Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to our actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; competitive conditions in the banking markets served by our subsidiaries; the adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other factors disclosed periodically in our filings with the Securities and Exchange Commission.

Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by us or on our behalf. We assume no obligation to update any forward-looking statements.

Financial Condition

Total assets decreased to $865.7 million at March 31, 2009 from $877.4 million as of December 31, 2008 due to decreases in net loans of $16.9 million and securities available for sale of $12.5 million. The Company utilized the net cash inflows to offset decreases in total deposits, FHLB advances, and other borrowings and increase its interest bearing deposits in other financial institutions by $19.2 million. Total deposits decreased to $600.3 million at March 31, 2009 from $603.2 million as of December 31, 2008 as interest-bearing deposits decreased by $7.0 million and non-interest bearing deposits increased by $4.1 million.

Net loans decreased by 2.7% to $606.2 million as of March 31, 2009 from $623.1 million at December 31, 2008. The decrease in the loan portfolio was concentrated in the Company's commercial real estate and residential real estate portfolios which declined by a combined $18.2 million from December 31, 2008. The decrease is the result of management's efforts to further diversify the Company's loan portfolio in addition to net loan payoffs of $13.8 million and net loan charge-offs of $1.7 million.

Securities available for sale decreased from December 31, 2008 by $12.5 million to $109.2 million as of March 31, 2009 primarily due to sales of $30.4 million and maturities, prepayments and calls of $6.2 million, offset primarily by purchases of $24.1 million. The securities portfolio serves as a source of liquidity and earnings and plays an important part in the management of interest rate risk. The current strategy for the investment portfolio is to maintain an overall average repricing term between 3.0 and 3.5 years to limit exposure to rising interest rates.

FHLB advances and other borrowings decreased to $107.0 million and $75.2 million at March 31, 2009, respectively, from $111.9 million and $79.0 million at December 31, 2008. The decrease in FHLB advances and other borrowings was offset through net cash inflows from net loans and securities available for sale.

Net Income. Net income was $623,000 for the three months ended March 31, 2009 compared to $1.0 million for the same period in 2008. Basic and diluted earnings per share decreased to $0.19 per share for the first quarter of 2009 from $0.32 for basic and diluted earnings per share for 2008. The decrease in net income and basic and diluted earnings per share for the first quarter in 2009 was due to increases in the provision for loan losses and non-interest expenses, offset by increases in net interest income and non-interest income and a decrease in income tax expense. The annualized return on average assets and average shareholders' equity were 0.30% and 3.99% for the three months ended March 31, 2009, respectively, compared to 0.51% and 6.34% for the equivalent periods in 2008.

Net interest income. Net interest income for the three months ended March 31, 2009 increased by $58,000 to $5.8 million. The Company's net interest margin on a taxable equivalent basis decreased to 3.08% for the three months ended March 31, 2009 from 3.13% for the same period in 2008. The increase in net interest income for the three months ended March 31, 2009 as compared to same period on 2008 was due to a larger decrease in the cost of interest bearing liabilities as compared to the yield on interest earning assets. The net interest margin on a taxable equivalent basis for the first quarter of 2009 decreased as compared to 2008 as average interest earning assets increased by $31.6 million. The net interest margin was negatively impacted by the increase in the average balance of interest bearing deposits in other financial institutions which have a lower yield as compared to the Company's other interest earning assets.

The cost of interest-bearing liabilities continues to be significantly affected by the $67.0 million in funding provided by FHLB advances, which principally consists of putable (or convertible) instruments that give the FHLB the option at the conversion date (and quarterly thereafter) to put an advance back to us, and are on average higher than current alternative costs of funds. If the FHLB puts an advance back to us, we can choose to prepay the advance without penalty or allow the interest rate on the advance to adjust to three-month LIBOR (London Interbank Offer Rate) at the conversion date (and adjusted quarterly thereafter). We estimate the three-month LIBOR would have to rise in excess of 300 basis points before the FHLB would exercise its option on the majority of the individual advances. We use FHLB advances for both short- and long-term funding. The balances reported at March 31, 2009 and December 31, 2008 are comprised of long-term and short-term advances. Subsequent to quarter end, we elected to prepay $20.0 million of the $67.0 million of outstanding putable advances incurring $251,000 in prepayment penalties as a result which will be expensed in the second quarter in accordance with EITF 96-19. Management has determined the prepayment of these advances will have a net accretive impact on net earnings for 2009 as the prepayment penalties will be fully offset by an increase in net interest income.

Average Balance Sheets. The following tables set forth certain information relating to our average balance sheets and reflect the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are computed on daily average balances. For analytical purposes, net interest margin and net interest spread are adjusted to a taxable equivalent adjustment basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent ("FTE") basis. Loans held for sale and loans no longer accruing interest are included in total loans.

                                                       Three Months Ended March 31,
                                            2009                                         2008
                            Average                      Average        Average                       Average
                            Balance      Interest      Yield/Cost       Balance      Interest       Yield/Cost
                                       (In thousands)                               (In thousands)
ASSETS
Earning assets:
Interest-bearing
deposits with banks        $  26,314     $      66            1.02 %   $   9,095     $      61              2.70 %
Taxable securities            99,393         1,248            5.09        86,118         1,094              5.11
Tax-exempt securities         20,599           332            6.53        13,069           206              6.34
Total loans and fees (1)
(2)                          627,959         8,613            5.56       634,744        10,412              6.60
FHLB and Federal Reserve
stock                          8,472           159            7.59         8,096            99              4.92
Total earning assets         782,737        10,418            5.40       751,122        11,872              6.36

Less: Allowance for loan
losses                        (9,388 )                                    (6,296 )
Non-earning assets:
Cash and due from banks       26,178                                      14,027
Bank premises and
equipment, net                15,070                                      15,202
Other assets                  41,785                                      43,169
Total assets               $ 856,382                                   $ 817,224

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings and other          $ 209,534     $     339            0.66 %   $ 210,172     $     933              1.79 %
Time deposits                285,030         2,357            3.35       260,217         2,905              4.49
Other borrowings              65,720           225            1.39        69,378           472              2.74
FHLB advances                108,450         1,376            5.15       105,099         1,421              5.44
Subordinated debentures       17,000           167            3.98        17,000           289              6.84
Total interest-bearing
liabilities                  685,734         4,464            2.64       661,866         6,020              3.66

Non-interest bearing
liabilities:
  Non-interest demand
deposits                     104,608                                      84,361
  Accrued interest
payable and other
liabilities                    2,755                                       5,234
  Stockholders' equity        63,285                                      65,763
Total liabilities and
stockholders' equity       $ 856,382                                   $ 817,224

Net interest income
(taxable equivalent
basis)                                   $   5,954                                   $   5,852
Less: taxable equivalent
adjustment                                    (114 )                                       (70 )
Net interest income                      $   5,840                                   $   5,782
Net interest spread                                           2.76 %                                        2.70 %
Net interest margin                                           3.08                                          3.13

(1) The amount of direct loan origination cost included in interest on loans was $163 and $148 for the three months ended March 31, 2009 and 2008.

(2) Calculations include non-accruing loans in the average loan amounts outstanding.

Rate/Volume Analysis. The table below illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our 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.

                                                         Three Months Ended
                                                     March 31, 2009 compared to
                                                         Three Months Ended
                                                           March 31, 2008
                                                     Increase/(Decrease) Due to
                                                Total Net
                                                  Change        Volume        Rate
                                                           (In thousands)
Interest income:
Interest-bearing deposits with banks            $        5      $    61     $    (56 )
Taxable securities                                     154          167          (13 )
Tax-exempt securities                                   82           80            2
Total loans and fees                                (1,799 )       (110 )     (1,689 )
FHLB and Federal Reserve stock                          60            5           55
Total increase (decrease) in interest income        (1,498 )        203       (1,701 )

Interest expense:
Savings and other                                     (594 )         (3 )       (591 )
Time deposits                                         (548 )        258         (806 )
Other borrowings                                      (247 )        (24 )       (223 )
FHLB advances                                          (45 )         44          (89 )
Subordinated debentures                               (122 )          -         (122 )
Total increase (decrease) in interest expense       (1,556 )        275       (1,831 )
Increase (decrease) in net interest income      $       58      $   (72 )   $    130

                                PART I - ITEM 2

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES

Allowance and Provision for Loan Losses. Our financial performance depends on
the quality of the loans we originate and management's ability to assess the
degree of risk in existing loans when it determines the allowance for loan
losses. An increase in loan charge-offs or non-performing loans or an inadequate
allowance for loan losses could have an adverse effect on net income. The
allowance is determined based on the application of loss estimates to graded
loans by categories.

Summary of Loan Loss Experience:

                                   Three Months Ended
                                        March 31,
Activity for the period ended:      2009          2008
                                     (In thousands)
Beginning balance                $     9,478     $ 6,316
Charge-offs:
Residential real estate                  (89 )       (19 )
Commercial real estate                     -           -
Construction                          (1,006 )       (21 )
Commercial business                     (374 )      (650 )
Home equity                             (178 )       (21 )
Consumer                                (161 )       (82 )
Total                                 (1,808 )      (793 )

Recoveries:
Residential real estate                   30           -
Commercial real estate                    10           1
Construction                               -           -
Commercial business                       10           3
Home equity                                1           1
Consumer                                  33          29
Total                                     84          34
Net loan charge-offs                  (1,724 )      (759 )

Provision                              1,064         800

Ending balance                   $     8,818     $ 6,357

Provision for loan losses increased to $1.1 million for the three months ended March 31, 2009 compared to $800,000 for the equivalent period in 2008. Net charge-offs during the first quarter in 2009 were $1.7 million, an increase from $759,000 from the same period in 2008. The increase in the provision for loan losses for the first quarter was due to deterioration in the underlying collateral on certain loans during the quarter, an increase in classified credits to $55.7 million as of March 31, 2009 from $44.1 million at December 31, 2008, and an increase in management's allocation for environmental factors. The aforementioned resulted in an increase in the allowance for loan losses as a percentage of loans to 1.43% as of March 31, 2009 from 1.00% as of March 31, 2008 while decreasing from 1.50% as of December 31, 2008. The decrease in the allowance as a percentage of loans was attributable to a large construction real-estate charge-off, which reduced the allowance for losses by $1.0 million which had been fully provided for in previous periods. Assuming the construction real-estate charge-off had not occurred in the first quarter of 2009, the Company's allowance for loan losses to total loans would have increased to 1.60% as of March 31, 2009 due to increases in classified credits and the allocation for environmental factors. 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 increase in the Company's classified credits was concentrated primarily in the least severe classification which did not significantly increase the Company's allocation for probable incurred losses associated with those credits. The Company's internal asset review committee meets on a monthly basis to review the Company's classified credits and determine the appropriate classification given the current circumstances for each problem credit relationship. The committee reviews all relevant information in establishing these classifications including: the financial position of the borrower, payment history, underlying collateral of the loan, loan officer provided updates on the borrower's current status, and any other information deemed significant to the determination of the quality of the relationship. In addition, the Company's Chief Credit Officer reviews the values assigned to the underlying collateral securing classified credits for appropriateness. In particular, the Chief Credit Officer reviews the dates of the appraisals supporting the valuations to determine they are current, and if not, that appropriate adjustments have been made to the values to reflect current economic conditions. The Company continues to see weakness in its construction and commercial real estate loan portfolios and has provided for the probable incurred losses in those portfolios accordingly. The increase in net charge-offs during the three months ended March 31, 2009 was due to a construction real estate charge-off for $1.0 million related to one credit during the quarter. The Company had identified and classified the credit prior to 2009 and had allocated amounts to cover the entire charge-off in previous years. The credit has a remaining balance of $2.5 million which represents the anticipated collateral liquidation value, less costs to sell. The Company continues to closely monitor its loan portfolio to identify any additional problem credits, deterioration in underlying collateral values, and credits requiring further downgrades in accordance with the Company's internal policies. As of March 31, 2009, management has reserved for probable incurred losses within the loan portfolio based on information currently available to the Company.

Non-performing assets. Loans (including impaired loans under the Financial Accounting Standard Board's Statement of Financial Accounting Standards 114 and 118) are placed on non-accrual status when they become past due ninety days or more as to principal or interest, unless they are adequately secured and in the process of collection. When these loans are placed on non-accrual status, all unpaid accrued interest is reversed and the loans remain on non-accrual status until the loan becomes current or the loan is deemed uncollectible and is charged off. We define impaired loans as those loans for which it is probable that all scheduled interest and principal payments will not be received based on the contractual terms of the loan agreement. Impaired loans increased to $22.2 million at March 31, 2009 as compared to $20.2 million at December 31, 2008 due to further downgrades in certain commercial credits and an increase in non-accrual commercial credits. Impaired loans consist of commercial, commercial real estate, and construction real estate credits that are on non-accrual or have been internally classified as "substandard" or "doubtful".

                                                  March 31,
                                                    2009          December 31, 2008
                                                           (In thousands)

Loans on non-accrual status                      $    24,165     $            20,702
Loans past due over 90 days still on accrual               -                       -
Other real estate owned                                  955                   1,147
Total non-performing assets                      $    25,120     $            21,849

Non-performing loans to total loans                     3.93 %                  3.27 %
Non-performing assets to total loans                    4.08                    3.45
Allowance as a percent of non-performing loans         36.49                   45.78
Allowance as a percent of total loans                   1.43                    1.50

Non-interest income. Non-interest income increased by 44.6% to $2.2 million for the three months ended March 31, 2009 compared to $1.5 million in 2008. The increase was primarily due to net gains on sales of investment securities during 2009, offset by a decrease in the change in fair value and cash settlements of interest rate swap. During the first quarter in 2009, the Company sold $30.4 million of investment securities which resulted in a net gain of $773,000; the Company did not sell securities in the first quarter of 2008. The Company was able to sell a portion of its portfolio at a gain and reinvest the proceeds in securities with substantially the same yield and risk profile while extending out slightly further on the yield curve. The proceeds realized from the sale were utilized to purchase securities in the first quarter while the remaining proceeds were used to prepay certain FHLB advances in the second quarter of 2009 (See Note 11 to the Consolidated Financial Statements). The change in fair value and cash settlement of interest rate swap decreased to $0 for the period ended March 31, 2009 from $157,000 for 2008 due to the maturation of the swap agreement in second quarter of 2008. The Company expensed $68,000 for cash settlements and had an unrealized gain of $225,000 in the first quarter of 2008 associated with the swap.

Non-interest expense. Non-interest expense increased to $6.3 million for the three months ended March 31, 2009 from $5.3 million for the equivalent period in 2008 due primarily to increases in salaries and employee benefits, occupancy expense, data processing expense, legal and professional expense, FDIC insurance premiums, and other expenses. Salaries and employee benefits increased by $249,000 from the three month period ended March 31, 2008 due to an increase in the employer portion of insurance premiums, a severance payment to a former employee, and normal recurring pay raises. The Company's full time equivalent employees decreased to 227 as of March 31, 2009 from 241 in 2008 while the expense per full time equivalent increased to $14,200 from $12,300 for the same period in 2008. The decrease in full time equivalent employees is due to attrition of employees whose positions were not filled while the increase in expense per full time equivalent was due to the aforementioned increases in salaries and benefits expense. Occupancy expenses were $623,000 for the three months ended March 31, 2009, an increase of $154,000 from the same period in 2008 as the Company opened a new YCB branch location in the third quarter of 2008 which increased the number of the Company's branch locations to 23 from
22. Also factoring into the increase in occupancy expense was an increase in the property tax assessments from the Company's owned branch locations. Data processing expenses increased by 20.8% to $575,000, primarily because of the conversion of SCSB's to a new core banking data processing system and associated charges to terminate certain related contracts. Legal and professional fees were $321,000 for the first quarter of 2009, an increase of 23.9% from 2008 due to additional legal fees incurred associated with collection efforts of certain loans in the Company's portfolio. FDIC insurance premiums were $288,000 for the period ended March 31, 2009 compared to $16,000 for the same period in 2008 due to a uniform 7 basis point increase in the Company's premium during the first quarter of 2009 and the expiration of a credit granted to SCSB. Effective April 1, 2009, the FDIC is modifying its risk based assessment to incorporate additional risk-based adjustments for unsecured and secured borrowings and brokered deposits and also increasing the base assessment rate for all risk categories. Also, in the first quarter of 2009, the FDIC announced a proposed . . .