   $    58     2.22%  $   3,398   $    42    1.24%
    Taxable securities ...................     105,287    4,738   4.50      85,025     3,352     3.94      81,364     2,929    3.60
    Tax-exempt securities ................       9,419      467   4.96       5,860       291     4.97       8,742       376    4.30
    Total loans and fees(1)(2) ...........     575,100   40,299   7.01     493,219    30,993     6.28     416,857    24,073    5.77
    FHLB stock ...........................       8,028      397   4.95       8,508       364     4.28       8,196       366    4.47
                                             ---------  -------          ---------   -------            ---------   -------

Total earning assets .....................     702,199   46,033   6.56     595,226    35,058     5.89     518,557    27,786    5.36

Non-interest earning assets:
    Less: Allowance for loan losses ......      (5,823)                     (5,200)                        (4,472)
    Non-earning assets:
    Cash and due from banks ..............      15,759                      12,917                         10,734
    Bank premises and equipment, net .....      13,827                      11,284                         11,683
    Other assets .........................      22,505                      17,261                         16,185
                                             ---------                   ---------                      ---------

Total assets .............................   $ 748,467                   $ 631,488                      $ 552,687
                                             =========                   =========                      =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest bearing liabilities:
    Savings and other ....................   $ 218,981  $ 6,071   2.77%  $ 209,450   $ 4,364     2.08%  $ 172,722   $ 1,999    1.16%
    Time deposits ........................     249,036   10,862   4.36     187,233     6,418     3.43     169,355     5,241    3.09
    Short-term borrowings ................      64,153    3,054   4.76      48,684     1,395     2.87      36,572       409    1.12
    FHLB advances ........................      86,024    5,066   5.89      84,552     4,746     5.61      83,340     4,979    5.97
    Subordinated debenture ...............      12,479      942   7.55       7,000       421     6.01       3,893       168    4.32
                                             ---------  -------          ---------   -------            ---------   -------

Total interest bearing liabilities .......     630,673   25,995   4.12     536,919    17,344     3.23     465,882    12,796    2.75

Non-interest bearing liabilities:
    Non-interest bearing deposits ........      62,079                      47,197                         40,631
    Other liabilities ....................       2,507                       4,187                          3,737
    Shareholders' equity .................      53,208                      43,185                         42,437
                                             ---------                   ---------                      ---------
Total liabilities and shareholders' equity   $ 748,467                   $ 631,488                      $ 552,687
                                             =========                   =========                      =========

Net interest income ......................              $20,038                      $17,714                        $14,990
                                                        =======                      =======                        =======
Net interest spread ......................                        2.44%                          2.66%                         2.61%
Net interest margin ......................                        2.85%                          2.98%                         2.89%
</TABLE>

(1)   The amount of fee income included in interest on loans was $697, $647, and
      $610 for the years ended December 31, 2006, 2005, and 2004, respectively.

(2)   Includes  loans held for sale and  non-accruing  loans in the average loan
      amounts outstanding.


--------------------------------------------------------------------------------

                                       21
<PAGE>

Table 3 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing  liabilities affected
the Company's interest income and interest expense during the periods indicated.
Information   is  provided  in  each   category  with  respect  to  (i)  changes
attributable to changes in volume (changes in volume  multiplied by prior rate),
(ii) changes  attributable  to changes in rate  (changes in rate  multiplied  by
prior  volume),  and (iii)  the net  change.  The  changes  attributable  to the
combined  impact of volume and rate have been allocated  proportionately  to the
changes due to volume and the changes due to rate.

Table 3 - Volume/Rate Variance Analysis

<TABLE>
<CAPTION>
                                                             Year Ended December 31, 2006           Year Ended December 31, 2005
                                                                       compared to                          compared to
                                                             Year Ended December 31, 2005           Year Ended December 31, 2004
                                                           --------------------------------     ----------------------------------
                                                                   INCREASE/(DECREASE)                  INCREASE/(DECREASE)
                                                                         Due to                                Due to
                                                           --------------------------------     ----------------------------------
                                                           Total Net                            Total Net
                                                            Change       Volume        Rate       Change        Volume        Rate
                                                            ------       ------        ----       ------        ------        ----

                                                                                     (Dollars in thousands)
<S>                                                         <C>         <C>          <C>          <C>          <C>          <C>
Interest income:
Interest-bearing deposits with banks ..................     $    74     $    48      $    26      $    16      $   (11)     $    27
Taxable securities ....................................       1,386         870          516          423          136          287
Tax-exempt securities .................................         176         176           --          (85)        (137)          52
Total loans and fees ..................................       9,306       5,495        3,811        6,920        4,672        2,248
FHLB stock ............................................          33         (21)          54           (2)          14          (16)
                                                            -------     -------      -------      -------      -------      -------

Total increase (decrease) in interest income ..........      10,975       6,568        4,407        7,272        4,674        2,598

Interest expense:
Savings and other .....................................       1,707         207        1,500        2,365          496        1,869
Time deposits .........................................       4,444       2,435        2,009        1,177          583          594
Short-term borrowings .................................       1,659         538        1,121          986          172          814
FHLB advances .........................................         320          84          236         (233)          72         (305)
Subordinated debenture ................................         521         393          128          253          169           84
                                                            -------     -------      -------      -------      -------      -------

Total increase (decrease) in interest expense .........       8,651       3,657        4,994        4,548        1,492        3,056
                                                            -------     -------      -------      -------      -------      -------

Increase (decrease) in net interest income ............     $ 2,324     $ 2,911      $  (587)     $ 2,724      $ 3,182      $  (458)
                                                            =======     =======      =======      =======      =======      =======
</TABLE>

Non-interest Income

Non-interest  income was $4.8 million for 2006,  $4.9 million for 2005, and $3.3
million for 2004. In 2005, the Company had a gain on life insurance  benefits of
$656,000,  a gain on the  disposition  of equity stock of $345,000 and a gain on
sale of AFS securities of $23,000 which substantially  impacted 2005.  Excluding
these items, total non-interest income increased by $935,000 or 24.3% from 2005.
Non-interest  income  in 2006 was  affected  by the  acquisition  of SCSB  which
provided total  non-interest  income in 2006 of $383,000,  of which $326,000 was
related to service charges on deposit accounts.  The remaining growth in service
charge  income is due to an  increase  in YCB's  overdraft  service  charge,  an
increase in  transaction  accounts,  and an increase in the number of  overdrawn
accounts.  The Company continues to emphasize the importance of customer service
and believes this emphasis  facilitated  the opening of a significant  number of
new demand deposit accounts during 2006 and 2005,  which helped  contribute to a
34.5% and 28.3%  increase in service  charges on deposit  accounts  for 2006 and
2005, respectively.

Table 4 provides a breakdown of the  Company's  non-interest  income  during the
past three years.

Table 4 - Analysis of Non-interest Income

<TABLE>
<CAPTION>
                                                                Year Ended December 31,      Percent Increase/(Decrease)
                                                                -----------------------      --------------------------

(Dollars in thousands)                                        2006        2005       2004      2006/2005      2005/2004
                                                              ----        ----       ----      ---------      ---------
<S>                                                         <C>         <C>         <C>            <C>           <C>
Service charges on deposit accounts ...................     $ 3,487     $ 2,593     $ 2,021        34.5%         28.3%
Commission income .....................................         107          74          64        44.6          15.6
Gain on sale of mortgage loans ........................         262         426         322       (38.5)         32.3
Loan servicing income, net of amortization ............          60          36          49        66.7         (26.5)
Increase in cash surrender value of life insurance ....         573         527         493         8.7           6.9
Other .................................................         287         185         184        55.1           0.5
                                                            -------     -------     -------
   Subtotal ...........................................       4,776       3,841       3,133        24.3%         22.6%

Gain on life insurance benefit ........................          --         656          --      (100.0)           NM
Gain on disposition of equity stock ...................          18         345          --       (94.8)           NM
Gain on sale of available for sale securities .........          --          23         138      (100.0)        (83.3)
                                                            -------     -------     -------

   Total ..............................................     $ 4,794     $ 4,865     $ 3,271        (1.5)%        48.7%
                                                            =======     =======     =======
</TABLE>


--------------------------------------------------------------------------------

                                       22
<PAGE>

The market interest rate environment  heavily  influences  revenue from mortgage
banking activities. The decrease in net gain on sale of mortgage loans from 2005
to 2006 reflects  decreased  origination  activity due to an overall  decline in
home sales in 2006 as compared to 2005 and increasing  interest rates during the
year. Management  anticipates gains on sales of mortgage loans in 2007 to remain
consistent  with 2006.  The increase in net gain on mortgage  loans from 2004 to
2005 reflected increased origination  activity,  even as mortgage interest rates
were generally stable throughout 2005.

The Company had a $345,000  gain  during  2005 on the  disposition  of an equity
stock  position it held in a company that provides data  processing  services to
the banking industry.  The disposition resulted from the acquisition of the data
processing  provider by a third party  organization.  In  addition,  there was a
$656,000  non-taxable  gain on life  insurance  benefit.  Combined  these  items
accounted for a decrease in non-interest  income of $1,001,000 from 2005 to 2006
which was  offset by  increases  in  service  charges  on  deposit  accounts  as
previously noted.

Non-interest Expense

Total  non-interest  expense  increased  18.3% to  $19.1  million  in 2006  when
compared  with 2005 as a result of increases in salaries and employee  benefits,
and occupancy and equipment expenses.  A significant  percentage of the increase
was due to the  acquisition  of SCSB in 2006 which  accounted  for an additional
$1.8  million in expense in 2006.  Other  factors  for the  increase  include an
increase in salaries and benefits,  occupancy expenses,  data processing,  legal
and professional, and other expenses. Total non-interest expense increased 16.2%
to $16.2  million in 2005 when  compared  with 2004 as a result of  increases in
salaries and employee benefits and occupancy and equipment expenses. The Company
expects that non-interest expense will increase approximately 10% during 2007 as
the  Company  will  incur a full year of  expenses  from SCSB as  opposed to six
months in 2006.

Table 5 provides a breakdown of the Company's  non-interest expense for the past
three years.

Table 5 - Analysis of Non-interest Expense

<TABLE>
<CAPTION>
                                                                Year Ended in December 31,        Percent Increase/(Decrease)
                                                                --------------------------        ---------------------------

(Dollars in thousands)                                       2006          2005        2004        2006/2005      2005/2004
                                                             ----          ----        ----        ---------      ---------
<S>                                                        <C>           <C>         <C>              <C>            <C>
Salaries and employee benefits .....................       $10,345       $ 8,843     $ 7,679          17.0%          15.2%
Occupancy ..........................................         1,479         1,193       1,130          24.0            5.6
Equipment ..........................................         1,188         1,142       1,231           4.0           (7.2)
Data processing ....................................         2,162         1,883       1,333          14.8           41.3
Marketing and advertising ..........................           527           503         387           4.8           30.0
Legal and professional .............................         1,097           836         573          31.2           45.9
Other ..............................................         2,318         1,755       1,570          32.1           11.8
                                                           -------       -------     -------

Total ..............................................       $19,116       $16,155     $13,903          18.3%          16.2%
                                                           =======       =======     =======
</TABLE>

Salaries and benefits, the largest component of non-interest expense,  increased
17.0% to $10.3 million in 2006 compared with $8.8 million for 2005 due primarily
to the  acquisition  of SCSB.  The Company  increased its  full-time  equivalent
employees by 49 as a result of the acquisition of SCSB.  Excluding  salaries and
benefits of $988,000 from SCSB, the increase from 2005 was 5.8% due primarily to
normal,  recurring pay raises. The Company's full-time equivalent employees grew
from 182  full-time  equivalent  employees at December 31, 2005 to 224 full-time
equivalent  employees  (including 49 from SCSB) at December 31, 2006.  Excluding
SCSB,  full-time  equivalent  employees decreased from 2005 by 7 to 175 due to a
retail  branch  analysis  conducted by the Company  during 2006 that resulted in
more efficient  allocation of retail employees.  Salaries and benefits increased
15.2% to $8.8 million in 2005 compared with $7.7 million for 2004  primarily due
to the growth in the  Company's  level of staffing to 182  full-time  equivalent
employees  at  December  31, 2005 from 169  full-time  equivalent  employees  at
December 31, 2004,  primarily in commercial banking,  loan operations to support
growth in the loan  portfolio,  and  deposit  operations  to  support  growth in
deposit accounts.

Occupancy  expenses  increased  24.0% to $1.5 million in 2006 compared with $1.2
million for 2005.  The  increase in  occupancy  expense is due  primarily to the
opening  of a new YCB branch in  Jefferson  County,  Kentucky  in early 2006 and
entering into a lease for an additional  branch in Jefferson County in the third
quarter of 2006 to be opened in 2007.  Together,  these  branches  accounted for
approximately  $90,000 increase in rent expense in 2006 as compared to 2005. The
remaining increase is due to related to increased utilities,  taxes, repairs and
maintenance,   and  depreciation  associated  with  the  new  branches  and  the
acquisition of SCSB, which accounted for $97,000 of additional occupancy expense
in 2006.  Occupancy  expenses were consistent between 2005 and 2004 growing 5.6%
to $1.2 million from $1.1 million in 2004.

Data  processing  expense  increased 14.8% to $2.2 million in 2006 compared with
$1.9  million  for 2005 due to higher  item  processing  costs  associated  with
increased  deposit  growth  and  higher  per  item  charges.  Additionally,  the
acquisition  of SCSB  resulted  in an  additional  $71,000  of  data  processing
expenses in 2006. Data processing  expense  increased 41.3% during 2005 compared
to 2004 due to higher item processing  costs  associated with increased  deposit
growth, and higher depreciation costs due to building infrastructure designed to
support growth.


--------------------------------------------------------------------------------

                                       23
<PAGE>

Legal and professional  expenses increased from $836,000 in 2005 to $1.1 million
in 2006, or 31.2%. The increase is due to $117,000 of expenses  incurred by SCSB
during 2006 along with  increased  legal fees  associated  with more  aggressive
collection efforts on several large commercial credits.  Management  anticipates
incurring  similar charges in 2007 as the Company continues to pursue collection
on certain credits. Legal and profession fees increased from $573,000 in 2004 to
$836,000 in 2005, or 45.9% primarily due to increased legal fees associated with
the increase in nonperforming loans in 2005.

Other  operating  expenses  increased  32.1% to $2.3 million in 2006 compared to
2005  primarily due to the  acquisition of SCSB,  which  incurred  approximately
$344,000 of other operating expenses in 2006 including  amortization  expense of
$176,000 of a core deposit  intangible asset acquired as part of the transaction
(see Note 6 to the Company's consolidated financial statements).  Another factor
in the increased operating expenses was increased  miscellaneous and other taxes
and assessments of approximately  $69,000. Other operating expenses increased to
$1.8  million  in 2005 from $1.6  million  in 2004,  or 11.8% due to  additional
expenses  incurred  associated  with the  Company's  growth  including  postage,
supplies, miscellaneous taxes, and other expense items.

Financial Condition

Loan Portfolio

The  Company  experienced  loan  growth  of 18.4%  during  2006 as  total  loans
increased  $95.2 million to $613.6 million at December 31, 2006. The acquisition
of SCSB accounted for most of the Company's loan growth in 2006; total loans for
SCSB as of December 31, 2006 were $93.0 million.  Excluding the balance of loans
acquired,  total  loans grew by $2.2  million  or 0.43%  from  2005.  Due to the
acquisition,  the Company's  loan portfolio mix changed from 2005 to 2006. As of
December 31, 2005,  residential real estate loans represented 21.6% of the total
loan portfolio while commercial real estate loans comprised 36.0%. Subsequent to
acquisition, at December 31, 2006, residential real estate loans comprised 30.1%
of the portfolio while  commercial  real estate loans  represented  26.8%.  Also
contributing to the change in the loan portfolio mix was the reclassification of
certain loans  previously  classified as commercial  real estate to  residential
real estate.  Management  elected to reclassify  these loans to more  accurately
reflect the collateral  securing  these loans;  the allowance for loan losses or
management's   assessment  and  monitoring  were  not  affected  for  the  loans
reclassified.  In total,  residential and commercial real estate loans accounted
for  approximately  the same  percentage of the total loan  portfolio in 2006 at
56.9% and 2005 at 57.6%.  Excluding the  acquisition of SCSB, the Company's loan
growth slowed in 2006 as compared to 2005,  as  management  focused on improving
the net interest  margin.  The Company  expects  measured growth within its loan
portfolio in 2007 due to new deposit products  targeted  towards  attracting new
small business customers and a more focused sales effort.

Real  estate  construction  loans  grew 24.7%  including  SCSB in 2006 and 14.7%
excluding SCSB due primarily to the continuing  strong growth  opportunities  in
the Company's market areas. At December 31, 2006, real estate construction loans
accounted for 12.4% of total gross loans.

Residential  real estate loans  increased  64.8% from $112.0 million at December
31, 2005 to $184.5  million at December 31, 2006. The increase was primarily due
to the Company's  acquisition of SCSB which  accounted for $49.9 million of loan
growth during 2006. Excluding SCSB,  residential real estate loans grew by $22.6
million  or  20.2%  from  2005  due  to   increase   is   primarily   due  to  a
reclassification  of certain loans  previously  classified  as  commercial  real
estate to  residential  real estate to more  accurately  reflect the  underlying
collateral.  Management's evaluation and determination of the collectibility and
sufficiency   of  the   underlying   collateral   was   not   affected   by  the
reclassification.

Commercial  real estate loans  decreased by $22.2  million or 11.9% from 2005 to
$164.4  million as of December 31, 2006.  Excluding  $14.5 million of commercial
real estate loans acquired as part of the  acquisition of SCSB, the decrease was
$36.7 million or 19.7% from 2005.  The decrease in commercial  real estate loans
is primarily due to a  reclassification  of loans to residential  real estate in
2006 to more accurately  reflect the collateral  underlying certain loans in the
Company's portfolio. The reclassification did not affect management's evaluation
and  determination  of the  collectibility  and  sufficiency  of the  underlying
collateral.  Also contributing to the decrease were the efforts of management to
increase its net interest  margin by increasing  rates on commercial real estate
loans and a dampening of demand due to rising interest rates.

Commercial loans increased to $105.9 million in 2006 from $92.6 million in 2005,
a change of $13.3  million or 14.3%.  A portion of the  increase  was due to the
acquisition of SCSB, which accounted for $8.7 million of commercial loan growth.
While demand for commercial  loans has remained  strong,  rising  interest rates
have somewhat diminished the demand for commercial loans in the Company's market
area.

Consumer  loans grew by $12.3 million or 168.0% from 2005 to $19.5 million as of
December 31, 2006 due almost  entirely to the  acquisition of SCSB which,  as of
December 31, 2006, totaled $11.9 million.

At the end of 2006,  the Company was servicing  $20.7 million in mortgage  loans
for other investors compared to $24.9 million in 2005. Loans serviced for others
consist  of  loans  the  Company  has  sold  to the  Federal  National  Mortgage
Association and the Federal Home Loan Mortgage Corporation with servicing rights
retained by the Company.


--------------------------------------------------------------------------------

                                       24
<PAGE>

The  Company's  lending  activities  remain  primarily  concentrated  within its
existing   markets,   and  are   principally   comprised  of  loans  secured  by
single-family residential housing developments, owner occupied manufacturing and
retail facilities,  general business assets, and single-family  residential real
estate. The Company emphasizes the acquisition of deposit relationships from new
and existing commercial business and real estate loan clients.

Table 6 provides a breakdown of the Company's loans by type during the past five
years.

Table 6 - Loans by Type

<TABLE>
<CAPTION>
                                                                    As of December 31,

(Dollars in thousands)                               2006        2005        2004        2003       2002
                                                     ----        ----        ----        ----       ----
<S>                                                <C>         <C>         <C>         <C>        <C>
Real estate:
  Residential .................................    $184,474    $111,969    $100,553    $ 94,975   $ 81,618
  Commercial ..................................     164,435     186,644     186,175     161,343    119,196
  Construction ................................      76,126      61,031      38,638      15,691     13,972
Commercial ....................................     105,922      92,640      73,374      72,981     70,234
Home Equity ...................................      62,324      58,060      49,677      42,562     29,595
Consumer ......................................      19,549       7,295       6,095       5,962     10,488
Loans secured by deposit accounts .............         756         729         687         546        345
                                                   --------    --------    --------    --------   --------

Total loans ...................................    $613,586    $518,368    $455,199    $394,060   $325,448
                                                   ========    ========    ========    ========   ========
</TABLE>

Table 7 illustrates the Company's fixed rate maturities and repricing  frequency
for the loan portfolio.

Table 7 - Selected Loan Distribution

<TABLE>
<CAPTION>
                                                                             One         Over One        Over
As of December 31, 2006                                                      Year      Through Five      Five
(Dollars in thousands)                                          Total      Or Less        Years          Years
                                                                -----      -------        -----          -----
<S>                                                           <C>          <C>           <C>            <C>
Fixed rate maturities:
Real estate:
  Residential ..........................................      $139,813     $  3,993      $ 18,183       $117,637
  Commercial ...........................................        44,937        2,843        26,217         15,877
  Construction .........................................        17,434        3,918         3,692          9,824
Commercial .............................................        32,116        5,288        18,544          8,284
Home equity ............................................        12,883          169         3,080          9,634
Consumer ...............................................        19,291        4,502        13,693          1,096
Loans secured by deposits ..............................           756          461           295             --
                                                              --------     --------      --------       --------

Total fixed rate maturities ............................      $267,230     $ 21,174      $ 83,704       $163,352
                                                              ========     ========      ========       ========

Variable rate maturities:
Real estate:
  Residential ..........................................      $ 44,661     $ 24,643      $ 17,402       $  2,616
  Commercial ...........................................       119,498       26,008        73,268         20,222
  Construction .........................................        58,692       35,895        18,937          3,860
Commercial .............................................        73,806       51,922        20,380          1,504
Home equity ............................................        49,441       40,005         3,526          5,910
Consumer ...............................................           258          258            --             --
                                                              --------     --------      --------       --------

Total variable rate maturities .........................      $346,356     $178,731      $133,513       $ 34,112
                                                              ========     ========      ========       ========
</TABLE>

Allowance and Provision for Loan Losses

Federal regulations  require insured  institutions to classify their assets on a
regular basis. The regulations provide for three categories of classified loans:
substandard,  doubtful and loss. The regulations  also contain a special mention
and a specific allowance  category.  Special mention is defined as loans that do
not currently  expose an insured  institution to a sufficient  degree of risk to
warrant   classification  but  do  possess  credit   deficiencies  or  potential
weaknesses  deserving   management's  close  attention.   Assets  classified  as
substandard or doubtful require the institution to establish general  allowances
for loan  losses.  If an asset or portion  thereof is  classified  as loss,  the
insured institution must either establish  specified  allowances for loan losses
in the amount of 100% of the portion of the asset classified loss, or charge off
such amount.

The  Company  maintains  the  allowance  for  loan  losses  at a  level  that is
sufficient to absorb probable credit losses incurred in its loan portfolio.  The
allowance is determined  based on the  application  of loss  estimates to graded
loans by categories.  Management  determines the level of the allowance for loan
losses based on its  evaluation  of the  collectibility  of the loan  portfolio,
including the  composition of the portfolio,  historical  loan loss  experience,
specific  impaired  loans,  and  general  economic  conditions.  Allowances  for
impaired  loans  are  generally  determined  based on  collateral  values or the
present value of estimated  future cash flows.  The allowance for loan losses is
increased  by a provision  for loan  losses,  which is charged to  expense,  and
reduced by charge-offs  of specific  loans,  net of  recoveries.  Changes in the
allowance  relating  to impaired  loans are charged or credited  directly to the
provision


--------------------------------------------------------------------------------

                                       25
<PAGE>

for loan losses.  At December 31, 2006, the Company's  allowance for loan losses
totaled  $5.7  million as compared to $5.9  million and $4.5 million at December
31, 2005 and 2004, respectively. The Company's allowance for loan losses to loan
ratio was 0.92% as of December 31, 2006  compared to 1.14% at December 31, 2005.
The  decrease  in the  allowance  to the loan  loss was due to  several  factors
including  a lower  provision  for loan  losses in 2006 as  compared to 2005 and
increased net charge-offs  for which the Company had previously  provided for in
years  preceding  2006. The Company's net  charge-offs in 2006 were from credits
that  management had identified and classified in accordance  with the Company's
policy for  estimating its allowance for loan losses.  Accordingly,  the Company
recorded a  provision  for loan  losses at the point at which the  credits  were
identified as classified credits and appropriately  adjusted the recorded amount
for changes in circumstances and estimates in collectibility  and the underlying
value  of the  collateral.  Most of the  credits  charged-off  in 2006  had been
identified and classified prior to 2006, therefore the provision for loan losses
was not commensurate  with the increase in net charge-offs.  Also factoring into
the decrease in the allowance for loan losses was a change in the Company's loan
portfolio  mix  during  2006 as  compared  to 2005 and  management's  efforts to
remediate  problem  credits.  Due to the  acquisition  of  SCSB,  the  Company's
residential  real estate loans,  which tend to be less risky then other types of
credits,  increased  from 22% of the portfolio as of December 31, 2005 to 30% of
the  portfolio  as  of  December  31,  2006.  Correspondingly,   commercial  and
commercial  real estate  loans,  which tend to be more risky then other types of
credits,  decreased  from 54% of the portfolio as of December 31, 2005 to 44% of
the  portfolio  as of December 31, 2006.  In addition,  management  began a more
aggressive  initiative to remediate  problem  credits during 2006 resulting in a
decrease in problem  credits  from $19.0  million at December  31, 2005 to $16.8
million at December 31, 2006 which  included $4.8 million of classified  credits
from the acquisition of SCSB.  Excluding SCSB,  classified  credits decreased by
$7.0  million  from  2005.  The net  effect  of the  loan  portfolio  shift  and
remediation of certain  problem  credits was to decrease the Company's loan risk
profile and therefore decrease  management's  estimate of the allowance for loan
losses necessary for losses that are probable within its portfolio.

Provisions  for loan  losses are  charged  against  earnings  to bring the total
allowance for loan losses to a level considered  adequate by management based on
historical experience,  the volume and type of lending conducted by the Company,
the  status  of past due  principal  and  interest  payments,  general  economic
conditions,  and  inherent  credit  risk  related to the  collectibility  of the
Company's  loan  portfolio.  The  provision for loan losses was $262,000 for the
year ended  December 31, 2006 as compared to $1,750,000  for 2005 and $1,105,000
for 2004.  Management  attributes  the decrease in the provision for loan losses
for 2006 to a decrease in the balance of classified loans in 2006 as compared to
2005. The Company experienced a decline in the balance of classified of loans of
$2.2 million to $16.8  million at December 31, 2006 compared to $19.0 million as
of December 31, 2005.  Excluding  the  classified  loans of SCSB,  the Company's
classified  loans decreased by $7.0 million from 2005. Also  contributing to the
decrease  in the  provision  for loan  losses  during 2006 was a decrease in the
estimated collateral exposure from classified loans (calculated as the excess of
the loan balance over the estimated value of the collateral  securing the loan),
which is a significant  factor in management's  and calculation of the allowance
for  loan  losses  and the  corresponding  provision  required  to  achieve  the
necessary  allowance.  The balance of impaired loans increased $1.9 million from
2005 to $4.4 million in 2006 primarily due to one large construction  credit. In
2006, the Company recorded a significant  partial charge-off of $600,000 on this
credit which reduced the Company's exposure. The Company has previously expensed
and provided an amount for  potential  losses  related to this  credit,  and, as
such,  did not increase the provision for loan losses  related to this credit in
2006. The aggregate remaining balance of loans outstanding with this customer as
of December 31, 2006 approximated $3.4 million. Management has allocated amounts
for  probable  incurred  losses  associated  with this credit and  believes  the
outstanding  balance,  net of estimated potential loss, is a materially accurate
assessment of the potential net  collectibilty  of this credit given the current
circumstances  and  management's  best estimate of the  potential  outcome as of
December 31, 2006. Management is monitoring the ongoing collection procedures of
this credit and will provide  additional amounts should  circumstances  warrant.
Net  charge-offs  were $1.3  million  during 2006 as  compared  to $353,000  and
$616,000 for 2005 and 2004,  respectively.  As previously noted,  charge-offs in
2006  were  significantly  impacted  by  a  partial  $600,000  charge-off  of  a
construction credit. Charge-offs were not materially affected by the acquisition
of SCSB during 2006.

Statements made in this section regarding the adequacy of the allowance for loan
losses are forward-looking statements that may or may not be accurate due to the
impossibility of predicting future events. Because of uncertainties intrinsic in
the estimation process,  management's  estimate of credit losses inherent in the
loan portfolio and the related allowance may differ from actual results.


--------------------------------------------------------------------------------

                                       26
<PAGE>

Table 8 provides the Company's loan charge-off and recovery  activity during the
past five years.

Table 8 - Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                      Year Ended in December 31,
                                                                                      --------------------------

(Dollars in thousands)                                               2006          2005          2004          2003          2002
                                                                     ----          ----          ----          ----          ----
<S>                                                                <C>           <C>           <C>           <C>           <C>
Allowance for loan losses at beginning of year ...............     $ 5,920       $ 4,523       $ 4,034       $ 3,814       $ 3,030

Acquired allowance of SCSB, July 1, 2006 .....................         754            --            --            --            --
Charge-offs:
   Residential real estate ...................................         (35)          (83)          (22)          (24)          (24)
   Commercial real estate ....................................        (193)           --          (339)         (815)         (297)
   Construction ..............................................        (600)           --            --            --            --
   Commercial business .......................................        (138)         (194)         (245)         (158)         (189)
   Home equity ...............................................         (26)         (198)          (22)          (23)           --
   Consumer ..................................................        (362)          (64)          (52)          (55)          (48)
                                                                   -------       -------       -------       -------       -------
     Total ...................................................      (1,354)         (539)         (680)       (1,075)         (558)
                                                                   -------       -------       -------       -------       -------
Recoveries:
   Residential real estate ...................................          --            --             1            --            --
   Commercial real estate ....................................           9             7            24            13           192
   Construction ..............................................          --            --            --            --            --
   Commercial business .......................................          26            34            18             2            --
   Home equity ...............................................          --             3            --            --            --
   Consumer ..................................................          37           142            21             6             6
                                                                   -------       -------       -------       -------       -------
     Total ...................................................          72           186            64            21           198
                                                                   -------       -------       -------       -------       -------
Net loan charge-offs .........................................      (1,282)         (353)         (616)       (1,054)         (360)
Provision for loan losses ....................................         262         1,750         1,105         1,274         1,144
                                                                   -------       -------       -------       -------       -------
Allowance for loan losses at end of year .....................     $ 5,654       $ 5,920       $ 4,523       $ 4,034       $ 3,814
                                                                   =======       =======       =======       =======       =======

Ratios:
   Allowance for loan losses to total loans ..................        0.92%         1.14%         0.99%         1.02%         1.17%
   Net loan charge-offs to average loans .....................        0.22          0.07          0.15          0.29          0.12
   Allowance for loan losses to non-performing loans .........         102           108           285           223           120
</TABLE>

The following  table depicts  management's  allocation of the allowance for loan
losses by loan type during the last five years. Allowance funding and allocation
is  based  on  management's   assessment  of  economic  conditions,   past  loss
experience, loan volume, past-due history and other factors. Since these factors
and  management's  assumptions  are  subject to change,  the  allocation  is not
necessarily indicative of future loan portfolio performance.  Allocations of the
allowance  may be made for  specific  loans or loan  categories,  but the entire
allowance  is available  for any loan that may be charged  off.  Loan losses are
charged against the allowance when management deems a loan uncollectible.

Table 9 - Management's Allocation of the Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                             As of December 31,

                                      2006                        2005                           2004
                                      ----                        ----                           ----

                                        Percent of Loans            Percent of Loans               Percent of Loans
(Dollars in thousands)       Allowance   to Total Loans   Allowance  to Total Loans     Allowance   to Total Loans
                             ---------   --------------   ---------  --------------     ---------   --------------
<S>                            <C>           <C>            <C>           <C>             <C>           <C>
Residential Real Estate        $  479         30.0%         $  336         21.6%          $  325         22.1%
Commercial Real Estate          2,992         26.8%          3,544         36.0%           2,162         40.9%
Construction                       48         12.4%             23         11.8%              17          8.5%
Commercial Business             1,501         17.3%          1,407         17.9%           1,533         16.1%
Home Equity                       435         10.2%            495         11.2%             389         10.9%
Consumer                          199          3.3%            115          1.5%              97          1.5%
                               ------                       ------                        ------

Total                          $5,654        100.0%         $5,920        100.0%          $4,523        100.0%
                               ======                       ======                        ======

<CAPTION>
                                                  As of December 31,

                                        2003                          2002
                                        ----                          ----

                                           Percent of Loans             Percent of Loans
(Dollars in thousands)         Allowance    to Total Loans   Allowance   to Total Loans
                               ---------    --------------   ---------   --------------
<S>                              <C>             <C>           <C>           <C>
Residential Real Estate          $  342           24.3%        $  319         25.2%
Commercial Real Estate            1,769           40.9%         1,321         36.6%
Construction                          5            4.0%            80          4.3%
Commercial Business               1,436           18.5%         1,764         21.6%
Home Equity                         371           10.8%           224          9.1%
Consumer                            111            1.5%           106          3.2%
                                 ------                        ------

Total                            $4,034          100.0%        $3,814        100.0%
                                 ======                        ======

</TABLE>

Asset Quality

Loans  (including  impaired  loans  under  Statements  of  Financial  Accounting
Standards  114 and 118) are placed on  non-accrual  status when they become past
due 90 days or more as to  principal  or  interest.  When  loans  are  placed on
non-accrual status, all unpaid accrued interest is reversed.  These loans remain
on  non-accrual  status  until the loan  becomes  current  or the loan is deemed
uncollectible and is charged off. The Company defines impaired loans to be those
loans  that  management  has  determined  it  is  probable,   based  on  current
information  and events,  the Company  will be unable to collect all amounts due
according to the  contractual  terms of the loan agreement.  Loans  individually
classified as impaired  decreased from $2.5 million at December 31, 2005 to $1.8
million at December 31, 2006. As previously  noted,  the decrease in the balance
of impaired  credits was due  primarily to a charge-off  of $600,000  associated
with a large impaired  construction  credit during 2006.  Non-performing  assets
also include  foreclosed real estate that has been acquired through  foreclosure
or  acceptance  of a deed in lieu of  foreclosure.  Foreclosed  real  estate  is
carried at the lower of cost or fair value less estimated  selling costs, and is
actively marketed for sale.

--------------------------------------------------------------------------------

                                       27
<PAGE>

Total  non-performing  loans increased from $5.5 million at December 31, 2005 to
$5.6  million at December  31,  2006.  The balance of  non-performing  loans was
substantially affected by the acquisition of SCSB which had non-performing loans
as of December 31, 2006 of $703,000.  Excluding the SCSB,  non-performing  loans
decreased  by  $640,000  from 2005.  These  non-performing  loans are  primarily
secured by real estate and,  historically,  the  Company's  interest in the real
estate  securing  these loans has generally been adequate to limit the Company's
exposure to significant loss.  Management's  estimate of future credit losses is
inherently uncertain and may differ from actual results.

Table 10 provides the Company's  non-performing  loan experience during the past
five years.

Table 10 - Non-Performing Assets

<TABLE>
<CAPTION>
                                                                                           As of December 31,
                                                                                           ------------------

(Dollars in thousands)                                                 2006          2005          2004          2003          2002
                                                                       ----          ----          ----          ----          ----
<S>                                                                  <C>           <C>           <C>           <C>           <C>
Loans on non-accrual status (1) ..............................       $5,566        $5,498        $1,588        $1,788        $3,171
Loans past due 90 days or more and still accruing ............           --             5            --            25            --
                                                                     ------        ------        ------        ------        ------
Total non-performing loans ...................................        5,566         5,503         1,588         1,813         3,171
Other real estate owned ......................................          457           106           106           610           630
                                                                     ------        ------        ------        ------        ------
Total non-performing assets ..................................       $6,023        $5,609        $1,694        $2,423        $3,801
                                                                     ======        ======        ======        ======        ======

Percentage of non-performing loans to total loans ............         0.91%         1.06%         0.35%         0.46%         0.97%
Percentage of non-performing assets to total loans ...........         0.98          1.08          0.37          0.61          1.17
</TABLE>

----------
(1)   Impaired loans on non-accrual  status are included in loans. See Note 4 to
      the  Consolidated   Financial  Statements  for  additional  discussion  on
      impaired loans.

Investment Securities

Table 11 sets forth the breakdown of the Company's  securities portfolio for the
past five years.

Table 11 - Securities Portfolio

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------

(Dollars in thousands)                                            2006           2005            2004           2003           2002
                                                                  ----           ----            ----           ----           ----
<S>                                                             <C>             <C>            <C>            <C>            <C>
Securities Available for Sale:
 U.S. Government and federal agency ....................        $ 29,972        $10,921        $ 4,739        $    --        $ 8,756
 State and municipal ...................................          11,645          6,449          6,613         15,246         13,040
 Mortgage-backed .......................................          67,304         66,752         63,943         52,657         61,295
 Corporate bonds .......................................          12,150         14,471         14,611         14,990          9,283
 Mutual Funds ..........................................             240            242            246            250             --
                                                                --------        -------        -------        -------        -------

         Total securities available for sale ...........        $121,311        $98,835        $90,152        $83,143        $92,374
                                                                ========        =======        =======        =======        =======
</TABLE>


--------------------------------------------------------------------------------

                                       28
<PAGE>

Table  12 sets  forth  the  breakdown  of the  Company's  investment  securities
available for sale by type and maturity as of December 31, 2006.

Table 12 - Investment Securities Available for Sale

<TABLE>
<CAPTION>
                                                                               As of December 31, 2006
                                                                               -----------------------
                                                                                                     Weighted
                                                                      Amortized                       Average
(Dollars in thousands)                                                   Cost         Fair Value       Yield
                                                                         ----         ----------       -----
<S>                                                                    <C>              <C>              <C>
U.S. Government and federal agency
   Within one year ...........................................         $ 14,727         $ 14,650         4.30%
   Over one through five years ...............................           13,356           13,279         4.63
   Over five through ten years ...............................            2,000            2,043         5.90
                                                                       --------         --------
Total U.S. Government and federal agency .....................           30,083           29,972         4.55

State and municipal
   Within one year ...........................................            1,231            1,235         7.53%
   Over one through five years ...............................            3,359            3,412         6.31
   Over five through ten years ...............................            1,507            1,535         7.07
   Over ten years ............................................            5,328            5,463         6.21
                                                                       --------         --------
Total state and municipal ....................................           11,425           11,645         6.48

Corporate Bonds
   Within one year ...........................................            2,535            2,507         2.79%
   Over one through five years ...............................            1,011              983         2.91
   Over ten years ............................................            8,605            8,660         6.89
                                                                       --------         --------
Total corporate bonds ........................................           12,151           12,150         5.72

Total mutual funds ...........................................              250              240         4.36%

Mortgage-backed securities
   Within one year ...........................................               22               22         7.50%
   Over one through five years ...............................              191              192         5.85
   Over five through ten years ...............................           16,628           16,161         3.90
   Over ten years ............................................           51,810           50,929         4.67
                                                                       --------         --------
Total mortgage-backed securities .............................           68,651           67,304         4.49
                                                                       --------         --------

Total available for sale securities ..........................         $122,560         $121,311         4.81%
                                                                       ========         ========
</TABLE>

Securities  available for sale increased from $98.8 million at December 31, 2005
to $121.3  million at December  31, 2006.  The  increase in  available  for sale
securities  was due  primarily to the  acquisition  of SCSB which  accounted for
$18.4 million in securities available for sale at December 31, 2006. The current
strategy for the  securities  portfolio  is to maintain a short to  intermediate
average  life  that  remains  relatively  stable  in a  changing  interest  rate
environment,  thus minimizing exposure to sustained increases in interest rates.
The  investment  portfolio  primarily  consists of  mortgage-backed  securities,
securities issued by the United States  government and its agencies,  securities
issued  by states  and  municipalities,  and  corporate  bonds.  Mortgage-backed
securities  consist  primarily of  obligations  insured or guaranteed by Federal
Home Loan  Mortgage  Corporation,  Federal  National  Mortgage  Association,  or
Government  National  Mortgage  Association.  The  acquisition  of SCSB  did not
materially  impact the  Company's  investment  strategy or change the  Company's
investment  risk  profile as a majority  of the  acquired  securities  were U.S.
government or federal agency securities.

Deposits

The Company attracts deposits from the market areas it serves by offering a wide
range of deposit  accounts  with a variety  of rate  structures  and terms.  The
Company uses interest rate risk  simulations to assist  management in monitoring
the  Company's  deposit  pricing,  and  periodically  may offer special rates on
certificates  of deposits  and money  market  accounts  to  maintain  sufficient
liquidity  levels.  The Company  relies  primarily on its retail and  commercial
sales staff and current  customer  relationships to attract and retain deposits.
Market interest rates and  competitive  pressures can  significantly  affect the
Company's ability to attract and retain deposits.  The Company's  strategic plan
includes  continuing to grow  non-interest  bearing accounts which contribute to
higher levels of non-interest income and net interest margin.

Total deposits  increased  18.3% to $549.9 million at December 31, 2006 compared
to $464.8 million at December 31, 2005, primarily as a result of the acquisition
of SCSB, which accounted for $101.4  (excluding  inter-company  accounts) of the
increase.  Excluding the SCSB acquisition,  deposits  decreased by $16.3 million
from 2005.  The decrease,  excluding  SCSB, was due to a decline in money market
deposits  from  $146.7  million  in 2005 to  $112.3  (excluding  SCSB)  in 2006.
Management  attributes the decline to a focused effort to increase the Company's
net interest  margin by reducing the offered rate on its money market  accounts.
The decrease in money market  accounts was  partially  offset with  increases in
other  deposit  categories  attributed  primarily  to  acquisition  of SCSB  and
secondarily to the Company's  continued,  concerted effort to increase  deposits
through a focused commitment on improving customer service throughout its retail
delivery systems.


--------------------------------------------------------------------------------

                                       29
<PAGE>

The Company anticipates that it will continue to attract a significant amount of
both  non-interest  and  interest-bearing  deposits  as it expands  its  banking
operations and continues to promote it s retail product offerings.

Table 13  provides  a profile  of the  Company's  deposits  during the past five
years.

Table 13 - Deposits

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                              ------------

(Dollars in thousands)                                                2006          2005          2004          2003          2002
                                                                      ----          ----          ----          ----          ----
<S>                                                                 <C>           <C>           <C>           <C>           <C>
Demand (NOW) .................................................      $ 63,542      $ 36,496      $ 38,243      $ 35,973      $ 38,008
Money market accounts ........................................       115,248       146,659       114,332        82,546        74,448
Savings ......................................................        30,264        22,507        26,159        28,456        30,656
Individual retirement accounts-savings .......................            --            --            --            --           338
Individual retirement accounts-certificates of deposit .......        27,054        19,674        18,771        17,841        16,173
Certificates of deposit, $100,000 and over ...................        95,069        88,592        65,705        41,028        28,048
Other certificates of deposit ................................       143,891       103,335       104,259       101,085        76,369
                                                                    --------      --------      --------      --------      --------

Total interest bearing deposits ..............................       475,068       417,263       367,469       306,929       264,040
Total non-interest bearing deposits ..........................        74,850        47,573        43,837        34,386        25,790
                                                                    --------      --------      --------      --------      --------

Total ........................................................      $549,918      $464,836      $411,306      $341,315      $289,830
                                                                    ========      ========      ========      ========      ========
</TABLE>

Short-Term Borrowings

The Company's short-term borrowings consist of repurchase  agreements,  lines of
credit with other  financial  institutions  and federal funds  purchased,  which
represent overnight liabilities to non-affiliated financial institutions.  While
repurchase  agreements are effectively deposit  equivalents,  these arrangements
consist of securities that are sold to commercial  customers under agreements to
repurchase.  Short-term borrowings increased $36.6 million from $47.7 million at
December  31,  2005 to $84.3  million  at  December  31,  2006  mostly due to an
increase in federal  funds  purchased of $32.7  million and in increase  line of
credit borrowings of $3.5 while the balance of repurchase  agreements  increased
by $466,000.  The liquidity  provided by the increase in  short-term  borrowings
were used to offset maturities of FHLB advances during 2006.

Federal Home Loan Bank Advances

FHLB advances decreased from $98.0 million at December 31, 2005 to $92.8 million
at  December  31, 2006  primarily  due to  scheduled  maturities  of  short-term
variable  rate  advances  that were  partially  replaced  with  additional  FHLB
borrowings;  additional  liquidity to offset the remaining  maturities  and cash
flow needs of the Company  were  obtained  through  short-term  borrowings.  The
decrease  in FHLB  advances  was  offset  by the  acquisition  of  SCSB  and its
outstanding  FHLB  advances of $10.3  million as of  December  31,  2006.  These
advances  principally consist of putable (or convertible)  instruments that give
the FHLB the option  quarterly to put the advance back to the Company,  at which
time the Company can prepay the advance without penalty or can allow the advance
to become variable adjusting to three-month LIBOR (London Interbank Offer Rate).
However,  there is a  substantial  penalty if the Company  prepays the  advances
prior to the FHLB exercising its option. In calculations provided by the FHLB to
the Company,  three month LIBOR would have to rise by more than 200 basis points
from  December  31, 2006 levels  before the FHLB would  exercise its put option.
These  advances  have  various  maturities  through  2010  (see  Note  9 to  the
Consolidated Financial Statements for additional information).  The Company does
not  anticipate  that it will enter into putable  advances  for the  foreseeable
future,  but  instead may use fixed or variable  rate  advances to fund  balance
sheet growth as needed.

Liquidity

Liquidity  levels  are  adjusted  in order to meet  funding  needs  for  deposit
outflows,   repayment  of  borrowings,   and  loan   commitments   and  to  meet
asset/liability  objectives.  The Bank's primary  sources of funds are deposits;
repayment  of loans  and  mortgage-backed  securities;  Federal  Home  Loan Bank
advances;  maturities of investment securities and other short-term investments;
and income from operations.  While scheduled loan and  mortgage-backed  security
repayments are a relatively  predictable source of funds, deposit flows and loan
and  mortgage-backed  security  prepayments  are greatly  influenced  by general
interest rates,  economic  conditions and competition.  Liquidity  management is
both a daily and long term function of business management. If the Bank requires
funds beyond those  generated  internally,  as of December 31, 2006 the Bank had
$53.2 million in additional  capacity  under its borrowing  agreements  with the
FHLB and  approximately  $18.9 million in federal  funds  purchased and lines of
credit availability with other financial  institutions.  The Company anticipates
it will have  sufficient  funds  available to meet current loan  commitments and
other credit commitments.


--------------------------------------------------------------------------------

                                       30
<PAGE>

Capital

Total  capital of the Company  increased  to $65.5  million at December 31, 2006
from $42.8  million as of December  31,  2005,  an increase of $22.8  million or
53.2%.  The increase was  significantly  affected by the acquisition of SCSB for
which the Company issued 862,875 common shares which accounted for $19.8 million
of the increase.  Other factors affecting  stockholders'  equity during the year
were net income of $4.1 million,  an increase in accumulated other comprehensive
income of $1.1 million  related to increases in the fair value of the  Company's
available for sale securities and interest rate swaps, net of  reclassifications
and a net actuarial gain on the Company's  pension plan, and $356,000 related to
stock based  compensation  activity offset by dividends on common shares of $1.9
million and repurchase of common shares of $685,000.

The Company has actively been repurchasing  shares of its common stock since May
21,  1999. A net total of 424,423  shares at an  aggregate  cost of $6.7 million
have  been  repurchased  since  that  time  under  both the  current  and  prior
repurchase  plans,  with 30,000 shares at a cost of $685,000  purchased in 2006.
The Company's Board of Directors  authorized a share repurchase plan in May 2001
under which a maximum of $3.0  million of the  Company's  common  stock could be
purchased.  Through December 31, 2006, a total of $2.8 million had been expended
to purchase 181,398 shares under this plan. Subsequently, the Company's Board of
Directors  authorized  a share  repurchase  plan in October  2004 under  which a
maximum of $5.0 million of the Company's common stock may be purchased.  Through
December 31, 2006, a total of $1.2 million had been expended to purchase  54,700
shares under this repurchase plan.

Regulatory  agencies  measure  capital  adequacy  within a framework  that makes
capital  requirements,  in part,  dependent on the risk  inherent in the balance
sheets of individual financial institutions.  The Company and the Banks continue
to exceed the  regulatory  requirements  for Tier I, Tier I  leverage  and total
risk-based   capital  ratios  (see  Note  14  to  the   Consolidated   Financial
Statements).

Off Balance Sheet Arrangements

The Company uses off balance sheet financial instruments, such as commitments to
make loans, credit lines and letters of credit to meet customer financing needs.
These agreements provide credit or support the credit of others and usually have
expiration  dates but may expire without being used. In addition to credit risk,
the Company also has liquidity risk associated with these commitments as funding
for these obligations could be required  immediately.  The contractual amount of
these  financial  instruments  with off  balance  sheet  risk was as  follows at
December 31, 2006:

 (Dollars in thousands)

Commitments to make loans                  $    14,172
Unused lines of credit                         134,986
Standby letters of credit                        6,390
                                           -----------
Total                                      $   155,548
                                           ===========

The Company also utilizes  interest rate swap arrangements with notional amounts
totaling $50 million to exchange variable payments of interest tied to the prime
interest rate for receipt of fixed rate payments. The variable rate of the swaps
resets daily,  with net interest being settled  monthly.  The notional amount of
the swaps  does not  represent  amounts  exchanged  by the  parties.  The amount
exchanged is determined  by reference to the notional  amount and other terms of
the swaps.  The swaps have been  designated by management as cash flow hedges of
its prime  rate-based  commercial  loans to in  effect  convert  the loans  from
variable  interest  to fixed  interest  rates  (See Note 15 to the  Consolidated
Financial Statements).

Aggregate Contractual Obligations

As of December 31, 2006

<TABLE>
<CAPTION>
(Dollars in thousands)                                 Less than                           More than
                                             Total       1 year    1-3 years   3-5 years    5 years
                                             -----       ------    ---------   ---------    -------
<S>                                        <C>          <C>          <C>         <C>         <C>
Deposits .............................      549,918      508,250      33,708       7,886         74
FHLB Borrowings ......................       92,756       16,477      26,382      49,897         --
Lease commitments ....................        4,106          458         782         751      2,115
                                           --------     --------     -------     -------     ------

Total ................................     $646,780     $525,185     $60,872     $58,534     $2,189
                                           ========     ========     =======     =======     ======
</TABLE>


--------------------------------------------------------------------------------

                                       31
<PAGE>

Deposits  represent  non-interest  bearing,   interest  bearing,  money  market,
savings,  certificates  of deposit and all other  deposits  held by the Company.
Deposits  that have no stated  maturity  period  are  included  in the less than
one-year category above.

FHLB  advances  represent the amounts that are due the FHLB and consist of $67.0
million  in  convertible  fixed  rate  advances,  $13.8  million  in fixed  rate
advances,  and $12.0  million in variable  rate  advances.  With  respect to the
convertible fixed rate advances, the FHLB has the quarterly right to require the
Company to choose either conversion of the fixed rate to a variable rate tied to
the three month LIBOR index or prepayment of the advance without penalty.  There
is a  substantial  penalty if the  Company  prepays  the  advances  before  FHLB
exercises its right.  Management  does not expect these advances to be converted
in the near term.

Lease commitments represent the total minimum lease payments under noncancelable
operating leases, before considering renewal options that generally are present.

Item 7A. Quantitative And Qualitative Disclosures About Market Risk

Asset/liability  management is the process of balance sheet control  designed to
ensure  safety and soundness and to maintain  liquidity and  regulatory  capital
standards while maintaining  acceptable net interest income.  Interest rate risk
is the exposure to adverse  changes in net interest income as a result of market
fluctuations in interest rates.  Management  continually  monitors interest rate
and liquidity risk so that it can implement appropriate funding, investment, and
other balance sheet strategies.  Management  considers market interest rate risk
to  be  one  of  the   Company's   most   significant   ongoing   business  risk
considerations.

The Company currently  contracts with an independent third party consulting firm
to measure its interest  rate risk  position.  The  consulting  firm utilizes an
earnings  simulation model to analyze net interest income  sensitivity.  Current
balance sheet  amounts,  current  yields and costs,  corresponding  maturity and
repricing amounts and rates, other relevant information, and certain assumptions
made by management are combined with gradual  movements in interest rates of 200
basis  points up and 200 basis  points down  within the model to estimate  their
combined effects on net interest income over a one-year  horizon.  Interest rate
movements are spread  equally over the forecast  period of one year. The Company
feels  that  using  gradual  interest  rate  movements  within the model is more
representative of future rate changes than  instantaneous  interest rate shocks.
The Company does not project  growth in amounts for any balance  sheet  category
when constructing the model because of the belief that projected growth can mask
current  interest rate risk imbalances over the projected  horizon.  The Company
believes  that the changes made to its interest  rate risk  measurement  process
have improved the accuracy of results of the process.  Consequently, the Company
believes  that it has better  information  on which to base asset and  liability
allocation decisions going forward.

Assumptions based on the historical  behavior of the Company's deposit rates and
balances  in relation to changes in  interest  rates are  incorporated  into the
model.  These assumptions are inherently  uncertain and, as a result,  the model
cannot  precisely  measure future net interest  income or precisely  predict the
impact of  fluctuations  in market  interest rates on net interest  income.  The
Company  continually  monitors and updates the  assumptions  as new  information
becomes available. Actual results will differ from the model's simulated results
due to timing,  magnitude and  frequency of interest  rate  changes,  and actual
variations from the managerial  assumptions utilized under the model, as well as
changes  in  market  conditions  and  the  application  and  timing  of  various
management strategies.

The base  scenario  represents  projected  net  interest  income over a one year
forecast  horizon  exclusive of interest rate changes to the  simulation  model.
Given a gradual 200 basis point  increase in the  projected  yield curve used in
the simulation  model ("Up 200  Scenario"),  it is estimated that as of December
31, 2006 the Company's net interest  income would decrease by an estimated 5.6%,
or $1.1  million,  over  the one year  forecast  horizon.  However,  considering
reasonable growth assumptions, the Company expects that net interest income will
grow over the forecast horizon.  As of December 31, 2005, in the Up 200 Scenario
the Company estimated that net interest income would decrease 3.1%, or $541,000,
over a one year forecast  horizon ending December 31, 2006.  Given a gradual 200
basis point decrease in the projected  yield curve used in the simulation  model
("Down  200  Scenario"),  it is  estimated  that as of  December  31,  2006  the
Company's net interest  income would decrease by an estimated 1.6%, or $324,000,
over the one year forecast horizon. As of December 31, 2005, given a gradual 200
basis point decrease in the projected  yield curve used in the simulation  model
("Down 200  Scenario"),  the Company  estimated  that net interest  income would
decrease 0.8%, or $144,000, over a one year forecast horizon ending December 31,
2006.


--------------------------------------------------------------------------------

                                       32
<PAGE>

The projected results are within the Company's asset/liability management policy
limits,  which states that the negative impact to net interest income should not
exceed 7% in a 200 basis point decrease or increase in the projected yield curve
over a one year forecast horizon.  The forecast results are heavily dependent on
the assumptions regarding changes in deposit rates; the Company can minimize the
reduction in net  interest  income in a period of rising  interest  rates to the
extent that it can curtail raising deposit rates during this period. The Company
continues  to explore  transactions  and  strategies  to both  increase  its net
interest income and minimize its interest rate risk.

The  interest  sensitivity  profile of the  Company at any point in time will be
affected  by a number of  factors.  These  factors  include  the mix of interest
sensitive assets and liabilities as well as their relative repricing  schedules.
Such profile is also influenced by market interest rates,  deposit growth,  loan
growth, and other factors.

The  following  tables,  which  are  representative  only  and are  not  precise
measurements  of the effect of  changing  interest  rates on the  Company's  net
interest income in the future,  illustrate the Company's  estimated one year net
interest   income   sensitivity   profile   based   on  the   above   referenced
asset/liability model as of December 31, 2006 and 2005, respectively:

Interest Rate Sensitivity For 2006

<TABLE>
<CAPTION>
                                                              Gradual                           Gradual
                                                              Decrease                         Increase
                                                            In Interest                       In Interest
                                                            Rates of 200                     Rates of 200
(Dollars in thousands)                                      Basis Points          BASE       Basis Points
                                                            ------------          ----       ------------
<S>                                                         <C>               <C>             <C>
Projected interest income:
    Loans .............................................     $    41,508       $    44,098     $    46,630
    Investments .......................................           5,573             5,690           5,814
    FHLB and FRB stock ................................             364               364             364
    Interest-bearing deposits in other ................
    financial institutions ............................             340               435             522
                                                            -----------       -----------     -----------
Total interest income .................................          47,785            50,587          53,330

Projected interest expense:
    Deposits ..........................................          17,575            18,778          20,975
    Federal funds purchased, line of credit and
     repurchase agreements ............................           4,048             5,006           5,957
    FHLB advances .....................................           5,211             5,385           5,960
    Subordinated debentures ...........................           1,133             1,276           1,416
                                                            -----------       -----------     -----------
Total interest expense ................................          27,967            30,445          34,308
                                                            -----------       -----------     -----------

Net interest income ...................................     $    19,818       $    20,142     $    19,022
                                                            ===========       ===========     ===========

Change from base ......................................     $      (324)                      $    (1,120)
% Change from base ....................................           (1.61)%                           (5.56)%
</TABLE>

Interest Rate Sensitivity For 2005

<TABLE>
<CAPTION>
                                                              Gradual                           Gradual
                                                              Decrease                         Increase
                                                            In Interest                       In Interest
                                                            Rates of 100                     Rates of 200
(Dollars in thousands)                                      Basis Points          BASE       Basis Points
                                                            ------------          ----       ------------
<S>                                                         <C>               <C>             <C>
Projected interest income:
    Loans .............................................     $    32,041       $    33,870     $    35,655
    Investments .......................................           4,388             4,564           4,705
    FHLB stock ........................................             360               360             360
    Interest-bearing deposits in other ................
    financial institutions ............................              41                61              69
                                                            -----------       -----------     -----------
Total interest income .................................          36,830            38,855          40,789

Projected interest expense:
    Deposits ..........................................          12,347            13,510          15,243
    Federal funds purchased and repurchase
     agreements .......................................           1,100             1,592           2,080
    FHLB advances .....................................           5,386             5,554           5,747

Subordinated debentures ...............................             450               508             569
                                                            -----------       -----------     -----------
Total interest expense ................................          19,283            21,164          23,639
                                                            -----------       -----------     -----------

Net interest income ...................................     $    17,547       $    17,691     $    17,150
                                                            ===========       ===========     ===========

Change from base ......................................     $      (144)                      $      (541)
% Change from base ....................................           (0.81)%                           (3.06)%
</TABLE>


--------------------------------------------------------------------------------

                                       33
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                               New Albany, Indiana

                              FINANCIAL STATEMENTS
                        December 31, 2006, 2005, and 2004

                                    CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...................   35

FINANCIAL STATEMENTS

  CONSOLIDATED BALANCE SHEETS.............................................   36

  CONSOLIDATED STATEMENTS OF INCOME.......................................   37

  CONSOLIDATED STATEMENTS OF CHANGES IN
    SHAREHOLDERS' EQUITY..................................................   38

  CONSOLIDATED STATEMENTS OF CASH FLOWS...................................   41

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..............................   43


--------------------------------------------------------------------------------

                                       34
<PAGE>

[LOGO] CROWE(R)

       Crowe Chizek and Company LLC
       Member Horwath International

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Community Bank Shares of Indiana, Inc.
New Albany, Indiana

We have audited the accompanying  consolidated  balance sheets of Community Bank
Shares of  Indiana,  Inc.  as of  December  31,  2006 and 2005,  and the related
consolidated  statements of income,  changes in shareholders'  equity,  and cash
flows for each of the three years in the period ended  December 31, 2006.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of Community  Bank
Shares of Indiana, Inc. as of December 31, 2006 and 2005, and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2006 in conformity with United States generally accepted accounting
principles.


                                           /s/ Crowe Chizek and Company LLC

Louisville, Kentucky
March 27, 2007


--------------------------------------------------------------------------------

                                       35
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   December 31
                      (In thousands, except share amounts)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     2006             2005
                                                                     ----             ----
<S>                                                              <C>              <C>
ASSETS
Cash and due from financial institutions                         $    20,224      $    11,225
Interest-bearing deposits in other financial institutions              1,210            1,358
Securities available for sale                                        121,311           98,835
Loans held for sale                                                      908            1,694
Loans, net of allowance for loan losses of $5,654 and $5,920         607,932          512,448
Federal Home Loan Bank and Federal Reserve stock                       7,418            8,572
Accrued interest receivable                                            3,968            2,500
Premises and equipment, net                                           15,025           10,933
Cash surrender value of life insurance                                16,233           13,610
Goodwill                                                              15,983               --
Core deposit intangibles                                               2,893               --
Other assets                                                           3,528            3,833
                                                                 -----------      -----------

                                                                 $   816,633      $   665,008
                                                                 ===========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest-bearing                                             $    74,850      $    47,573
  Interest-bearing                                                   475,068          417,263
                                                                 -----------      -----------
      Total deposits                                                 549,918          464,836
Short-term borrowings                                                 84,335           47,735
Federal Home Loan Bank advances                                       92,756           98,000
Subordinated debentures                                               17,000            7,000
Accrued interest payable                                               2,178            1,066
Other liabilities                                                      4,905            3,596
                                                                 -----------      -----------
  Total liabilities                                                  751,092          622,233

Commitments and contingent liabilities (Note 16)                          --               --

Shareholders' equity
  Preferred stock, without par value;
    5,000,000 shares authorized; none issued                              --               --
  Common stock, $.10 par value per share
    10,000,000 shares authorized; 2006 -
    3,863,942 shares issued and 3,439,519
    shares outstanding; 2005 - 3,001,067 issued and
    2,605,544 shares outstanding                                         386              300
  Additional paid-in capital                                          45,032           24,971
  Retained earnings                                                   28,519           26,329
  Accumulated other comprehensive loss                                (1,741)          (2,838)
  Treasury stock, at cost (2006 - 424,423 shares,
    2005 - 395,523 shares)                                            (6,655)          (5,987)
                                                                 -----------      -----------
      Total shareholders' equity                                      65,541           42,775
                                                                 -----------      -----------

                                                                 $   816,633      $   665,008
                                                                 ===========      ===========
</TABLE>

--------------------------------------------------------------------------------

                             See accompanying notes.


                                       36
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                             Years ended December 31
                    (In thousands, except per share amounts)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                   2006          2005          2004
                                                                   ----          ----          ----
<S>                                                             <C>           <C>           <C>
Interest and dividend income
  Loans, including fees                                         $  40,299     $  30,993     $  24,073
  Taxable securities                                                4,738         3,352         2,929
  Tax-exempt securities                                               467           291           376
  Federal Home Loan Bank dividends                                    397           364           366
  Interest-bearing deposits in other financial institutions           132            58            42
                                                                ---------     ---------     ---------
                                                                   46,033        35,058        27,786
Interest expense
  Deposits                                                         16,933        10,782         7,240
  Other short-term borrowings                                       3,054         1,395           409
  Federal Home Loan Bank advances                                   5,066         4,746         4,979
  Subordinated debentures                                             942           421           168
                                                                ---------     ---------     ---------
                                                                   25,995        17,344        12,796
                                                                ---------     ---------     ---------

Net interest income                                                20,038        17,714        14,990

Provision for loan losses                                             262         1,750         1,105
                                                                ---------     ---------     ---------

Net interest income after provision for loan losses                19,776        15,964        13,885

Non-interest income
  Service charges on deposit accounts                               3,487         2,593         2,021
  Commission income                                                   107            74            64
  Net gain on sales of available for sale securities                   --            23           138
  Net gain on sales of mortgage loans                                 262           426           322
  Loan servicing income, net of amortization                           60            36            49
  Increase in cash surrender value of life insurance                  573           527           493
  Gain on recognition of life insurance benefit                        --           656            --
  Gain on disposition of equity stock                                  18           345            --
  Other income                                                        287           185           184
                                                                ---------     ---------     ---------
                                                                    4,794         4,865         3,271

Non-interest expense
  Salaries and employee benefits                                   10,345         8,843         7,679
  Occupancy                                                         1,479         1,193         1,130
  Equipment                                                         1,188         1,142         1,231
  Data processing                                                   2,162         1,883         1,333
  Marketing and advertising                                           527           503           387
  Legal and professional service fees                               1,097           836           573
  Other expense                                                     2,318         1,755         1,570
                                                                ---------     ---------     ---------
                                                                   19,116        16,155        13,903
                                                                ---------     ---------     ---------

Income before income taxes                                          5,454         4,674         3,253

Income tax expense                                                  1,343           925           665
                                                                ---------     ---------     ---------

Net income                                                      $   4,111     $   3,749     $   2,588
                                                                =========     =========     =========

Earnings per share:
  Basic                                                         $    1.36     $    1.43     $    0.98
  Diluted                                                       $    1.35     $    1.41     $    0.97
</TABLE>


--------------------------------------------------------------------------------

                             See accompanying notes.

                                       37
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                             Years ended December 31
                     (In thousands except per share amounts)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                         Common Stock            Additional
                                                     Shares                       Paid-In         Retained
                                                  Outstanding        Amount       Capital         Earnings
                                                  -----------        ------       -------         --------
<S>                                                <C>            <C>            <C>             <C>
Balance at January 1, 2004                         2,383,696      $      273     $   19,497      $   28,299

Comprehensive income:
 Net income                                               --              --             --           2,588
Change in net unrealized gains (losses),
   securities available for sale, net of
   reclassification and tax effects                       --              --             --              --
 Change in unrealized gains (losses),
   interest rate swap net of reclassification
     and tax effects                                      --              --             --              --
 Change in minimum pension liability,
   net of tax effects                                     --              --             --              --

    Total comprehensive income

Stock dividend on common stock (10%)                 238,661              27          5,339          (5,370)
Cash dividends declared ($.54 per share)                  --              --             --          (1,419)
Purchase of treasury stock                           (22,864)             --             --              --
Stock options exercised                               26,386              --            (31)             --
Commitment of shares to be released
   under ESOP                                          3,775              --             40              --
                                                  ----------      ----------     ----------      ----------
Balance at December 31, 2004                       2,629,654             300         24,845          24,098

Comprehensive income:
 Net income                                               --              --             --           3,749
Change in net unrealized gains (losses),
   securities available for sale, net of
   reclassification and tax effects                       --              --             --              --

<CAPTION>
                                                    Accumulated       Unearned
                                                       Other          ESOP and                          Total
                                                   Comprehensive    Performance        Treasury     Shareholders'
                                                        Loss        Share Awards        Stock          Equity
                                                        ----        ------------        -----          ------
<S>                                                  <C>             <C>             <C>             <C>
Balance at January 1, 2004                           $     (400)     $      (39)     $   (5,341)     $   42,289

Comprehensive income:
 Net income                                                  --              --              --           2,588
Change in net unrealized gains (losses),
   securities available for sale, net of
   reclassification and tax effects                        (230)             --              --            (230)
 Change in unrealized gains (losses),
   interest rate swap net of reclassification
     and tax effects                                       (361)             --              --            (361)
 Change in minimum pension liability,
   net of tax effects                                       (33)             --              --             (33)
                                                                                                     ----------
    Total comprehensive income                                                                            1,964

Stock dividend on common stock (10%)                         --              --              --              (4)
Cash dividends declared ($.54 per share)                     --              --              --          (1,419)
Purchase of treasury stock                                   --              --            (533)           (533)
Stock options exercised                                      --              --             438             407
Commitment of shares to be released
   under ESOP                                                --              37              --              77
                                                     ----------      ----------      ----------      ----------
Balance at December 31, 2004                             (1,024)             (2)         (5,436)         42,781

Comprehensive income:
 Net income                                                  --              --              --           3,749
Change in net unrealized gains (losses),
   securities available for sale, net of
   reclassification and tax effects                      (1,259)             --              --          (1,259)
</TABLE>

--------------------------------------------------------------------------------

                             See accompanying notes.


                                       38
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                             Years ended December 31
                     (In thousands except per share amounts)

<TABLE>
<CAPTION>

                                                         Common Stock             Additional
                                                    Shares                         Paid-In        Retained
                                                 Outstanding        Amount         Capital        Earnings
                                                 -----------        ------         -------        --------
<S>                                                <C>            <C>            <C>             <C>
Change in unrealized gains (losses),
   interest rate swap net of reclassification
   and tax effects                                        --      $       --     $       --      $       --
Change in minimum pension liability,
   net of tax effects                                     --              --             --              --

      Total comprehensive income

Cash dividends declared ($.58 per share)                  --              --             --          (1,518)
Purchase of treasury stock                           (24,700)             --             --              --
Stock award expense                                       --              --            125              --
Stock options exercised                                  375              --             (1)             --
Commitment of shares to be released
   under ESOP                                            215              --              2              --
                                                  ----------      ----------     ----------      ----------

Balance at December 31, 2006                       2,605,544             300         24,971          26,329

Comprehensive income:
Net income                                                --              --             --           4,111
Change in net unrealized gains,
   securities available for sale, net of
   reclassification and tax effects                       --              --             --              --
Change in unrealized gains (losses),
   interest rate swap net of reclassification
    and tax effects                                       --              --             --              --
Net actuarial gain on defined benefit plan,
   net of tax effects                                     --              --             --              --

      Total comprehensive income

<CAPTION>
                                                    Accumulated     Unearned
                                                       Other        ESOP and                          Total
                                                   Comprehensive   Performance       Treasury      Shareholders'
                                                        Loss       Share Awards        Stock          Equity
                                                        ----       ------------        -----          ------
<S>                                                  <C>             <C>            <C>             <C>
Change in unrealized gains (losses),
   interest rate swap net of reclassification
   and tax effects                                   $     (534)     $       --     $       --      $     (534)
Change in minimum pension liability,
   net of tax effects                                       (21)             --             --             (21)
                                                                                                    ----------
      Total comprehensive income                                                                         1,935

Cash dividends declared ($.58 per share)                     --              --             --          (1,518)
Purchase of treasury stock                                   --              --           (557)           (557)
Stock award expense                                          --              --             --             125
Stock options exercised                                      --              --              6               5
Commitment of shares to be released
   under ESOP                                                --               2             --               4
                                                     ----------      ----------     ----------      ----------

Balance at December 31, 2006                             (2,838)             --         (5,987)         42,775

Comprehensive income:
Net income                                                   --              --             --           4,111
Change in net unrealized gains,
   securities available for sale, net of
   reclassification and tax effects                         631              --             --             631
Change in unrealized gains (losses),
   interest rate swap net of reclassification
    and tax effects                                         390              --             --             390
Net actuarial gain on defined benefit plan,
   net of tax effects                                        76              --             --              76
                                                                                                    ----------
      Total comprehensive income                                                                         5,208
</TABLE>

--------------------------------------------------------------------------------

                             See accompanying notes.


                                       39
<PAGE>


                     COMMUNITY BANK SHARES OF INDIANA, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                             Years ended December 31
                     (In thousands except per share amounts)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                    Common Stock            Additional
                                               Shares                         Paid-In        Retained
                                            Outstanding         Amount        Capital        Earnings
                                            -----------         ------        -------        --------
<S>                                           <C>            <C>            <C>             <C>
Cash dividends declared ($.64 per share)             --      $       --     $       --      $   (1,921)
Purchase of treasury stock                      (30,000)             --             --              --
Acquisition of The Bancshares, Inc.             862,875              86         19,722              --
Stock award expense                                  --              --            261              --
Stock options exercised                           1,100              --             (2)             --
Tax benefit from stock options exercised             --              --             80              --
                                             ----------      ----------     ----------      ----------
Balance at December 31, 2006                  3,439,519      $      386     $   45,032      $   28,519
                                             ==========      ==========     ==========      ==========

<CAPTION>
                                               Accumulated       Unearned
                                                  Other          ESOP and                         Total
                                              Comprehensive    Performance       Treasury     Shareholders'
                                                   Loss        Share Awards        Stock         Equity
                                                   ----        ------------        -----         ------
<S>                                             <C>             <C>            <C>             <C>
Cash dividends declared ($.64 per share)        $       --      $       --     $       --      $   (1,921)
Purchase of treasury stock                              --              --           (685)           (685)
Acquisition of The Bancshares, Inc.                     --              --             --          19,808
Stock award expense                                     --              --             --             261
Stock options exercised                                 --              --             17              15
Tax benefit from stock options exercised                --              --             --              80
                                                ----------      ----------     ----------      ----------
Balance at December 31, 2006                    $   (1,741)     $       --     $   (6,655)     $   65,541
                                                ==========      ==========     ==========      ==========
</TABLE>


--------------------------------------------------------------------------------

                             See accompanying notes.

                                       40
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             Years ended December 31
                                 (In thousands)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              2006           2005           2004
                                                              ----           ----           ----
<S>                                                        <C>            <C>            <C>
Cash flows from operating activities
  Net income                                               $   4,111      $   3,749      $   2,588
  Adjustments to reconcile net income to
    net cash from operating activities
      Provision for loan losses                                  262          1,750          1,105
  Depreciation and amortization                                1,287          1,231          1,256
  Net amortization of securities                                   9            259            387
  Net gain on sales of available for sale securities              --            (23)          (138)
  Mortgage loans originated for sale                         (17,418)       (27,622)       (20,227)
  Proceeds from mortgage loan sales                           18,466         27,702         27,887
  Net gain on sales of mortgage loans                           (262)          (426)          (322)
  Increase in cash surrender value of life insurance            (573)          (527)          (493)
  Gain on life insurance benefit                                  --           (656)            --
  Federal Home Loan Bank stock dividends                         (37)          (207)          (366)
  Share-based compensation expense                               332            155             --
  ESOP compensation expense                                       --              4             77
  Net gain on sale of other real estate                          (20)            --             --
  Gain on disposition of equity stock                            (18)          (345)            --
  Net change in
      Accrued interest receivable                               (503)          (641)           (10)
      Accrued interest payable                                   862            337            378
      Other assets                                               484         (1,644)          (280)
      Other liabilities                                         (351)         1,901           1081
                                                           ---------      ---------      ---------
         Net cash from operating activities                    6,631          4,997         12,923

Cash flows from investing activities
  Acquisition of The Bancshares, Inc., net                      (795)            --             --
  Net change in interest-bearing deposits                        164            501            358
  Available for sale securities:
      Sales                                                    2,990          5,127          8,596
      Purchases                                              (18,980)       (26,608)       (28,455)
      Maturities, prepayments and calls                       18,969         10,655         12,253
  Loan originations and payments, net                         (7,914)       (63,993)       (69,443)
  Purchase of premises and equipment, net                     (2,248)          (616)        (1,473)
  Proceeds from the sale of other real estate                    416             --             --
  Redemption of FHLB stock                                     2,011             --             --
  Proceeds from life insurance benefit                            --            977             --
  Investment in cash surrender value of life insurance        (2,050)        (1,854)            --
                                                           ---------      ---------      ---------
      Net cash from investing activities                      (7,437)       (75,811)       (78,164)
</TABLE>


--------------------------------------------------------------------------------

                             See accompanying notes.

                                       41
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             Years ended December 31
                                 (In thousands)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            2006             2005             2004
                                                            ----             ----             ----
<S>                                                     <C>              <C>              <C>
Cash flows from financing activities
  Net change in deposits                                $   (18,784)     $    53,530      $    69,991
  Net change in short-term borrowings                        36,600            4,106           (1,696)
  Proceeds from Federal Home Loan Bank advances             128,300           86,500           10,000
  Repayment of Federal Home Loan Bank advances             (143,800)         (70,500)         (18,200)
  Proceeds from issuance of subordinated debentures          10,000               --            7,000
  Exercise of stock options                                      15                5              407
  Purchase of treasury stock                                   (685)            (557)            (533)
  Tax benefit of stock options exercised                         80               --               --
  Cash dividends paid                                        (1,921)          (1,518)          (1,419)
                                                        -----------      -----------      -----------
      Net cash from financing activities                      9,805           71,566           65,550
                                                        -----------      -----------      -----------

Net change in cash and due from banks                         8,999              752              309

Cash and due from banks at beginning
  of year                                                    11,225           10,473           10,164
                                                        -----------      -----------      -----------

Cash and due from banks at end of year                  $    20,224      $    11,225      $    10,473
                                                        ===========      ===========      ===========

Supplemental cash flow information:
  Interest paid                                         $    25,133      $    17,007      $    12,418
  Income taxes paid, net of refunds                           1,145            1,460              368

Supplemental noncash disclosures:
  Transfers from loans to loans held for sale                    --               --            7,513
  Transfers from loans to foreclosed real estate                506              471              175
  Sale and financing of foreclosed real estate                  249               --               --
</TABLE>

See Note 2 regarding noncash transactions  included in the Company's acquisition
of The Bancshares, Inc.


--------------------------------------------------------------------------------

                             See accompanying notes.

                                       42
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial
statements  include Community Bank Shares of Indiana,  Inc. and its wholly owned
subsidiaries,  Your Community Bank (YCB) and The Scott County State Bank (SCSB),
collectively  referred to as "the  Company".  YCB  utilizes  three  wholly-owned
subsidiaries to manage its investment  portfolio.  CBSI Holdings,  Inc. and CBSI
Investments,  Inc. are Nevada  corporations  which  jointly own CBSI  Investment
Portfolio  Management,  LLC, a Nevada limited liability  corporation which holds
and manages the Bank's  investment  securities.  YCB established a new Community
Development  Entity (CDE) subsidiary in July 2002 named CBSI  Development  Fund,
Inc.  The CDE enables YCB to  participate  in the federal New Markets Tax Credit
(NMTC) Program.  The NMTC Program is  administered by the Community  Development
Financial  Institutions  Fund of the United  States  Treasury and is designed to
promote  investment  in  low-income  communities  by providing a tax credit over
seven years for equity investments in CDE's. During June 2004 and June 2006, the
Company completed  placements of floating rate subordinated  debentures  through
Community  Bank  Shares (IN)  Statutory  Trust I and Trust II  (Trusts),  trusts
formed by the Company. Because the Trusts are not consolidated with the Company,
pursuant to FASB  Interpretation  No. 46, the financial  statements  reflect the
subordinated debt issued by the Company to the Trusts. Intercompany balances and
transactions  are  eliminated  in  consolidation.  On July 1, 2006,  the Company
completed  its  acquisition  of  The  Bancshares,   Inc.  and  its  wholly-owned
subsidiary SCSB; subsequently, the Company liquidated The Bancshares, Inc.

The Company provides  financial services through its offices in Floyd, Clark and
Scott counties in Indiana,  and Jefferson and Nelson  counties in Kentucky.  Its
primary deposit products are checking,  savings, and term certificate  accounts,
and its primary  lending  products are  residential  mortgage,  commercial,  and
installment  loans.  Substantially  all loans are secured by  specific  items of
collateral  including  business  assets,  consumer  assets,  and  commercial and
residential  real estate.  Commercial  loans are expected to be repaid from cash
flow from operations of businesses.  There are no significant  concentrations of
loans to any one industry or customer.  However, the customers' ability to repay
their loans is dependent on the real estate and general  economic  conditions in
the area.

Use of Estimates:  To prepare financial statements in conformity with the United
States generally accepted accounting  principles  management makes estimates and
assumptions  based on available  information.  These  estimates and  assumptions
affect the amounts  reported in the  financial  statements  and the  disclosures
provided,  and actual  results  could  differ.  The  allowance  for loan losses,
valuation of goodwill and other intangible  assets,  and deferred tax assets are
particularly subject to change.

Cash Flows:  Cash and cash  equivalents  include cash and  non-interest  bearing
deposits with other  financial  institutions  with maturities less than 90 days.
Net cash flows are reported  for  interest-bearing  deposits in other  financial
institutions, loans, deposits, and short-term borrowings.

Interest-bearing  Deposits  in Other  Financial  Institutions:  Interest-bearing
deposits in other financial  institutions mature within one year, are carried at
cost.

Securities:  Securities  are classified as available for sale when they might be
sold before maturity.  Securities  available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income,
net of tax.


--------------------------------------------------------------------------------

                                       43
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest income includes amortization of purchase premium or discount.  Premiums
and discounts on  securities  are amortized on the  level-yield  method  without
anticipating prepayments except for mortgage backed securities where prepayments
are  anticipated.  Gains and losses on sales are  recorded on the trade date and
determined using the specific identification method.

Declines  in the fair value of  securities  below their cost that are other than
temporary are reflected as realized losses.  In estimating  other-than-temporary
losses,  management considers: the length of time and extent that fair value has
been less than cost,  the  financial  condition  and near term  prospects of the
issuer,  and the Company's  ability and intent to hold the security for a period
sufficient to allow for any anticipated recovery in fair value.

Mortgage Banking Activities:  Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market value.
To deliver closed loans to the secondary market and to control its interest rate
risk prior to sale,  the Company  enters  into  agreements  to sell  loans.  The
aggregate  market value of mortgage  loans held for sale  considers the price of
the sales  contracts.  Loan  commitments  related to the origination of mortgage
loans  held  for sale  and the  corresponding  sales  contracts  are  considered
derivative  instruments.  The Company's  commitments are for fixed rate mortgage
loans,  generally  lasting 60 days and are at market rates when  initiated.  The
Company had  commitments to originate  $1,134,000 and $4,307,000 in loans and an
equal amount of corresponding sales contracts at December 31, 2006 and 2005. The
impact of accounting for these  instruments as derivatives  was not material and
substantially all of the gain on sale generated from mortgage banking activities
continues  to be  recorded  when  closed  loans  are  delivered  into the  sales
contracts.

The Company sells loans on a servicing  released  basis.  The Company sold loans
previous to 2006 on a servicing retained basis. Servicing assets are recorded on
loans sold with  servicing  retained  and are  capitalized  in other  assets and
expensed into other income against service fee income in proportion to, and over
the period of, estimated net servicing  revenues.  Impairment is evaluated based
on the fair value of the assets,  using groupings of the underlying  loans as to
interest  rates  and  then,   secondarily,   as  to  geographic  and  prepayment
characteristics.  Fair value is determined  using prices for similar assets with
similar  characteristics,  when  available,  or based upon discounted cash flows
using  market-based  assumptions.  Any impairment of a grouping is reported as a
valuation allowance,  to the extent that fair value is less than the capitalized
amount for a grouping.

Servicing fee income is recorded for fees earned for servicing  loans.  The fees
are based on a contractual percentage of the outstanding  principal;  or a fixed
amount per loan and are  recorded as income when  earned.  The  amortization  of
mortgage servicing rights is netted against loan servicing fee income.

Loans:  Loans  that  management  has the  intent  and  ability  to hold  for the
foreseeable  future or until  maturity or payoff are  reported at the  principal
balance  outstanding,  net of deferred  loan fees and costs and an allowance for
loan losses.


--------------------------------------------------------------------------------

                                       44
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest  income is accrued  on the  unpaid  principal  balance.  Mortgage  loan
origination  fees, net of certain  direct  origination  costs,  are deferred and
recognized in interest income using the level-yield method without  anticipating
prepayments.  Interest  income on  commercial,  mortgage and  consumer  loans is
discontinued  at the time the loan is 90 days  delinquent.  Consumer  loans  are
typically  charged-off no later than 120 days past due. In all cases,  loans are
placed on  non-accrual  or  charged-off  at an  earlier  date if  collection  of
principal  or interest is  considered  doubtful.  All  interest  accrued but not
received for loans placed on non-accrual is reversed  against  interest  income.
Interest  received  on  such  loans  is  accounted  for  on  the  cash-basis  or
cost-recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts  contractually due
are brought current and future payments are reasonably assured.

Purchased  Loans:  The Company  purchases  groups of loans in purchase  business
combinations.  Purchased  loans  acquired  in a business  combination  that show
evidence of credit deterioration since origination are recorded at the allocated
fair value,  such that there is no carryover of the seller's  allowance for loan
losses. After acquisition,  incurred losses are recognized by an increase in the
allowance for loan losses.

Purchased loans are accounted for individually or aggregated into pools of loans
based on common risk characteristics (e.g., credit score, loan type, and date of
origination). The Company estimates the amount and timing of expected cash flows
for each purchased loan or pool, and the expected cash flows in excess of amount
paid is recorded as interest  income over the remaining life of the loan or pool
(accretable yield). The excess of the loans' or pool's contractual principal and
interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated.
If the present value of expected cash flows is less than the carrying  amount, a
loss is recorded.  If the present  value of expected  cash flows is greater than
the carrying amount, it is recognized as part of future interest income.

During 2006, the Company  acquired loans as part of its acquisition of SCSB with
a book value as of the acquisition date of $89.2 million. The Company determined
loans  acquired  as  part  of  the  acquisition   showing   evidence  of  credit
deterioration were not material.

Allowance  for Loan  Losses:  The  allowance  for  loan  losses  is a  valuation
allowance for probable  incurred  credit losses,  increased by the provision for
loan losses and decreased by charge-offs less recoveries.  Management  estimates
the allowance  balance required using past loan loss experience,  the nature and
volume of the  portfolio,  information  about specific  borrower  situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance  may be made for specific  loans,  but the entire  allowance is
available for any loan that, in  management's  judgment,  should be charged-off.
Loan losses are charged  against the  allowance  when  management  believes  the
uncollectibility of a loan balance is confirmed.


--------------------------------------------------------------------------------

                                       45
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The  allowance  consists  of  specific  and  general  components.  The  specific
component relates to loans that are individually classified as impaired or loans
otherwise  classified as substandard,  doubtful,  or loss. The general component
covers  non-classified loans and is based on historical loss experience adjusted
for current factors.

A loan is  impaired  when full  payment  under the loan  terms is not  expected.
Commercial  and  commercial  real estate loans are  individually  evaluated  for
impairment.  If a loan is impaired,  a portion of the  allowance is allocated so
that the loan is reported,  net, at the present  value of estimated  future cash
flows  using the  loan's  existing  rate or at the fair value of  collateral  if
repayment is expected  solely from the collateral.  Smaller balance  homogeneous
loans, such as consumer and residential real estate, are collectively  evaluated
for  impairment,  and  accordingly,  they  are  not  separately  identified  for
impairment disclosure.

Premises and  Equipment:  Land is carried at cost.  Premises and  equipment  are
stated at cost less accumulated  depreciation.  Buildings and related components
are depreciated using the straight-line  method with useful lives ranging from 7
to 40 years.  Furniture,  fixtures,  and  equipment  are  depreciated  using the
straight-line method with useful lives ranging from 2 to 10 years.

Federal  Home Loan Bank  (FHLB) and  Federal  Reserve  Stock:  FHLB and  Federal
Reserve stock are required  investments for institutions that are members of the
Federal Reserve and FHLB systems. The required investment in the common stock is
based on a predetermined formula.  Federal Reserve and FHLB stock are carried at
cost, classified as restricted  securities,  and are periodically  evaluated for
impairment.  Because the stocks are viewed as long term investments,  impairment
is based on ultimate  recovery of par value.  Both cash and stock  dividends are
reported as income.

Cash Surrender Value of Life Insurance: The Company has purchased life insurance
policies on certain key executives. The life insurance is recorded at the amount
that can be realized, which is referred to as the cash surrender value.

Goodwill  and  Other   Intangible   Assets:   Goodwill   results  from  business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable  intangible assets.
Goodwill is assessed at least annually for impairment and any such impairment is
recognized in the period identified.

Other intangible  assets consist of core deposit  intangible assets arising from
bank  acquisitions.  They are  initially  measured  at fair  value  and then are
amortized  on an  accelerated  method over their  estimated  useful  lives of 10
years.

Long-term  Assets:  Premises and equipment,  core deposit  intangibles and other
long-term assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future  undiscounted cash flows. If impaired,
the assets are recorded at fair value.


--------------------------------------------------------------------------------

                                       46
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreclosed  Assets:  Assets acquired  through or instead of loan foreclosure are
initially  recorded at fair value when acquired,  establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after  acquisition  are  expensed.  Foreclosed  assets  amounted to $457,000 and
$106,000  at year-end  2006 and 2005,  respectively,  and are  included in other
assets in the consolidated balance sheets.

Repurchase Agreements:  Repurchase agreement liabilities, included in short-term
borrowings,  represent  amounts  advanced by various  customers.  Securities are
pledged to cover these  liabilities,  which are not  covered by federal  deposit
insurance.

Equity:  Stock  dividends of 20% or less are reported by  transferring  the fair
value, as of the ex-dividend date, of the stock issued from retained earnings to
common stock and additional  paid-in capital.  Fractional share amounts are paid
in cash with a reduction in retained earnings.

Benefit Plans:  Pension expense is the net of service and interest cost,  return
on plan assets, and amortization of gains and losses not immediately recognized.
The Company adopted FAS 158 in 2006, and accordingly,  recognizes the overfunded
or underfunded status of its defined benefit  postretirement plan as an asset or
liability in its balance sheet and will  recognize  changes in the funded status
in the year in which the changes occur through comprehensive income beginning in
2007. Profit sharing and 401k plan expense is the amount contributed  determined
by formula.

Stock  Compensation:  Prior to 2005, employee  compensation  expense under stock
options  is  reported   using  the  intrinsic   value  method.   No  stock-based
compensation  cost was  reflected in net income,  as all options  granted had an
exercise  price  equal to or  greater  than the market  price of the  underlying
common stock at date of grant.  Effective  January 1, 2005, the Company  adopted
the fair value  recognition  provision of FASB Statement No. 123(r),  Accounting
for Stock-Based Compensation,  and recognizes stock option expense based on fair
value at date of grant.  The following table  illustrates for 2004 the effect on
net income and earnings  per share if expense was measured  using the fair value
recognition provisions of FAS 123(r).


--------------------------------------------------------------------------------

                                       47
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

<TABLE>
<CAPTION>
                                                                           2004
                                                                           ----

                                                          (In thousands, except per share amounts)
<S>                                                                      <C>
Net income as reported                                                   $   2,588
Less: Stock-based compensation expense
  determined under fair value based method                                     (46)
                                                                         ---------
Pro forma net income                                                     $   2,542
                                                                         =========

Basic earnings per share as reported                                     $    0.98
Pro forma basic earnings per share                                            0.97

Diluted earnings per share as reported                                        0.97
Pro forma diluted earnings per share                                          0.96
</TABLE>

The  weighted-average  assumptions  for options  granted during the year and the
resulting estimated weighted average fair values per share used in computing pro
forma disclosures are as follows.

<TABLE>
<CAPTION>
                                                                           2004
                                                                           ----
<S>                                                                     <C>
  Risk-free interest rate                                                    3.97%
  Expected option life                                                  9.1 years
  Expected stock price volatility                                           15.92%
  Expected dividend yield                                                    2.61%
  Weighted-average fair value of options
    granted during the year                                                 $3.78
</TABLE>

Income Taxes: Income tax expense is the total of the current year income tax due
or refundable  and the change in deferred tax assets and  liabilities.  Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences  between  carrying  amounts and tax bases of assets and liabilities,
computed  using enacted tax rates.  A valuation  allowance,  if needed,  reduces
deferred tax assets to the amount expected to be realized.

Employee  Stock  Ownership  Plan: The cost of shares issued to the ESOP, but not
yet  committed  to be  released  or  allocated  to  participants,  is shown as a
reduction of shareholders'  equity.  Compensation expense is based on the market
price of shares as they are  committed to be released to  participant  accounts.
Dividends  on  allocated  ESOP shares  reduce  retained  earnings;  dividends on
unearned  ESOP shares  reduce debt and accrued  interest.  Participants  may put
their  ESOP  shares  back  to the  Company  upon  termination.  If  the  Company
repurchases  the ESOP shares,  an amount  equal to these  shares  times  current
market price is reclassified out of shareholders' equity.

Loan  Commitments  and  Related  Financial  Instruments:  Financial  instruments
include off-balance sheet credit instruments,  such as commitments to make loans
and standby letters of credit, issued to meet customer-financing needs. The face
amount for these  items  represents  the  exposure to loss,  before  considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.


--------------------------------------------------------------------------------

                                       48
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivatives:  Derivative  financial  instruments  are  recognized  as  assets or
liabilities at fair value. The Company's  derivatives consist mainly of interest
rate swap agreements,  which are used as part of its asset liability  management
to help manage  interest  rate risk.  The Company does not use  derivatives  for
trading purposes.

At the start of a derivative contract,  the Company designates the derivative as
one of three types  based on the  Company's  intentions  and belief as to likely
effectiveness  as a hedge.  These three types are a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("fair value
hedge"), a hedge of a forecasted transaction or the variability of cash flows to
be received  or paid  related to a  recognized  asset or  liability  ("cash flow
hedge"),   or  an   instrument   with  no  hedging   designation   ("stand-alone
derivative").  For a fair value hedge,  the gain or loss on the  derivative,  as
well as the  offsetting  loss or gain on the  hedged  item,  are  recognized  in
current earnings as fair values change.  For a cash flow hedge, the gain or loss
on the derivative is reported in other comprehensive  income and is reclassified
into earnings in the same periods  during which the hedged  transaction  affects
earnings.  For both types of hedges,  derivative  gains and losses  that are not
effective  in hedging the  changes in fair value or  expected  cash flows of the
hedged item are recognized immediately in current earnings.  Changes in the fair
value of  derivatives  that do not qualify  for hedge  accounting  are  reported
currently in earnings, as noninterest income.

Net cash  settlements  on  derivatives  that  qualify for hedge  accounting  are
recorded in interest income or interest expense, based on the item being hedged.
Net cash settlements on derivatives that do not qualify for hedge accounting are
reported in noninterest  income. Cash flows on hedges are classified in the cash
flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship  between  derivatives and hedged
items, as well as the risk-management objective and the strategy for undertaking
hedge transactions.  This documentation includes linking fair value or cash flow
hedges to specific  assets and  liabilities  on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the hedge's  inception and on an ongoing  basis,  whether the derivative
instruments  that are used are highly  effective in  offsetting  changes in fair
values  or cash  flows of the  hedged  items.  The  Company  discontinues  hedge
accounting  when it determines  that the  derivative  is no longer  effective in
offsetting  changes  in the fair value or cash  flows of the  hedged  item,  the
derivative  is settled or  terminates,  a hedged  forecasted  transaction  is no
longer probable, a hedged firm commitment is no longer firm, or treatment of the
derivative as a hedge is no longer appropriate or intended.

When  hedge  accounting  is  discontinued,  later  changes  in fair value of the
derivative  are  recorded  as  noninterest  income.  When a fair value  hedge is
discontinued, the hedged asset or liability is no longer adjusted for changes in
fair value and the existing  basis  adjustment is amortized or accreted over the
remaining life of the asset or liability. When a cash flow hedge is discontinued
but the hedged cash flows or forecasted  transaction is still expected to occur,
gains or  losses  that  were  accumulated  in  other  comprehensive  income  are
amortized into earnings over the same periods which the hedged transactions will
affect earnings.


--------------------------------------------------------------------------------

                                       49
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares  outstanding  during the period.
ESOP shares are considered  outstanding for this calculation unless unallocated.
Diluted  earnings per common share  include the  dilutive  effect of  additional
potential common shares issuable under stock options. Earnings and dividends per
share are restated for stock splits and  dividends  through the date of issuance
of the financial statements.

Comprehensive  Income:  Comprehensive  income  consists  of net income and other
comprehensive  income.  Other  comprehensive  income,   recognized  as  separate
components of equity,  includes changes in the following items: unrealized gains
and losses on  securities  available  for sale,  unrealized  gains and losses on
interest rate swaps, and a minimum pension liability.

Loss  Contingencies:  Loss  contingencies,  including  claims and legal  actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood  of loss is probable and an amount or range of loss can be reasonably
estimated.  Management  does not believe there are  currently  such matters that
will have a material effect on the financial statements.

Restrictions  on Cash:  Cash on hand or on deposit with the Federal Reserve Bank
of $6.5  million and $4.1 million was  required to meet  regulatory  reserve and
clearing  requirements  at year-end  2006 and 2005.  These  balances do not earn
interest.

Dividend  Restriction:  Banking  regulations require maintaining certain capital
levels and may limit the dividends paid by the bank  subsidiaries to the holding
company or by the holding company to shareholders,  as more fully described in a
separate note. These  restrictions pose no practical limit on the ability of the
subsidiaries or Holding Company to pay dividends at historical levels.

Fair Value of Financial  Instruments:  Fair values of financial  instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value  estimates  involve  uncertainties  and
matters  of  significant   judgment  regarding  interest  rates,   credit  risk,
prepayments,  and other factors,  especially in the absence of broad markets for
particular  items.   Changes  in  assumptions  or  in  market  conditions  could
significantly affect the estimates.

Operating Segments:  While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not material
and  operations  are  managed  and  financial  performance  is  evaluated  on  a
Company-wide  basis.  Accordingly,  all of the financial service  operations are
considered by management to be aggregated in one reportable operating segment.


--------------------------------------------------------------------------------

                                       50
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Adoption of New Accounting Standards:

FASB Statement No. 158: In September  2006, the Financial  Accounting  Standards
Board (FASB)  issued SFAS No. 158,  Employers'  Accounting  for Defined  Benefit
Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87,
88, 106 and  132(R).  This  Statement  requires an  employer  to  recognize  the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a  multiemployer  plan) as an  asset or  liability  in its  balance  sheet,
beginning with year end 2006,  and to recognize  changes in the funded status in
the year in which the changes occur through  comprehensive  income  beginning in
2007.  Additionally,  defined  benefit  plan  assets and  obligations  are to be
measured as of the date of the  employer's  fiscal  year-end,  starting in 2008.
Adoption had no impact on the financial  statements  of the Company  because the
benefits under the Company's defined benefit plan are suspended.

SAB 108:

In September 2006, the Securities and Exchange  Commission  (SEC) released Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying  Misstatements in Current Year Financial  Statements (SAB 108),
which is effective  for fiscal years ending on or after  November 15, 2006.  SAB
108 provides  guidance on how the effects of  prior-year  uncorrected  financial
statement  misstatements  should be  considered  in  quantifying  a current year
misstatement.  SAB 108 requires public companies to quantify misstatements using
both an income  statement  (rollover) and balance sheet (iron curtain)  approach
and evaluate  whether either approach  results in a misstatement  that, when all
relevant  quantitative and qualitative factors are considered,  is material.  If
prior  year  errors  that  had been  previously  considered  immaterial  now are
considered material based on either approach, no restatement is required so long
as management  properly applied its previous approach and all relevant facts and
circumstances were considered.  Adjustments considered immaterial in prior years
under the method  previously  used, but now  considered  material under the dual
approach  required by SAB 108, are to be recorded  upon initial  adoption of SAB
108. The adoption of SAB 108 had no effect on the Company's financial statements
for the year ending December 31, 2006

Effect of Newly Issued But Not Yet Effective Accounting Standards:

In February  2006,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  No. 155,  Accounting  for  Certain  Hybrid  Financial  Instruments-an
amendment to FASB Statements No. 133 and 140. This Statement  permits fair value
re-measurement for any hybrid financial instruments, clarifies which instruments
are  subject to the  requirements  of  Statement  No.  133,  and  establishes  a
requirement  to evaluate  interests in  securitized  financial  assets and other
items.  The new standard is effective  for financial  assets  acquired or issued
after  the  beginning  of the  entity's  first  fiscal  year that  begins  after
September 15, 2006. Management does not expect the adoption of this statement to
have a material  impact on its  consolidated  financial  position  or results of
operations.


--------------------------------------------------------------------------------

                                       51
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In March 2006,  the FASB issued  Statement No. 156,  Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140. This Statement provides
the  following:  1) revised  guidance  on when a servicing  asset and  servicing
liability should be recognized;  2) requires all separately recognized servicing
assets and  servicing  liabilities  to be initially  measured at fair value,  if
practicable;  3)  permits  an entity to elect to  measure  servicing  assets and
servicing  liabilities  at fair value each  reporting date and report changes in
fair value in earnings in the period in which the changes occur; 4) upon initial
adoption, permits a onetime reclassification of available-for-sale securities to
trading  securities  for  securities  which are  identified  as  offsetting  the
entity's  exposure  to  changes  in  the  fair  value  of  servicing  assets  or
liabilities that a servicer elects to subsequently measure at fair value; and 5)
requires  separate  presentation of servicing  assets and servicing  liabilities
subsequently  measured at fair value in the statement of financial  position and
additional footnote disclosures.  This standard is effective as of the beginning
of an entity's  first fiscal year that begins after  September 15, 2006 with the
effects of initial adoption being reported as a cumulative-effect  adjustment to
retained  earnings.  Management  does not expect the adoption of this  statement
will have a material impact on its consolidated financial position or results of
operations.

In September 2006, the FASB issued  Statement No. 157, Fair Value  Measurements.
This  Statement  defines fair value,  establishes a framework for measuring fair
value and expands  disclosures  about fair value  measurements.  This  Statement
establishes a fair value hierarchy  about the  assumptions  used to measure fair
value and clarifies  assumptions  about risk and the effect of a restriction  on
the  sale or use of an  asset.  The  standard  is  effective  for  fiscal  years
beginning  after November 15, 2007. The Company has not completed its evaluation
of the impact of the adoption of this standard.

In July  2006,  the FASB  issued  FASB  Interpretation  No. 48,  Accounting  for
Uncertainty in Income Taxes - an  interpretation  of FASB Statement No. 109 (FIN
48), which  prescribes a recognition  threshold and measurement  attribute for a
tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning  after December 15, 2006. The Company has determined that the adoption
of FIN 48  will  not  have  a  material  effect  on the  consolidated  financial
statements.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
Accounting  for Deferred  Compensation  and  Postretirement  Benefit  Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a
liability  be  recorded  during the  service  period  when a  split-dollar  life
insurance agreement continues after participants' employment or retirement.  The
required accrued liability will be based on either the  post-employment  benefit
cost for the  continuing  life  insurance or based on the future  death  benefit
depending on the contractual  terms of the underlying  agreement.  This issue is
effective for fiscal years  beginning  after  December 15, 2007. The Company has
not completed its evaluation of the impact of adoption of EITF 06-4.


--------------------------------------------------------------------------------

                                       52
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
Accounting for Purchases of Life  Insurance - Determining  the Amount That Could
Be Realized in Accordance with FASB Technical  Bulletin No. 85-4 (Accounting for
Purchases of Life Insurance).  This issue requires that a policyholder  consider
contractual  terms of a life  insurance  policy in  determining  the amount that
could be realized  under the  insurance  contract.  It also requires that if the
contract provides for a greater surrender value if all individual  policies in a
group are  surrendered at the same time,  that the surrender value be determined
based on the  assumption  that  policies  will be  surrendered  on an individual
basis.  Lastly,  the issue discusses  whether the cash surrender value should be
discounted  when the  policyholder  is  contractually  limited in its ability to
surrender a policy.  This issue is effective  for fiscal years  beginning  after
December 15, 2006.  The Company does not believe the adoption of this issue will
have a material impact on the financial statements.

Reclassifications:  Some items in the prior  years'  financial  statements  were
reclassified to conform to the current presentation.

NOTE 2 - BUSINESS COMBINATION

On July 1, 2006,  the Company  acquired  100% of the  outstanding  shares of The
Bancshares,  Inc. (TBI), parent of SCSB.  Operating results of TBI were included
in the consolidated  financial statements of the Company from July 1, 2006. As a
result of the  acquisition,  the Company  expects to further  improve its market
share in its  southern  Indiana  market,  expand  its  customer  base to improve
deposit fee income,  provide an  opportunity to market  additional  products and
services to new  customers,  and reduce  operating  costs  through  economies of
scale.  The aggregate  purchase  price was $30.8  million.  Approximately  $11.0
million was paid in cash and $19.8  million was paid through the issuance of the
Company's  common  stock to TBI  shareholders.  The purchase  price  resulted in
approximately  $16.0  million in  goodwill,  and $3.1  million  in core  deposit
intangible.  The intangible asset will be amortized over 10 years. Goodwill will
not be amortized but instead evaluated periodically for impairment. Goodwill and
core deposit intangibles will not be deducted for tax purposes.  Total assets of
approximately  $148 million were  acquired,  which  includes  approximately  $88
million in loans,  and $24 million in  investments.  Liabilities  assumed in the
acquisition totaled  approximately $117 million,  which includes $104 million in
deposits and $10 million in Federal Home Loan Bank advances.


--------------------------------------------------------------------------------

                                       53
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 2 - BUSINESS COMBINATION (Continued)

The following  table  summarizes the estimated fair value of assets acquired and
liabilities assumed (amounts in thousands).

      Securities available for sale             $  24,418
      Loans, net                                   87,999
      Goodwill                                     15,983
      Core deposit intangible                       3,069
      Premises and equipment                        3,045
      Other assets                                 13,403
                                                ---------
           Total assets acquired                  147,917

      Deposits                                   (103,952)
      Federal Home Loan Bank advances             (10,170)
      Other liabilities                            (2,986)
                                                ---------
           Total liabilities assumed             (117,108)

               Net assets acquired              $  30,809
                                                =========

As of the date of this report, the Company was in the process of obtaining third
party valuations and completing fair value estimates for certain assets acquired
and liabilities  assumed, and the allocation of the purchase price is subject to
further refinement.

The following table presents pro forma  information for years ended December 31,
2006 and 2005 as if the  acquisition  had occurred at the  beginning of 2006 and
2005. The pro forma  information  includes  adjustments  for interest  income on
loans and securities  acquired,  amortization  of  intangibles  arising from the
transaction,  depreciation  expense on property  acquired,  interest  expense on
deposits acquired,  and the related income tax effects.  The pro forma financial
information is not  necessarily  indicative of the results of operations as they
would have been had the transactions been effected on the assumed dates.

                                              2006             2005
                                              ----             ----
                                      (In thousands, expect per share amounts)

Net interest income                        $   22,464       $   22,250

      Net income                           $    3,470       $    4,537
                                           ==========       ==========

Basic earnings per share                   $     1.01       $     1.30
Diluted earnings per share                 $     1.00       $     1.29


--------------------------------------------------------------------------------

                                       54
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 3 - SECURITIES

The fair value of available for sale securities and the related gross unrealized
gains and losses  recognized in  accumulated  other  comprehensive  loss were as
follows.

                                                        Gross          Gross
                                            Fair      Unrealized     Unrealized
                                           Value        Gains          Losses
                                           -----        -----          ------
                                                    (In thousands)
2006
----
 U. S. Government and federal agency    $   29,972    $       48     $     (159)
 State and municipal                        11,645           228             (8)
 Mortgaged-backed                           67,304           117         (1,464)
 Corporate bonds                            12,150            55            (56)
 Mutual funds                                  240            --            (10)
                                        ----------    ----------     ----------
    Total                               $  121,311    $      448     $   (1,697)
                                        ==========    ==========     ==========

2005
----
 U. S. Government and federal agency    $   10,921    $        5     $     (198)
 State and municipal                         6,449           147            (17)
 Mortgaged-backed                           66,752            13         (2,025)
 Corporate bonds                            14,471            74           (149)
 Mutual funds                                  242            --             (8)
                                        ----------    ----------     ----------
    Total                               $   98,835    $      239     $   (2,397)
                                        ==========    ==========     ==========

Sales of available for sale securities were as follows.

<TABLE>
<CAPTION>
                                           2006          2005           2004
                                           ----          ----           ----
                                                   (In thousands)
<S>                                     <C>           <C>            <C>
Proceeds                                $    2,990    $    5,127     $    8,596
Gross gains                                     --            30            141
Gross losses                                    --            (7)            (3)
</TABLE>

The tax provision  applicable to these net realized gains amounted to $0, $8,000
and $47,000, respectively.


--------------------------------------------------------------------------------

                                       55
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 3 - SECURITIES (Continued)

Contractual maturities of available for sale securities at year-end 2006 were as
follows.  Mortgage-backed securities and mutual funds which do not have a single
maturity date are shown separately.

                                                                       Fair
                                                                       Value
                                                                       -----
                                                                  (In thousands)

   Due in one year or less                                           $ 18,392
   Due from one to five years                                          17,674
   Due from five to ten years                                           3,578
   Due after ten years                                                 14,123
   Mortgage-backed                                                     67,304
   Mutual Funds                                                           240
                                                                     --------

       Total                                                         $121,311
                                                                     ========

Securities  pledged at  year-end  2006 and 2005 had a  carrying  amount of $89.3
million and $80.8 million to secure public deposits,  repurchase  agreements and
Federal Home Loan Bank advances.

At year end 2006 and 2005,  there  were no  holdings  of  securities  of any one
issuer,  other than the U.S.  Government and its agencies,  in an amount greater
than 10% of shareholders' equity.

Securities  with  unrealized  losses  at year end 2006 and 2005,  aggregated  by
investment category and length of time that individual securities have been in a
continuous loss position are as follows (in thousands):


--------------------------------------------------------------------------------

                                       56
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 3 - SECURITIES (Continued)

<TABLE>
<CAPTION>
                               Less than 12 Month           12 Months or More                Total
                             ---------------------        ---------------------              -----
                             Fair       Unrealized        Fair       Unrealized        Fair        Unrealized
2006                         Value          Loss          Value         Loss           Value          Loss
----                         -----          ----          -----         ----           -----          ----
<S>                        <C>           <C>            <C>           <C>            <C>           <C>
  U. S. Government
   and federal agency      $  11,838     $     (28)     $  11,647     $    (131)     $  23,485     $    (159)
  State and municipal            125            (1)           737            (7)           862            (8)
  Mortgage-backed              4,571           (26)        50,473        (1,438)        55,044        (1,464)
  Corporate bonds                 --            --          3,490           (56)         3,490           (56)
  Mutual funds                    --            --            240           (10)           240           (10)
                           ---------     ---------      ---------     ---------      ---------     ---------

Total temporarily
  impaired                 $  16,534     $     (55)     $  66,587     $  (1,642)     $  83,121     $  (1,697)
                           =========     =========      =========     =========      =========     =========

2005
----
  U. S. Government
    and federal agency     $   4,341     $     (41)     $   4,651     $    (157)     $   8,992     $    (198)
  State and municipal            615           (17)            --            --            615           (17)
  Mortgage-backed             28,420          (521)        37,479        (1,504)        65,899        (2,025)
  Corporate bonds                 --            --          5,504          (149)         5,504          (149)
  Mutual funds                   242            (8)            --            --            242            (8)
                           ---------     ---------      ---------     ---------      ---------     ---------

Total temporarily
  impaired                 $  33,618     $    (587)     $  47,634     $  (1,810)     $  81,252     $  (2,397)
                           =========     =========      =========     =========      =========     =========
</TABLE>

Unrealized losses on securities have not been recognized into income because the
issuers' securities are of high credit quality (rated A- or higher),  management
has the intent and ability to hold for the foreseeable  future,  and the decline
in fair value is largely due to increases in market interest  rates.  Management
has  concluded  these  losses  are  not  significant  individually,  or  in  the
aggregate;  the fair value is  expected  to recover as the  securities  approach
their maturity date and/or market rates decline.


--------------------------------------------------------------------------------

                                       57
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 4 - LOANS

Loans at year-end were as follows:

                                                           2006         2005
                                                           ----         ----
                                                             (In thousands)

Commercial                                               $ 105,922    $  92,640
Real Estate:
    Residential                                            184,474      111,969
    Commercial                                             164,435      186,644
    Construction                                            76,126       61,031
Home equity                                                 62,324       58,060
Loans secured by deposit accounts                              756          729
Consumer                                                    19,549        7,295
                                                         ---------    ---------
      Subtotal                                             613,586      518,368
Less: Allowance for loan losses                             (5,654)      (5,920)
                                                         ---------    ---------

Loans, net                                               $ 607,932    $ 512,448
                                                         =========    =========

During  2006  and  2005,  substantially  all of the  Company's  residential  and
commercial real estate loans were pledged as collateral to the Federal Home Loan
Bank to secure advances.

Activity in the allowance for loan losses was as follows:

                                               2006         2005        2004
                                               ----         ----        ----
                                                      (In thousands)

Beginning balance                           $   5,920    $   4,523    $   4,034
Acquired allowance of SCSB, July 1, 2006          754           --           --
Provision for loan losses                         262        1,750        1,105
Loans charged-off                              (1,354)        (539)        (680)
Recoveries                                         72          186           64
                                            ---------    ---------    ---------

Ending balance                              $   5,654    $   5,920    $   4,523
                                            =========    =========    =========


--------------------------------------------------------------------------------

                                       58
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 4 - LOANS (Continued)

Information  about  impaired  loans is presented  below.  There were no impaired
loans for the periods presented without an allowance allocation.

<TABLE>
<CAPTION>
                                                           2006           2005           2004
                                                           ----           ----           ----
                                                                     (In thousands)
<S>                                                     <C>            <C>            <C>
  Impaired loans at year-end                            $    4,399     $    2,483     $      780
  Amount of the allowance for loan losses allocated            865          1,146            288
  Average of impaired loans during the year                  4,783          1,300          1,171
  Interest income recognized during impairment                   1              3              8

Nonperforming loans at year-end were as follows

  Loans past due over 90 days still on accrual          $       --     $        5     $       --
  Non-accrual loans                                          5,566          5,498          1,588
</TABLE>

Nonperforming  loans  includes both smaller  balance  homogenous  loans that are
collectively  evaluated for  impairment  and  individually  classified  impaired
loans.

Related  Party  Loans:  Loans  and  off-balance-sheet   commitments   (including
commitments  to make loans,  unused  lines of credit,  and letters of credit) to
principal officers, directors, and their affiliates were as follows.

                                                                       2006
                                                                       ----
                                                                  (In thousands)

  Beginning loans                                                   $   19,129
  New loans                                                              6,866
  Effect of changes in related parties                                     908
  Repayments                                                            (8,640)
                                                                    ----------

  Ending loans                                                      $   18,263
                                                                    ==========

Mortgage Banking Activities: Mortgage loans serviced for others are not included
in the accompanying  consolidated  balance sheets. The unpaid principal balances
of mortgage loans serviced for others were approximately $20.7 million and $24.9
million at year-end  2006 and 2005.  Custodial  escrow  balances  maintained  in
connection  with the  foregoing  loan  servicing,  and included in  non-interest
bearing deposits,  were approximately $133,000 and $156,000 at year-end 2006 and
2005.  Servicing assets related to these loans,  included in other assets,  were
$155,000 and $164,000 at year-end 2006 and 2005. Amortization expense was $9,000
and  $48,000 at year-end  2006 and 2005,  and there was no  valuation  allowance
required.  The fair  value for  mortgage  servicing  rights  were  $219,000  and
$269,000 at year-end 2006 and 2005.

The weighted average amortization period is 19.9 years.  Estimated  amortization
expense for each of the next five years is approximately $8,000 per year.


--------------------------------------------------------------------------------

                                       59
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 5- PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows.

<TABLE>
<CAPTION>
                                                          2006          2005
                                                          ----          ----
                                                            (In thousands)
<S>                                                    <C>            <C>
Land and land improvements                             $   2,629      $   1,294
Buildings                                                 13,074          9,674
Furniture, fixtures and equipment                          9,976          7,025
Leasehold improvements                                       982            737
                                                       ---------      ---------
                                                          26,661         18,730

Less: Accumulated depreciation                           (11,636)        (7,797)
                                                       ---------      ---------
                                                       $  15,025      $  10,933
                                                       =========      =========
</TABLE>

Rent expense was  $409,000,  $329,000 and  $305,000  for 2006,  2005,  and 2004,
respectively.   Rent  commitments  under  noncancelable   operating  leases  (in
thousands) were as follows,  before  considering  renewal options that generally
are present.

                 2007                                  $    458
                 2008                                       390
                 2009                                       392
                 2010                                       380
                 2011                                       371
                 Thereafter                               2,115
                                                       --------

                       Total                           $  4,106
                                                       ========

NOTE 6 - GOODWILL AND INTANGIBLE ASSETS

Goodwill

The change in balance for goodwill during the year is as follows (in thousands):

                                                          2006
                                                          ----

Beginning of year                                       $    --
Acquired goodwill (see Note 2)                           15,983
                                                        -------

End of year                                             $15,983
                                                        =======


--------------------------------------------------------------------------------

                                       60
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 6 - GOODWILL AND INTANGIBLE ASSETS (Continued)

Acquired Intangible Assets

Acquired intangible assets were as follows at year end (in thousands):

                                                               2006
                                                               ----
                                                       Gross
                                                      Carrying      Accumulated
                                                       Amount      Amortization
                                                       ------      ------------
Amortized intangible assets:
Core deposit intangibles (see Note 2)               $     3,069    $        176
                                                    ===========    ============

Aggregate amortization expense was $176,000 for 2006.

Estimated amortization expense for each of the next five years (in thousands):

2007                                                $       405
2008                                                        351
2009                                                        317
2010                                                        306
2011                                                        299

NOTE 7 - DEPOSITS

Time  deposits  of $100,000  or more were  $102.0  million and $93.1  million at
year-end 2006 and 2005.

Scheduled  maturities  of time  deposits for the next five years (in  thousands)
were as follows:

                     2007                           $   224,477
                     2008                                17,426
                     2009                                16,282
                     2010                                 6,914
                     2011                                   972

Deposits from  principal  officers,  directors and their  affiliates at year-end
2006 and 2005 were approximately $10.8 million and $8.5 million.

NOTE 8 - SHORT-TERM BORROWINGS

Short-term  borrowings  consist of, retail  repurchase  agreements  representing
overnight  borrowings from deposit customers,  effectively deposit  equivalents,
federal funds purchased  representing  overnight borrowings from other financial
institutions,  and lines of credit with other financial  institutions.  The debt
securities  sold under the repurchase  agreements  were under the control of the
subsidiary banks during 2006 and 2005.


--------------------------------------------------------------------------------

                                       61
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 8 - SHORT-TERM BORROWINGS (Continued)

The  Company  has  available  a  revolving  line of credit with a bank for $10.0
million. The line of credit expires on June 30, 2007 and bears interest at LIBOR
plus 1.25% (6.65% at December 31,  2006).  Payments  are due  quarterly  and are
interest only. All borrowings are  collateralized by 500 shares of the Company's
common stock. The outstanding balance on the line of credit was $3.5 million and
$0 at December 31, 2006 and 2005.

Information  concerning  2006 and 2005  short-term  borrowings  is summarized as
follows.

<TABLE>
<CAPTION>
                                                                  2006          2005
                                                                  ----          ----
                                                                (Dollars in thousands)
<S>                                                             <C>           <C>
Repurchase agreements at year-end
     Balance                                                    $ 48,201      $ 47,735
     Weighted average interest rate                                 4.84%         3.72%
Repurchase agreements during the year
     Average daily balance                                      $ 49,581      $ 39,905
     Maximum month-end balance                                    57,455        47,735
     Weighted average interest rate                                 4.58%         2.76%

Federal funds purchased and lines of credit at year-end
     Balance                                                    $ 36,134      $     --
     Weighted average interest rate                                 5.29%           --
Federal funds purchased and lines of credit during the year
     Average daily balance                                      $ 14,571      $  8,779
     Maximum month-end balance                                    36,134        32,772
     Weighted average interest rate                                 5.37%         3.35%
</TABLE>

NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES

At year-end, advances from the Federal Home Loan Bank (FHLB) were as follows.

<TABLE>
<CAPTION>
                                      2006                              2005
                          ---------------------------       ---------------------------
                           Weighted                         Weighted
                            Average                          Average
                             Rate            Amount            Rate            Amount
                             ----            ------            ----            ------
                                               (Dollars in thousands)
<S>                          <C>          <C>                  <C>          <C>
   Fixed rate                5.69%        $    80,756          5.72%        $    80,000
   Variable rate             5.34              12,000          4.30              18,000
                                          -----------                       -----------
                                          $    92,756                       $    98,000
                                          ===========                       ===========
</TABLE>

The advances were  collateralized  by $336.5 million and $257.3 million of first
mortgage and commercial  real estate loans under a blanket lien  arrangement and
certain  available for sale securities at year-end 2006 and 2005.  Based on this
collateral and the Company's  holdings of FHLB stock, the Company is eligible to
borrow up to $136.2 million at year-end 2006.


--------------------------------------------------------------------------------

                                       62
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES (Continued)

The contractual  maturities of advances  outstanding as of December 31, 2006 are
as follows:

                                        Fixed     Variable
                                        -----     --------
                                           (In thousands)

               2007                    $ 4,477     $12,000
               2008                      4,437          --
               2009                     21,945          --
               2010                     49,897          --

The fixed rate advances consisted of $67.0 million in convertible advances.  The
FHLB has the quarterly right to require the Company to choose either  conversion
of the fixed  rate to a variable  rate tied to the three  month  LIBOR  index or
prepayment of the advance without penalty. There is a substantial penalty if the
Company prepays the advances before FHLB exercises its right.

NOTE 10 - SUBORDINATED DEBENTURES

On June 15,  2006, a trust  formed by the  Company,  Community  Bank Shares (IN)
Statutory  Trust II (Trust II),  issued  $10.0  million of  floating  rate trust
preferred  securities as part of a pooled offering of such  securities.  On June
17, 2004, a trust formed by the Company,  Community  Bank Shares (IN)  Statutory
Trust I (Trust  I),  issued  $7.0  million  of  floating  rate  trust  preferred
securities as part of a pooled offering of such  securities.  The Company issued
subordinated  debentures to Trusts I and II in exchange for the proceeds of each
offering;  the  debentures  and related debt issuance  costs  represent the sole
assets of Trusts I and II.  Distributions on the trust preferred  securities are
payable  quarterly  in  arrears  at the  annual  rate  (adjusted  quarterly)  of
three-month  LIBOR plus 1.70% (7.06% as of the last adjustment) for Trust II and
three-month  LIBOR plus 2.65% (8.01% as of the last  adjustment) for Trust I and
are included in interest expense.

The maturity dates of the subordinated debentures are June 15, 2036 for Trust II
and June 17, 2034 for Trust I. The  subordinated  debentures  may be redeemed by
the Company,  in whole or in part, at any distribution  payment date on or after
the distribution  payment date in June 2011 for Trust II and June 2009 for Trust
I, at the redemption  price.  The  subordinated  debentures have variable rates,
adjusted quarterly,  which are identical to the trust preferred  securities.  In
addition,  the  subordinated  debentures are redeemable in whole or in part from
time to time,  upon the  occurrence of specific  events defined within the trust
debenture.  The  Company  has the  option  to  defer  interest  payments  on the
subordinated  debt from time to time for period not to exceed  five  consecutive
years.

Trust  Preferred  Securities  are  considered  as Tier I capital for the Company
under current regulatory guidelines.


--------------------------------------------------------------------------------

                                       63
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 11 - BENEFIT PLANS

Defined Benefit Plans:  The Company sponsors a defined benefit pension plan. The
benefits  are based on years of service and the  employees'  highest  average of
total  compensation for five consecutive years of employment.  In 1997, the plan
was amended such that there can be no new  participants or increases in benefits
to the participants.  The Company uses December 31st as its measurement date for
its pension plan.

A  reconciliation  of the  projected  benefit  obligation  and the value of plan
assets follow.

                                                         2006          2005
                                                         ----          ----
                                                          (In thousands)

Change in projected benefit obligation
  Balance, beginning of year                          $     951      $     870
  Interest cost                                              52             49
  Actuarial (gain) loss                                     (45)            52
  Benefits paid to participants                             (25)           (20)
                                                      ---------      ---------

  Ending benefit obligation                                 933            951

Change in plan assets
  Fair value, beginning of year                             598            556
  Actual return on plan assets                               86             21
  Employer contributions                                     --             41
  Benefits paid to participants                             (25)           (20)
                                                      ---------      ---------

  Fair value, end of year                                   659            598
                                                      ---------      ---------

  Funded status                                            (274)          (353)

  Unrecognized net actuarial loss                            --            436
                                                      ---------      ---------

       Net amount recognized                          $    (274)     $      83
                                                      =========      =========

Prior to adoption of FAS Statement 158, amounts (in thousands) recognized in the
balance sheet at December 31, 2005 consist of:

  Prepaid benefit cost                                               $      83
  Accrued benefit cost                                                    (436)
  Deferred tax asset                                                       125
  Accumulated other comprehensive loss                                     311
                                                                     ---------

      Net amount recognized                                          $      83
                                                                     =========

Amounts recognized in accumulated other  comprehensive loss at December 31, 2006
consisted of a net actuarial loss of $311,000.


--------------------------------------------------------------------------------

                                       64
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 11 - BENEFIT PLANS (Continued)

The  components of pension  expense and related  actuarial  assumptions  were as
follows.

<TABLE>
<CAPTION>
                                                    2006           2005           2004
                                                    ----           ----           ----
                                                         (Dollars in thousands)
<S>                                               <C>            <C>            <C>
Interest cost                                     $     52       $     49       $     47
Expected return on plan assets                         (49)           (45)           (42)
Amortization of unrecognized loss                       43             41             36
                                                  --------       --------       --------
     Pension expense                              $     46       $     45       $     41
                                                  ========       ========       ========

Discount rate on benefit obligation                   5.75%          5.50%          5.75%
Rate of expected return on plan assets                8.00%          8.00%          8.00%
</TABLE>

The  estimated  net loss for the  defined  benefit  pension  plan  that  will be
amortized from accumulated  other  comprehensive  loss into net periodic benefit
cost over the next fiscal year is $27,000.

Plan  Assets:  The  Company's  target  allocation  for 2007,  pension plan asset
allocation at year-end 2006 and 2005,  and expected  long-term rate of return by
asset category are as follows:

<TABLE>
<CAPTION>
                                   Target       Percentage of Plan       Weighted-Average
                                 Allocation     Assets at Year-end      Expected Long-Term
                                    2007         2006       2005          Rate of Return
                                    ----         ----       ----          --------------
<S>                                  <C>          <C>        <C>                <C>
Asset Category
  Mutual funds                       85%           88%        83%               9.0%
  Money market                       15            12         17                4.0
                                                -----      -----

  Total                                           100%       100%               8.0%
                                                =====      =====
</TABLE>

The expected  long-term return is based on a periodic review and modeling of the
plan's  asset  allocation  and  liability  structure  over a long-term  horizon.
Expectations  of  returns  on each  asset  class are the most  important  of the
assumptions  used in the  review  and  modeling  and are  based  on  reviews  of
historical  data.  The expected  long-term rate of return on assets was selected
from within the  reasonable  range of rates  determined by (a)  historical  real
returns,  net of  inflation,  for the asset  classes  covered by the  investment
policy,  and (b) projections of inflation over the long-term period during which
benefit are payable to plan participants.

The plan's  investment  policy  includes  guidelines and procedures  designed to
ensure  assets  are  invested  in a manner  necessary  to meet  expected  future
benefits  earned by  participants.  The investment  guidelines  consider a broad
range of economic conditions. Central to the policy are target allocation (shown
above) by major asset categories.  The objectives of the target  allocations are
to  maintain  investment  portfolios  that  limit  risk  through  prudent  asset
allocation  parameters,  achieve  asset  returns  that meet or exceed the plans'
actuarial assumptions,  and achieve asset returns that are competitive with like
institutions employing similar investment strategies.

Management periodically reviews the investment policy. The policy is established
and  administered  in a manner  so as to comply  at all  times  with  applicable
government regulations.


--------------------------------------------------------------------------------

                                       65
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 11 - BENEFIT PLANS (Continued)

Estimated  Future  Payments:  The  following  benefit  payments,  which  reflect
expected future service, are expected (in thousands):

                                              Pension Benefits
                                              ----------------

                     2007                         $    27
                     2008                              27
                     2009                              27
                     2010                              26
                     2011                              26
                     Years 2012-2016                  140

The Company expects to contribute  approximately  $70,000 to its pension plan in
2007.

Your Community Bank is a participant  in the Financial  Institutions  Retirement
Fund,  a  multi-employer  defined  benefit  pension  plan  covering  two  of its
employees.  Employees  are  fully  vested  at the  completion  of five  years of
participation in the plan. No contributions  were required during the three-year
period ended December 31, 2006. There have been no new enrollments since 1998.

Defined Benefit Plans - SCSB:

The Company  acquired a defined  benefit  retirement  plan upon the  purchase of
SCSB. Per the merger agreement,  the plan was curtailed.  The Company expects to
settle this plan in the second quarter of 2007. Plan assets total $2,773,000 and
are invested  primarily in  certificates of deposit.  The projected  termination
liability is $2,758,000.  The Company has a $25,000 liability  included in other
liabilities on the balance sheet.


--------------------------------------------------------------------------------

                                       66
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 11 - BENEFIT PLANS (Continued)

Employee  Stock  Ownership  Plan:  Employees  participate  in an Employee  Stock
Ownership  Plan  (ESOP).  Dividends  on allocated  shares  increase  participant
accounts.   Participants   receive   the  shares  at  the  end  of   employment.
Contributions  to the  ESOP  during  2006,  2005 and 2004  were $0,  $2,000  and
$37,000. Expense for 2006, 2005 and 2004 was $0, $4,000 and $77,000. Shares held
by the ESOP trust and allocated to participants  were 37,000 as of year end 2006
and 2005.  As of December 31, 2006 and 2005,  there were no unearned ESOP shares
held by the ESOP trust

Deferred  Compensation  Arrangements:  The  Company has  entered  into  deferred
compensation arrangements with certain directors and officers. The liability for
such arrangements is fully accrued during the service period, with benefits paid
monthly upon  retirement  until death,  or date specified by the agreement.  The
liability was $409,000 and $455,000 at December 31, 2006 and 2005, respectively.
Expense  related  to these  arrangements  for 2006,  2005 and 2004 was  $17,000,
$18,000 and $19,000.

Defined   Contribution   Plans:   The  401(k)  benefit  plan  matches   employee
contributions  equal to 100% of the  first 3% of the  compensation  contributed.
Expense for 2006, 2005 and 2004 was $206,000, $133,000 and $111,000.

NOTE 12 - STOCK-BASED COMPENSATION PLANS

The Company has two share based  compensation  plans as described  below.  Total
compensation  cost that has been  charged  against  income  for those  plans was
$332,000,  $155,000,  and $0 for 2006,  2005,  and 2004.  The total  income  tax
benefit was $82,000, $35,000, and $0.

Stock Options: The Company's 2005 stock option plan provides for the granting of
both incentive and nonqualified stock options for up to 400,000 shares of common
stock at exercise prices not less than the fair market value of the common stock
on the date of grant  and  expiration  dates of up to ten  years.  Additionally,
there are 116,000  shares  available for grant under the 1997 stock option plan.
Terms of the options are  determined  by the Board of  Directors  at the date of
grant and  generally  vest over  periods  of three to four  years.  Non-employee
directors  are  eligible  to receive  only  nonqualified  stock  options.  As of
December 31, 2006, the plan allows for additional option grants of up to 262,550
shares.

The fair value of each option  award is estimated on the date of grant using the
Black-Scholes model that uses the assumptions noted in the table below. Expected
volatilities are based on historical volatilities of the Company's common stock.
The Company uses historical  data to estimate  option exercise and  post-vesting
termination  behavior.  The  expected  term  of  options  granted  is  based  on
historical  data and  represents  the period of time that  options  granted  are
expected to be  outstanding,  which takes into  account that the options are not
transferable. The risk-free interest rate for the expected term of the option is
based on the U.S. Treasury yield curve in effect at the time of the grant.


--------------------------------------------------------------------------------

                                       67
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)

The  fair  value  of  options   granted  was  determined   using  the  following
weighted-average assumptions as of grant date.

                                                     2006              2005
                                                     ----              ----

Risk-free interest rate                              5.07%             3.66%
Expected term                                     5.7 years          5.6 years
Expected stock price volatility                     16.09%            15.70%
Dividend yield                                       2.91%             2.58%

A summary of the activity in the stock option plan for 2006 follows:

<TABLE>
<CAPTION>
                                                                  Weighted
                                                     Weighted      Average
                                                     Average      Remaining     Aggregate
                                                     Exercise    Contractual    Intrinsic
                                      Shares           Price        Term          Value
                                      ------           -----        ----          -----
                                          (in thousands)              (in thousands)
<S>                                        <C>      <C>                 <C>     <C>
Outstanding at beginning of year           199      $   19.28
Granted                                     65          22.70
Exercised                                   (1)         14.09
Forfeited or expired                       (10)         19.13
                                     ---------
Outstanding at end of year                 253      $   20.19           6.7     $     756
                                     =========      =========     =========     =========

Exercisable at end of year                 109      $   15.95           3.7     $     716
                                     =========      =========     =========     =========
</TABLE>

Information  related to the stock  option  plan  during  each year  follows  (in
thousands, except for weighted fair value of options granted):

<TABLE>
<CAPTION>
                                                       2006          2005          2004
                                                       ----          ----          ----
<S>                                                 <C>            <C>          <C>
Intrinsic value of options exercised                $       9      $       3    $     193
Cash received from option exercises                        15              5          407
Tax benefit realized from option exercises                 80             --           --
Weighted average fair value of options granted           3.61           2.76         3.78
</TABLE>

As of December 31, 2006, there was $298,000 of total  unrecognized  compensation
cost related to nonvested  stock  options  granted  under the Plan.  The cost is
expected to be recognized over a weighted-average period of 1.71 years.

Performance  Units  Awards:  The  Company may grant  performance  unit awards to
employees  for up to 275,000  shares of common stock.  The level of  performance
shares  eventually  distributed is contingent  upon the  achievement of specific
performance  criteria within a specified award period set at the grant date. The
Company estimates the progress toward achieving these objectives when estimating
the number of awards expected to vest and correspondingly, periodic compensation
expense.


--------------------------------------------------------------------------------

                                       68
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)

The compensation cost attributable to these restricted  performance units awards
is based on both the fair  market  value of the shares at the grant date and the
Company's stock price at the end of a reporting  cycle.  Thirty-five  percent of
the total award will be paid in cash and is therefore classified as a liability,
with total compensation cost changing as the Company's stock price changes.  The
remaining   sixty-five   percent  is  classified  as  an  equity  award;   total
compensation cost is based on the fair market value of sixty-five percent of the
total award on the date of grant.  The  compensation  expense is recognized over
the specified performance period.

A summary of changes in the Company's nonvested units for the year follows:

                                                             Weighted-Average
                                                                Grant-Date
         Nonvested Units                   Units                Fair Value
         ---------------                   -----                ----------
                                      (in thousands)

   Nonvested at January 1, 2006              24                  $  22.51
        Granted                              31                     22.45
        Vested                              (12)                    22.51
        Forfeited                           (12)                    22.51
                                        -------

   Nonvested at December 31, 2006            31                  $  22.45
                                        =======

As of December 31, 2006, there was $248,000 of total  unrecognized  compensation
cost related to nonvested  units granted under the Plan. The cost is expected to
be recognized over a weighted-average  period of 2.0 years. The total fair value
of units vested  during the years ended  December  31,  2006,  2005 and 2004 was
$259,000,  $0 and  $0.  There  were no  modifications  or  cash  paid to  settle
performance unit awards during the three year period ending December 31, 2006.

NOTE 13 - INCOME TAXES

Income tax expense (benefit) was as follows.

                                     2006            2005           2004
                                     ----            ----           ----
                                                (In thousands)

Current                            $   1,177      $   1,525       $     599
Deferred                                  81           (597)              3
Change in valuation allowance             85             (3)             63
                                   ---------      ---------       ---------
    Total                          $   1,343      $     925       $     665
                                   =========      =========       =========


--------------------------------------------------------------------------------

                                       69
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 13 - INCOME TAXES (Continued)

Effective  tax rates differ from federal  statutory  rates  applied to financial
statement income due to the following.

<TABLE>
<CAPTION>
                                                2006                 2005                  2004
                                                ----                 ----                  ----
                                                            (Dollars in thousands)
<S>                                     <C>          <C>     <C>           <C>     <C>          <C>
Federal statutory rate times
  financial statement income            $ 1,854      34.0%   $ 1,589       34.0%   $ 1,106      34.0%
Effect of:
  Tax-exempt income                        (222)     (4.1)      (153)      (3.3)      (156)     (4.8)
  State taxes, net of federal
    benefit                                 (85)     (1.6)         3        0.1        (63)     (2.1)
  Change in
    valuation allowance                      85       1.6         (3)      (0.1)        63       2.1
  Nontaxable earnings from
    cash surrender value
      of life insurance policies           (195)     (3.6)      (402)      (8.6)      (168)     (5.2)
  New markets tax credit                   (150)     (2.8)      (150)      (3.2)      (150)     (4.6)
  Incentive stock options expense            31       0.6         17        0.4         --        --
  Other, net                                 25       0.5         24        0.5         33       0.8
                                        -------   -------    -------    -------    -------   -------

      Total                             $ 1,343      24.6%   $   925       19.8%   $   665      20.2%
                                        =======   =======    =======    =======    =======   =======
</TABLE>

Year-end deferred tax assets and liabilities were due to the following.

<TABLE>
<CAPTION>
                                                                          2006              2005
                                                                          ----              ----
                                                                                (In thousands)
<S>                                                                    <C>               <C>
Deferred tax assets:
    Allowance for loan losses                                          $     2,263       $     2,228
    Employee benefit plans                                                     291               187
    Minimum pension liability                                                  121               170
    Net unrealized loss on securities available for sale                       406               734
    Net unrealized depreciation on interest rate swap                          535               734
    Net operating loss carryforward                                            345               260
    Other                                                                       58                27
                                                                       -----------       -----------
                                                                             4,019             4,340
    Deferred tax liabilities:
    Premises and equipment                                                    (528)             (428)
    FHLB stock                                                                (377)             (507)
    Deferred loan fees and costs                                              (155)             (160)
    Mortgage servicing rights                                                  (62)              (62)
    Fair value adjustments from acquisitions                                  (230)               --
    Intangible assets                                                       (1,157)               --
    Prepaid pension expense                                                   (211)               --
    Prepaid expenses                                                           (65)               --
    Other                                                                     (130)              (37)
                                                                       -----------       -----------
                                                                            (2,915)           (1,194)
Valuation allowance on net deferred tax assets                                (345)             (260)
                                                                       -----------       -----------
Net deferred tax asset                                                 $       759       $     2,886
                                                                       ===========       ===========
</TABLE>


--------------------------------------------------------------------------------

                                       70
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 13 - INCOME TAXES (Continued)

The Company  incurred net  operating  losses for state income taxes during years
2002  through  2006 which will be carried  forward and  applied to future  state
taxable  income.  Due to the  uncertainty  of the Company's  ability to use this
benefit,  a valuation  allowance has been  recorded.  The  cumulative  state net
operating  loss is $4.1  million  and can be carried  forward  for 15 years with
expiration beginning in 2017.

Retained earnings of Your Community Bank includes approximately $3.7 million for
which no  deferred  income  tax  liability  has  been  recognized.  This  amount
represents  an  allocation  of income to bad debt  deductions as of December 31,
1987 for tax purposes only. Reduction of amounts so allocated for purposes other
than tax bad debt losses including redemption of bank stock or excess dividends,
or loss of "bank" status would create income for tax purposes only,  which would
be  subject  to the  then-current  corporate  income  tax rate.  The  unrecorded
deferred  income tax  liability on the above amount for Your  Community  Bank at
December 31, 2006 was approximately $1.3 million.

NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

Banks and bank holding companies are subject to regulatory capital  requirements
administered  by federal  banking  agencies.  Capital  adequacy  guidelines and,
additionally  for  banks,   prompt   corrective   action   regulations   involve
quantitative  measures of assets,  liabilities,  and  certain  off-balance-sheet
items  calculated  under regulatory  accounting  practices.  Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.

Prompt  corrective  action  regulations  provide  five   classifications:   well
capitalized,    adequately    capitalized,    undercapitalized,    significantly
undercapitalized, and critically undercapitalized,  although these terms are not
used to  represent  overall  financial  condition.  If  adequately  capitalized,
regulatory   approval   is   required   to   accept   brokered   deposits.    If
undercapitalized,  capital  distributions  are  limited,  as is asset growth and
expansion,  and capital restoration plans are required.  As of December 31, 2006
and 2005, the most recent regulatory  notifications  categorized YCB and SCSB as
well capitalized under the regulatory  framework for prompt  corrective  action.
There are no  considerations  or events since December 31, 2006 that  management
believes have changed the institution's classification as well capitalized.


--------------------------------------------------------------------------------

                                       71
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(Continued)

Actual and required capital amounts and ratios are presented below at year-end.

<TABLE>
<CAPTION>
                                                                                                            To Be Well
                                                                                                        Capitalized Under
                                                                               For Capital              Prompt Corrective
                                                       Actual               Adequacy Purposes           Action Provisions
                                                       ------               -----------------           -----------------
                                                Amount        Ratio        Amount        Ratio        Amount        Ratio
                                                ------        -----        ------        -----        ------        -----
                                                                          (Dollars in millions)
<S>                                            <C>             <C>        <C>              <C>
2006
----
Total Capital (to Risk Weighted Assets):
  Consolidated                                 $  71.0         11.4%      $  50.0          8.0%          N/A          N/A
  Your Community Bank                             60.5         11.1%         43.5          8.0          54.3         10.0%
  Scott County State Bank                         13.4         16.3%          6.6          8.0           8.2         10.0

Tier I Capital (to Risk Weighted Assets):
  Consolidated                                 $  65.4         10.5%      $  25.0          4.0%          N/A          N/A
  Your Community Bank                             55.5         10.2%         21.7          4.0          32.6          6.0%
  Scott County State Bank                         12.6         15.4%          3.3          4.0           4.9          6.0

Tier I Capital (to Average Assets):
  Consolidated                                 $  65.4          8.1%      $  32.3          4.0%          N/A          N/A
  Your Community Bank                             55.5          8.1%         27.5          4.0          34.3          5.0%
  Scott County State Bank                         12.6          9.8%          5.1          4.0           6.4          5.0

2005
----
Total Capital (to Risk Weighted Assets):
  Consolidated                                 $  58.3         10.5%      $  44.2          8.0%          N/A          N/A
  Your Community Bank                             57.9         10.5%         44.2          8.0          55.3         10.0%

Tier I Capital (to Risk Weighted Assets):
  Consolidated                                 $  52.3          9.5%      $  22.1          4.0%          N/A          N/A
  Your Community Bank                             52.0          9.4%         22.1          4.0          33.2          6.0%

Tier I Capital (to Average Assets):
  Consolidated                                 $  52.3          8.0%      $  26.3          4.0%          N/A          N/A
  Your Community Bank                             52.0          7.9%         26.3          4.0          32.8          5.0%
</TABLE>

Dividend  Restrictions:  The  Company's  principal  source of funds for dividend
payments is dividends  received from the Banks.  Banking  regulations  limit the
amount of  dividends  that may be paid  without  prior  approval  of  regulatory
agencies.  Under these regulations,  the amount of dividends that may be paid in
any  calendar  year is limited  to the  current  year's  retained  net  profits,
combined with the retained net profits of the  preceding  two years,  subject to
the capital  requirements  described above. During 2007, the YCB and SCSB could,
without  prior  approval,  declare  dividends of  approximately  $5,621,000  and
$639,000  plus  any  2007  net  profits  retained  to the  date of the  dividend
declaration, respectively.


--------------------------------------------------------------------------------

                                       72
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 15 - INTEREST RATE SWAPS

On August 30, 2002,  the Company  entered  into a  $25,000,000  notional  amount
interest rate swap arrangement to exchange variable payments of interest tied to
Prime for receipt of fixed rate  payments of 6.51%.  An  additional  $25,000,000
notional amount interest rate swap was entered into on June 19, 2003 to exchange
variable  payments of interest  tied to Prime for receipt of fixed rate payments
of 5.22%.  The variable rate of the swaps resets daily,  with net interest being
settled  monthly.  The notional  amount of the swaps does not represent  amounts
exchanged by the parties. The amount exchanged is determined by reference to the
notional amount and other terms of the swaps.

The  swaps  have  been  designated  by  management  as cash  flow  hedges of its
Prime-based  commercial  loans to in  effect  convert  the loans  from  variable
interest to weighted  average fixed  interest rates of 6.76% on the initial swap
until the swap's  maturity on August 30, 2007, and 5.58% on the subsequent  swap
until its maturity on June 19, 2008. The hedge  relationships were determined to
be  highly  effective.  As such,  changes  in the fair  value of the  swaps  are
reported in other comprehensive income and will be reclassified to earnings over
the lives of the hedges.  During the 12 months ended December 31, 2006 and 2005,
respectively,  the Company recognized expense of $1,061,000 and $163,000.  Based
on current rates,  $1,035,000 is expected to be  transferred  out of accumulated
other  comprehensive  income as a reduction of interest  income during 2007. The
fair value of the swaps were  liabilities of $1.3 million and $1.9 million as of
year-end  2006 and 2005 and are reported in other  liabilities  in the Company's
consolidated financial statements.

NOTE 16 - OFF-BALANCE-SHEET ACTIVITIES

Some financial instruments,  such as commitments to make loans for the Company's
portfolio,   credit   lines  and   letters  of   credit,   are  issued  to  meet
customer-financing  needs.  These are agreements to provide credit or to support
the credit of others, as long as conditions established in the contract are met,
and usually have  expiration  dates.  Commitments may expire without being used.
Off-balance-sheet  risk to credit  loss  exists  up to the face  amount of these
instruments,  although  material  losses are not  anticipated.  The same  credit
policies  are used to make such  commitments  as are used for  loans,  including
obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with  off-balance-sheet risk was
as follows at year-end.

<TABLE>
<CAPTION>
                                       2006                        2005
                                       ----                        ----
                                Fixed        Variable       Fixed        Variable
                                 Rate          Rate          Rate          Rate
                                 ----          ----          ----          ----
                                                  (In thousands)
<S>                            <C>           <C>           <C>           <C>
Commitments to make loans      $  4,378      $  9,794      $ 11,150      $ 19,769
Unused lines of credit            4,800       130,186            --       140,956
Letters of credit                    --         6,390            --         5,646
</TABLE>

Commitments  to make loans are generally made for periods of 30 days or less and
are at market rates. The fixed rate loan commitments have interest rates ranging
from  approximately  8.15% to 9.25%  and  maturities  ranging  from 1 year to 20
years.


--------------------------------------------------------------------------------

                                       73
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Carrying  amount and  estimated  fair values of  financial  instruments  were as
follows at year-end.

<TABLE>
<CAPTION>
                                                     2006                             2005
                                                     ----                             ----
                                           Carrying          Fair          Carrying           Fair
                                            Amount          Value           Amount            Value
                                            ------          -----           ------            -----
                                                               (In thousands)
<S>                                       <C>             <C>             <C>                <C>
Financial assets
      Cash and due from financial
        financial institutions            $   20,224      $   20,224      $   11,225          11,225
      Interest-bearing deposits in
        other financial institutions           1,210           1,210           1,358           1,358
      Securities available for sale          121,311         121,311          98,835          98,835
      Loans held for sale                        908             923           1,694           1,719
      Loans, net                             607,932         597,729         512,448         513,248
      Federal Home Loan Bank and
         Federal Reserve stock                 7,418           7,418           8,572           8,572
      Accrued interest receivable              3,968           3,968           2,500           2,500

Financial liabilities
      Deposits                               549,918         549,405         464,836         463,613
      Advances from Federal Home
        Loan Bank                             92,756          94,589          98,000         101,117
      Subordinated debentures                 17,000          17,227           7,000           7,000
      Accrued interest payable                 2,178           2,178           1,066           1,066
      Interest rate swaps                      1,293           1,293           1,881           1,881
</TABLE>

The  methods  and  assumptions  used to  estimate  fair value are  described  as
follows:

The estimated fair value equals the carrying amount for cash and due from banks,
interest-bearing  deposits in other  financial  institutions,  Federal Home Loan
Bank stock, accrued interest receivable and payable, demand deposits, short-term
borrowings,  subordinated  debenture,  and variable  rate loans or deposits that
reprice  frequently  and fully.  Security and interest rate swap fair values are
based  on  market  prices  or  dealer  quotes,  and if no  such  information  is
available,  on the rate and term of the  instrument  and  information  about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current  market rates applied to the estimated  life and credit
risk.  Fair values for impaired loans are estimated  using  discounted cash flow
analysis or underlying  collateral values.  Fair value of loans held for sale is
based on market  quotes.  Fair value of FHLB  advances is based on current rates
for similar  financing.  The fair value of  off-balance-sheet  items is based on
current  fees or costs that would be  charged  to enter into or  terminate  such
arrangements and is not material.


--------------------------------------------------------------------------------

                                       74
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 18- PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information for Community Bank Shares of Indiana, Inc. is as
follows:

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                               December 31
                                                                           2006              2005
                                                                           ----              ----
                                                                              (In thousands)
<S>                                                                     <C>              <C>
ASSETS
Cash and due from financial institutions                                $        63      $       139
Investment in subsidiaries                                                   85,493           49,449
Other assets                                                                  1,647              700
                                                                        -----------      -----------

       Total assets                                                     $    87,203      $    50,288
                                                                        ===========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings                                                  $     3,480       $        --
Subordinated debentures                                                     17,000             7,000
Accrued expenses and other liabilities                                       1,182               513
                                                                        -----------      -----------
  Total liabilities                                                         21,662             7,513
  Total shareholders' equity                                                65,541            42,775
                                                                        -----------      -----------

                                                                        $    87,203      $    50,288
                                                                        ===========      ===========
</TABLE>

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                    Years ended December 31
                                                         2006               2005            2004
                                                         ----               ----            ----
                                                                       (In thousands)
<S>                                                   <C>               <C>              <C>
Income
  Dividends from subsidiaries                         $       950       $     2,250      $     2,600
  Management and other fees from subsidiaries                  --                --            1,955
                                                      -----------       -----------      -----------
      Total income                                            950             2,250            4,555

Expense
  Operating expenses                                        2,057               879            2,724
                                                      -----------       -----------      -----------

Income (loss) before income taxes and equity
  in undistributed net income of subsidiaries              (1,107)            1,371            1,831

Income tax benefit                                            668               281              525
                                                      -----------       -----------      -----------

Income (loss) before equity in undistributed net
  income of subsidiaries                                     (439)            1,652            2,356

Equity in undistributed of
  net income of subsidiaries                                4,550             2,097              232
                                                      -----------       -----------      -----------

Net income                                            $     4,111       $     3,749      $     2,588
                                                      ===========       ===========      ===========
</TABLE>


--------------------------------------------------------------------------------

                                       75
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               Years ended December 31
                                                          2006           2005           2004
                                                          ----           ----           ----
                                                                    (In thousands)
<S>                                                     <C>            <C>            <C>
Cash flows from operating activities
  Net income                                            $  4,111       $  3,749       $  2,588
  Adjustments to reconcile net income to net cash
     from operating activities
      Equity in undistributed
         net income of subsidiaries                       (4,550)        (2,097)          (232)
      Share-based compensation expense                       332            129             --
      Net change in other assets
         and liabilities                                      63           (229)        (6,753)
                                                        --------       --------       --------
    Net cash from operating activities                       (44)         1,552         (4,397)

Cash flows from investing activities
  Net change in interest-bearing deposits in other
    financial institutions                                    --             --              1
  Acquisition of The Bancshares, Inc.                    (11,001)            --             --
  Purchase of premises and equipment, net                     --             --            802
                                                        --------       --------       --------
    Net cash from investing activities                   (11,001)            --            803

Cash flows from financing activities
  Net change in short-term borrowings                      3,480             --         (1,200)
  Proceeds from issuance of subordinated debenture        10,000             --          7,000
  Exercise of stock options                                   15              5            407
  Purchase of treasury stock                                (685)          (557)          (533)
  Stock dividend declared                                     --             --             (4)

  Tax benefit of stock options exercised                      80             --             --
  Cash dividends paid                                     (1,921)        (1,518)        (1,419)
                                                        --------       --------       --------
    Net cash from financing activities                    10,969         (2,070)         4,251
                                                        --------       --------       --------

Net change in cash                                           (76)          (518)           657

Cash at beginning of year                                    139            657             --
                                                        --------       --------       --------

Cash at end of year                                     $     63       $    139       $    657
                                                        ========       ========       ========
</TABLE>


--------------------------------------------------------------------------------

                                       76
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 19 - EARNINGS PER SHARE

  The factors used in the earnings per share computation follows.

<TABLE>
<CAPTION>
                                                      2006              2005              2004
                                                      ----              ----              ----
                                                 (In thousands, except share and per share amounts)
<S>                                               <C>               <C>               <C>
Basic
      Net income                                  $     4,111       $     3,749       $     2,588
                                                  ===========       ===========       ===========

      Average shares:
        Common shares issued                        3,436,051         3,001,067         3,001,128
        Less: Unallocated ESOP shares                      --                --            (2,103)
              Treasury stock                         (413,004)         (381,787)         (371,374)
                                                  -----------       -----------       -----------

           Average shares outstanding               3,023,047         2,619,280         2,627,651
                                                  ===========       ===========       ===========

Net income per common share, basic                $      1.36       $      1.43       $      0.98
                                                  ===========       ===========       ===========

Diluted
      Net income                                  $     4,111       $     3,749       $     2,588
                                                  ===========       ===========       ===========

      Average shares:
        Common shares outstanding for basic         3,023,047         2,619,280         2,627,651
        Add: Dilutive effects of outstanding
          options                                      32,610            32,884            30,576
                                                  -----------       -----------       -----------
        Average shares and dilutive
          potential common shares                   3,055,657         2,652,164         2,658,227
                                                  ===========       ===========       ===========

Net income per common share, diluted              $      1.35       $      1.41       $      0.97
                                                  ===========       ===========       ===========
</TABLE>

Stock  options of 138,000 and 80,200  common  shares were excluded from 2006 and
2005 diluted earnings per share because they were  anti-dilutive.  There were no
anti-dilutive stock options for 2004.


--------------------------------------------------------------------------------

                                       77
<PAGE>

                     COMMUNITY BANK SHARES OF INDIANA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

--------------------------------------------------------------------------------

NOTE 20 - OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and related taxes were as follows.

<TABLE>
<CAPTION>
                                                                    2006           2005            2004
                                                                    ----           ----            ----
                                                                             (In thousands)
<S>                                                              <C>             <C>             <C>
Unrealized holding gains (losses) on
  available for sale securities                                  $     958       $  (1,884)      $    (210)
Less reclassification adjustments for gains
  recognized in income                                                  --             (23)           (138)
                                                                 ---------       ---------       ---------
Net unrealized gain (loss) on securities
    available for sale, net of reclassifications                       958          (1,907)           (348)

Unrealized holding gain (loss) on interest
  rate swaps                                                          (473)         (1,039)            185
Amounts reclassified to interest income                              1,061             163            (777)
                                                                 ---------       ---------       ---------
Net unrealized gain (loss) on interest rate
    swaps, net of reclassifications                                    588            (876)           (592)

Change in minimum pension liability                                    125             (34)            (54)
                                                                 ---------       ---------       ---------

Other comprehensive income (loss)
  before tax effects and cumulative
  effect of change in accounting principle                           1,671          (2,817)           (994)
Tax effect                                                            (574)          1,003             370
                                                                 ---------       ---------       ---------

  Other comprehensive income (loss)                              $   1,097       $  (1,814)      $    (624)
                                                                 =========       =========       =========
</TABLE>

NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                       Earnings Per Share
                                          Interest     Net Interest        Net         ------------------
                                           Income         Income         Income        Basic        Diluted
                                           ------         ------         ------        -----        -------
                                                     (In thousands, except per share amounts)
<S>                                      <C>             <C>             <C>          <C>           <C>
2006
----
  First quarter                          $   9,934       $   4,405       $   795      $  0.31       $  0.30
  Second quarter                            10,387           4,405           934         0.36          0.36
  Third quarter                             12,873           5,708         1,314         0.38          0.38
  Fourth quarter                            12,839           5,520         1,068         0.31          0.31

2005
----
  First quarter                          $   7,939       $   4,269       $   782      $  0.30       $  0.29
  Second quarter                             8,527           4,445           924         0.35          0.35
  Third quarter                              9,070           4,516         1,201         0.46          0.45
  Fourth quarter                             9,522           4,484           842         0.32          0.32
</TABLE>


--------------------------------------------------------------------------------

                                       78
<PAGE>

Part II

Item  9.  Changes  In And  Disagreements  With  Accountants  On  Accounting  And
Financial Disclosures

There has been no  change  in the  Company's  principal  independent  accountant
during the Company's two most recent fiscal years.

Item 9A. Controls And Procedures

Company  management,  including  the Chief  Executive  Officer  (serving  as the
principal  executive  officer)  and  Chief  Financial  Officer  (serving  as the
principal financial officer),  have conducted an evaluation of the effectiveness
of the design and operation of our disclosure  controls and procedures  pursuant
to Securities  Exchange Act of 1934 Rule 13a-14.  Based on that evaluation,  the
Chief  Executive  Officer and the Chief  Financial  Officer  concluded  that the
disclosure  controls and  procedures  are  effective in timely  alerting them to
material  information  required to be included in this report. There has been no
change in the Company's internal control over financial  reporting that occurred
during the Company's most recent fiscal quarter that has materially  affected or
is reasonable  likely to materially  affect the Company's  internal control over
financial reporting.

Item 9B. Other Information

There was no information to be disclosed by the Company on a Form 8-K during the
fourth quarter of 2006 but not reported.

Part III

Item 10. Directors, Executive Officers And Corporate Governance

The  information   regarding  Company   directors   required  by  this  item  is
incorporated  herein by reference to information  under the headings  "Corporate
Governance  and Board  Matters" and  "Proposal No. 1 - Election of Directors" in
the 2007  Proxy  Statement.  Information  regarding  the  members  of the  Audit
Committee, the Company's code of business conduct and ethics, the identification
of the Audit Committee  Financial Expert,  stockholder  nominations of directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is also
incorporated by reference to the information  under the aforesaid  headings,  as
well as the headings "Section 16(a) Beneficial Ownership Reporting  Compliance,"
in the 2007 Proxy Statement.  The information  regarding our executive  officers
required by this item is  incorporated  by reference to the  information  in the
2007 Proxy Statement.

Item 11. Executive Compensation

Information   concerning  executive   compensation  is  incorporated  herein  by
reference to the information under the heading  "EXECUTIVE  COMPENSATION" in the
2007 Proxy Statement.

Item 12.  Security  Ownership Of Certain  Beneficial  Owners And  Management And
Related Stockholder Matters

Information  concerning  security ownership of management is incorporated herein
by reference to the information  under the heading "STOCK OWNERSHIP BY DIRECTORS
AND EXECUTIVE  OFFICERS" in the  Company's  definitive  Proxy  Statement for the
Annual Meeting of Stockholders to be held on May 15, 2007.

Item  13.  Certain   Relationships  And  Related   Transactions,   And  Director
Independence

Information  concerning  relationships  and related  transactions,  and director
independence  is incorporated  herein by reference to the information  under the
headings   "COMPENSATION   COMMITTEE  INTERLOCKS  AND  INSIDER   PARTICIPATION",
"CORPORATE GOVERNANCE AND BOARD MATTERS" and "CERATIN  RELATIONSHIPS AND RELATED
PERSON TRANSACTIONS" in the 2007 Proxy Statement.

Item 14. Principal Accountant Fees And Services

Information  concerning  principal  accountant fees and services is incorporated
herein by reference to the information  under the headings  "REPORT OF THE AUDIT
COMMITTEE" and  "RATIFICATION  OF APPOINTMENT OF INDEPENDENT  REGISTERED  PUBLIC
ACCOUNTING FIRM" in the 2007 Proxy Statement.


--------------------------------------------------------------------------------

                                       79
<PAGE>

Part IV

Item 15. Exhibits And Financial Statement Schedules

(a)(1) Financial Statements

The following financial statements are included in Item 8 of this Form 10-K:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules

All financial statement schedules have been omitted as the required  information
is  inapplicable   or  the  required   information  has  been  included  in  the
Consolidated Financial Statements or notes thereto.

(a) (3) Exhibits

The following exhibits are filed herein:

Exhibit
Number                  Document
------                  --------

2.1         Agreement  and Plan of  Merger  between  Community  Bank  Shares  of
              Indiana,  Inc., The Bancshares,  Inc., and CBIN  Subsidiary,  Inc.
              (11)

3.1         Articles of Incorporation (1)

3.2         Bylaws (1)

4.0         Common Stock Certificate (1)

10.1        Employment Agreement with Dale L. Orem * (2)

10.2        Retirement Agreement with Robert E. Yates * (2)

10.3        Employment Agreement with James D. Rickard * (3)

10.4        Community Bank Shares of Indiana,  Inc. 1997 Stock  Incentive Plan *
              (4)

10.5        Community Bank Shares of Indiana,  Inc. Dividend Reinvestment Plan *
              (5)

10.6        Employment Agreement with Patrick J. Daily * (6)

10.7        Employment Agreement with Christopher L. Bottorff * (6)

10.8        Data Processing  Services  Agreement with Jack Henry and Associates,
              Inc. (6)

10.9        Electronic Funds Transfer  Agreement with Jack Henry and Associates,
            Inc. (6)

10.10       Employment Agreement with Kevin J. Cecil * (7)

10.11       Employment Agreement with Paul A. Chrisco * (7)

10.12       Consulting Agreement with Dale L. Orem * (7)

10.13       Community  Bank  Shares of Indiana,  Inc.  and  Affiliates  Business
              Ethics Policy (7)

10.14       Lease Agreement with Al Josam Dixieland, LLC (7)

10.15       Lease Agreement with JWL Properties, LLC (7)

10.16       Community Bank Shares of Indiana, Inc. 2005 Stock Award Plan (8)

10.17       Amendment to Employment Agreement with James D. Rickard * (9)

10.18       Amendment to Employment Agreement with Christopher L. Bottorff * (9)

10.19       Amendment to Employment Agreement with Kevin J. Cecil * (9)

10.20       Amendment to Employment Agreement with Paul A. Chrisco * (9)

10.21       Amendment  to  Community  Bank Shares of Indiana,  Inc.  Performance
              Units Plan (10)

11.1        Computation of Earnings Per Share

21.0        Subsidiaries of Registrant

23.1        Consent of Crowe Chizek and Company LLC

31.1        Certification of Principal  Executive  Officer Pursuant to 18 U.S.C.
              Section  1350,   As  Adopted   Pursuant  to  Section  302  of  the
              Sarbanes-Oxley Act of 2002

31.2        Certification of Principal  Financial  Officer Pursuant to 18 U.S.C.
              Section  1350,   As  Adopted   Pursuant  to  Section  302  of  the
              Sarbanes-Oxley Act of 2002

32.1        Certification of Principal Executive Officer pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002

32.2        Certification of Principal Financial Officer pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002

* Management  contract or compensatory plan or arrangement  required to be filed
as an exhibit to this Report pursuant to Item 601 of Regulation S-K.


--------------------------------------------------------------------------------

                                       80
<PAGE>

(1) Incorporated herein by reference to Registration Statement on Form S-1 filed
December 9, 1994 (File No. 33-87228).

(2)  Incorporated  by reference to the Annual Report on Form 10-K filed April 2,
2002.

(3)  Incorporated  by  reference  to the  Quarterly  Report on Form  10-Q  filed
November 14, 2000.

(4)  Incorporated  by reference  from the exhibits  filed with the  Registration
Statement  on Form  S-8,  filed  July  29,  1998,  and any  amendments  thereto,
Registration statement No. 333- 60089.

(5)  Incorporated  by reference  from the exhibits  filed with the  Registration
Statement on Form S-3,  filed  November 14, 1997,  and any  amendments  thereto,
Registration Statement No. 333-40211.

(6)  Incorporated by reference to the Annual Report on Form 10-K filed March 31,
2003.

(7)  Incorporated by reference to the Annual Report on Form 10-K filed March 30,
2004.

(8)  Incorporated  by reference  from the exhibits  filed with the  Registration
Statement on Form S-8, filed  September 13, 2005,  and any  amendments  thereto,
Registration Statement No. 333-128278.

(9)  Incorporated  by  reference  from the exhibits  filed with Form 8-K,  filed
November 6, 2006.

(10)  Incorporated  by reference  from the exhibits  filed with Form 8-K,  filed
October 23, 2006

(11)  Incorporated  by reference  from the exhibits  filed with Form 8-K,  filed
February 16, 2006.

(b) Exhibits

See response to Item 15(a)(3).

(c) Financial Statement Schedules

See response to Item 15(a)(2).


--------------------------------------------------------------------------------

                                       81
<PAGE>

Signatures

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                         COMMUNITY BANK SHARES
                                         OF INDIANA, INC.


March 29, 2007                           By: /s/ James D. Rickard
                                         ----------------------------
                                         James D. Rickard
                                         President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange of 1934, this report has
been signed below by the following  persons on behalf of the  Registrant  and in
the capacities and on the dates indicated.

<TABLE>
<S>                            <C>                                                             <C>
   /s/ James D. Rickard        President, Chief Executive Officer, and Director      March 29, 2007
   --------------------        (Principal Executive Officer)
   James D. Rickard

   /s/ Paul A. Chrisco         Senior Vice-President and Chief Financial Officer     March 29, 2007
   -------------------         (Principal Financial and Accounting Officer)
   Paul A. Chrisco

   /s/ Timothy T. Shea         Chairman of the Board of Directors and Director       March 29, 2007
   -------------------
   Timothy T. Shea

   /s/ Gary L. Libs            Director                                              March 29, 2007
   ----------------
   Gary L. Libs

   /s/ R. Wayne Estopinal      Director                                              March 29, 2007
   ----------------------
   R. Wayne Estopinal

   /s/ George M. Ballard       Director                                              March 29, 2007
   ---------------------
   George M. Ballard

   /s/ Gordon L. Huncilman     Director                                              March 29, 2007
   -----------------------
   Gordon L. Huncilman

   /s/ Kerry M. Stemler        Director                                              March 29, 2007
   --------------------
   Kerry M. Stemler

   /s/ Steven R. Stemler       Director                                              March 29, 2007
   ---------------------
   Steven R. Stemler

   /s/ Dale L. Orem            Director                                              March 29, 2007
   ----------------
   Dale L. Orem
</TABLE>


--------------------------------------------------------------------------------

                                       82
<PAGE>

Exhibit Index

Exhibit
Number                   Document
------                   --------

2.1         Agreement  and Plan of  Merger  between  Community  Bank  Shares  of
              Indiana,  Inc., The Bancshares,  Inc., and CBIN  Subsidiary,  Inc.
              (11)

3.1         Articles of Incorporation (1)

3.2         Bylaws (1)

4.0         Common Stock Certificate (1)

10.1        Employment Agreement with Dale L. Orem * (2)

10.2        Retirement Agreement with Robert E. Yates * (2)

10.3        Employment Agreement with James D. Rickard * (3)

10.4        Community Bank Shares of Indiana,  Inc. 1997 Stock  Incentive Plan *
              (4)

10.5        Community Bank Shares of Indiana,  Inc. Dividend Reinvestment Plan *
              (5)

10.6        Employment Agreement with Patrick J. Daily * (6)

10.7        Employment Agreement with Christopher L. Bottorff * (6)

10.8        Data Processing  Services  Agreement with Jack Henry and Associates,
              Inc. (6)

10.9        Electronic Funds Transfer  Agreement with Jack Henry and Associates,
              Inc. (6)

10.10       Employment Agreement with Kevin J. Cecil * (7)

10.11       Employment Agreement with Paul A. Chrisco * (7)

10.12       Consulting Agreement with Dale L. Orem * (7)

10.13       Community  Bank  Shares of Indiana,  Inc.  and  Affiliates  Business
              Ethics Policy (7)

10.14       Lease Agreement with Al Josam Dixieland, LLC (7)

10.15       Lease Agreement with JWL Properties, LLC (7)

10.16       Community Bank Shares of Indiana, Inc. 2005 Stock Award Plan (8)

10.17       Amendment to Employment Agreement with James D. Rickard * (9)

10.18       Amendment to Employment Agreement with Christopher L. Bottorff * (9)

10.19       Amendment to Employment Agreement with Kevin J. Cecil * (9)

10.20       Amendment to Employment Agreement with Paul A. Chrisco * (9)

10.21       Amendment  to  Community  Bank Shares of Indiana,  Inc.  Performance
              Units Plan (10)

11.1        Computation of Earnings Per Share

21.0        Subsidiaries of Registrant

23.1        Consent of Crowe Chizek and Company LLC

31.1        Certification of Principal  Executive  Officer Pursuant to 18 U.S.C.
              Section  1350,   As  Adopted   Pursuant  to  Section  302  of  the
              Sarbanes-Oxley Act of 2002

31.2        Certification of Principal  Financial  Officer Pursuant to 18 U.S.C.
              Section  1350,   As  Adopted   Pursuant  to  Section  302  of  the
              Sarbanes-Oxley Act of 2002

32.1        Certification of Principal Executive Officer pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002

32.2        Certification of Principal Financial Officer pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002

* Management  contract or compensatory plan or arrangement  required to be filed
as an exhibit to this Report pursuant to Item 601 of Regulation S-K.

(1) Incorporated herein by reference to Registration Statement on Form S-1 filed
December 9, 1994 (File No. 33-87228).

(2)  Incorporated  by reference to the Annual Report on Form 10-K filed April 2,
2002.

(3)  Incorporated  by  reference  to the  Quarterly  Report on Form  10-Q  filed
November 14, 2000.

(4)  Incorporated  by reference  from the exhibits  filed with the  Registration
Statement  on Form  S-8,  filed  July  29,  1998,  and any  amendments  thereto,
Registration statement No. 333- 60089.

(5)  Incorporated  by reference  from the exhibits  filed with the  Registration
Statement on Form S-3,  filed  November 14, 1997,  and any  amendments  thereto,
Registration Statement No. 333-40211.

(6)  Incorporated by reference to the Annual Report on Form 10-K filed March 31,
2003.

(7)  Incorporated by reference to the Annual Report on Form 10-K filed March 30,
2004.

(8)  Incorporated  by reference  from the exhibits  filed with the  Registration
Statement on Form S-8, filed  September 13, 2005,  and any  amendments  thereto,
Registration Statement No. 333-128278.

(9)  Incorporated  by  reference  from the exhibits  filed with Form 8-K,  filed
November 6, 2006.

(10)  Incorporated  by reference  from the exhibits  filed with Form 8-K,  filed
October 23, 2006

(11)  Incorporated  by reference  from the exhibits  filed with Form 8-K,  filed
February 16, 2006.


--------------------------------------------------------------------------------

                                       83