SECURITIES AND EXCHANGE COMMISSION
                                  Washington, D.C. 20549
                                       Form 10-K
                      ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
                           THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999       Commission file number 0-15786
                          ------------------                             -------

                                  COMMUNITY BANKS, INC.
--------------------------------------------------------------------------------
                   (Exact names of registrant as specified in its charter)

        Pennsylvania                                        23-2251762
---------------------------------            -----------------------------------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                          Identification No.)

150 Market Street, Millersburg, PA                            17061
----------------------------------------     -----------------------------------
(Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code        (717) 692-4781
                                                    ----------------------------

Securities registered pursuant to Section 12 (b) of the Act:
                                                           Name of each exchange
           Title of each class                             on which registered
           -------------------                             ---------------------

Common Stock, par value $5 per share                     American Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act:       NONE

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 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.
                                      Yes  X         No
                                         -----         -----
As of March 1,  2000,  the  aggregated  market  value  (based on recent  selling
prices)  of  the  voting  stock  of the  registrant  held  by its  nonaffiliates
(5,542,872 shares) was $110,164,581.

Indicate the number of shares outstanding of each registrant's classes of common
stock, as of the latest practical date.
                  6,778,261 shares of common stock outstanding on March 1, 2000

                             DOCUMENTS INCORPORATED BY REFERENCE

   Exhibit  13  contains   portions  of  the  Annual  Report  to  Stockholders
               incorporated by reference into Parts I, II, and III.

Exhibit index is located on page 27, This document contains 32 pages.

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. [ ]



                                   1

<PAGE>



                                                                  PART I
Item 1.  Business:
-----------------

     Community Banks, Inc. (Corporation) is a bank holding company whose banking
subsidiaries are Community Banks, N.A.  (CBNA) and Peoples State Bank  (PSB) and
whose non-banking subsidiaries are Community Banks Investments, Inc.  (CBII) and
Community Banks Life Insurance Company, Inc. (CBLIC)

     The Corporation  conducts a full service  commercial  banking  business and
provides  trust  services in Adams  County,  Dauphin  County,  southern  Luzerne
County,  Northumberland  County,  western Schuylkill County,  Snyder County, and
York County. The Corporation  currently has 32 offices.  There are 70 offices of
commercial banks and savings and loan  associations  within its market area with
which  the  Corporation   competes.   Deposits  of  the  Corporation   represent
approximately  15% of the total deposits in the market area. The Corporation has
2 offices in Adams  County,  8 offices in Dauphin  County,  3 offices in Luzerne
County, 2 offices in Northumberland  County, 10 offices in Schuylkill  County, 1
office in  Snyder  County,  and 6 offices  in York  County.  On March 31,  1998,
Community  Banks,  Inc.  completed  its merger of the Peoples State Bank of East
Berlin.  PSB's  banking  offices  are  located in Adams and York  Counties.  The
transaction was accounted for as a pooling of interests.

     Like other depository  institutions,  the Corporation has been subjected to
competition  from  brokerage  firms,  money market funds,  consumer  finance and
credit card  companies  and other  companies  providing  financial  services and
credit to consumers. As a result of federal legislation, regulatory restrictions
previously  imposed on the Bank with respect to  establishing  money market fund
accounts  have been  eliminated  and the Bank is now better able to compete with
other financial  institutions in its service area with respect to interest rates
paid on time and  savings  deposits,  service  charges on deposit  accounts  and
interest rates charged on loans.

     During 1986 the  Corporation  formed CBLIC to provide credit life insurance
to its consumer  credit  borrowers.  Total premiums earned were $558,000 for the
year ended December 31, 1999.  During 1985 the  Corporation  formed CBII to make
investments  primarily in equity securities of other banks. Total assets of CBII
at December 31, 1999 were $3,852,000.

     The  Corporation  has  approximately  439 full and part-time  employees and
considers its employee relations to be satisfactory.

     Community  Banks,  Inc. is  registered  as a bank holding  company with the
Board  of  Governors  of the  Federal  Reserve  System  in  accordance  with the
requirements  of  the  Bank  Holding  Company  Act of  1956.  It is  subject  to
regulation by the Federal Reserve Board and the Comptroller of the Currency.

     In 1989, the Federal Board issued final risk-based  capital  guidelines for
bank holding  companies  which were phased in through  December  31,  1992.  The
intent of regulatory  capital  guidelines is to measure  capital  adequacy based
upon the  credit  risk of various  assets  and  off-balance  sheet  items.  Risk
categories,  weighted at 0%, 20%, 50% and 100%, are specifically identified. The
sum of the results of each such category is then related to the adjusted capital
account of the  Corporation.  The minimum required capital ratio at December 31,
1999, was 8 percent. The Corporation's December 31, 1999 ratio approximated 12%.
Subsequently, in August 1990 the board announced



                                           2

<PAGE>






approval of capital to total assets (leverage) guidelines. This minimum leverage
ratio  was  set at 4% and  would  apply  only  to  those  banking  organizations
receiving a regulatory  composite 1 rating.  Most banking  organizations will be
required to maintain a leverage  ratio  ranging  from 1 to 2  percentage  points
above minimum standard.  The Corporation's  leverage ratio at December 31, 1999,
approximated  8%.  Risk-based  capital  requirements  replace  previous  capital
guidelines which established minimum primary and total capital requirements.

     CBNA and PSB are also subject to various  regulatory  capital  requirements
administered  by federal and state  banking  agencies.  Failure to meet  minimum
capital  requirements  can initiate  certain  mandatory and possibly  additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect  on  the  Corporation's  financial  statements.  Under  capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
each  subsidiary  bank  must  meet  specific  capital  guidelines  that  involve
quantitative  measures of assets,  liabilities,  and  certain  off-balance-sheet
items as calculated under regulatory accounting  practices.  The capital amounts
and classification are also subject to qualitative  judgements by the regulators
about components risk weightings, and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
requires CBNA and PSB to maintain  minimum  amounts and ratios (set forth in the
table  below) of total and Tier 1 capital  (as  defined in the  regulations)  to
risk-weighted  assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that CBNA and
PSB meet all capital adequacy requirements to which they are subject.


<TABLE>

     The following table summarizes the Corporation's capital adequacy position:

------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                       <C>                               <C>
------------------------------------------------------------------------------------------------------------------------------------
                                                      Tier 1 Capital            Total Risk-Based Capital          Capital Leverage
                                                        Ratio (A)                     Ratio (B)                       Ratio (C)
------------------------------------------------------------------------------------------------------------------------------------

Required Minimum                                           4.0%                          8.0%                           4.0%
Community Banks, N.A.                                     12.4                          13.4                            8.4
Peoples State Bank                                         9.8                          11.1                            7.6
Community Banks, Inc.                                     11.3                          12.4                            8.4

</TABLE>

[FN]
(A) Tier 1 capital divided by year-end  risk-adjusted  assets, as defined by the
risk-based capital guidelines.

(B) Total capital divided by year-end risk-adjusted assets.

(C) Tier 1 capital  divided by average total assets less  disallowed  intangible
assets.
</FN>




                                                         3

<PAGE>












     On   November   12,   1999,   President   Clinton   signed   into  law  the
Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act
of 1999)  which  will,  when  effective  March 11,  2000,  permit  bank  holding
companies to become  financial  holding  companies  and thereby  affiliate  with
securities firms and insurance companies and engage in other activities that are
financial  in nature.  A bank  holding  company may become a  financial  holding
company if each of its subsidiary banks is well capitalized, is well managed and
has at least a  satisfactory  rating under the  Community  Reinvestment  Act, by
filing a declaration  that the bank holding company wishes to become a financial
holding company.  Also effective March 11, 2000, no regulatory  approval will be
required for a financial holding company to acquire a company, other than a bank
or savings  association,  engaged in activities  that are financial in nature or
incidental  to  activities  that are  financial in nature,  as determined by the
Federal  Reserve  Board.  The  Financial  Services   Modernization  Act  defines
"financial in nature" to include;  securities  underwriting,  dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking.  A national bank also may
engage,  subject to limitations on investment,  in activities that are financial
in nature,  other  than  insurance  underwriting,  insurance  company  portfolio
investment,  real  estate  development  and real  estate  investment,  through a
financial subsidiary of the bank, if the bank is well capitalized,  well managed
and has at least a satisfactory  Community Reinvestment Act rating. The specific
effects of the  enactment of the  Financial  Services  Modernization  Act on the
banking  industry in general and on the  Corporation in particular has yet to be
determined  due to the fact that the Financial  Services  Modernization  Act was
only recently adopted.




















                                                 4

<PAGE>


Statistical Data:
----------------



     Pages  5,  21,  and  22 of the  Community  Banks,  Inc.  Annual  report  to
stockholders   dated  December  31,  1999  contain  the  following   information
concerning:

     Financial Highlights,  Average Balances,  Effective Interest  Differential,
 and Interest Yields for the three years ended December 31, 1999.

    Rate/Volume Analysis for the two years ended December 31, 1999.

     Appendix A attached to Part I contains information concerning:

     Return on Equity and Assets for the five years ended December 31, 1999.

     Amortized cost and Estimated  Market Values of Investment  Securities as of
        December 31, 1999, 1998, and 1997.

     Maturity Distribution of Securities as of December 31, 1999 (Market Value).

     Loan Account  Composition as of December 31, 1999,  1998,  1997,  1996, and
1995.

     Maturities and  Sensitivity  to Changes in Interest  Rates for  Commercial,
        Financial, and Agricultural Loans as of December 31, 1999.

     Non-performing  Loans as of December 31, 1999,  1998, 1997, 1996, and 1995.
     Loan Loss Experience for the five years ended December 31, 1999.

     Loans Charged Off and Recovered for the five years ended December 31, 1999.

     Allowance for Loan Losses as of December 31, 1999,  1998,  1997,  1996, and
1995.

     Maturity  Distribution  of Time  Deposits  over $100,000 as of December 31,
1999.

     Maturity Distribution of all Time Deposits as of December 31, 1999.

     Interest Rate Sensitivity as of December 31, 1999.


                                       5

<PAGE>




Item 2.  Properties:
--------------------

     The Corporation owns no real property except through its subsidiary  banks.
CBNA owns the  following  buildings:  150 Market  Street,  Millersburg,  Dauphin
County,  Pennsylvania (the corporate  headquarters);  13-23 South Market Street,
Elizabethville,   Dauphin  County,  Pennsylvania;  3679  Peters  Mountain  Road,
Halifax,  Dauphin County,  Pennsylvania;  906 North River Road, Halifax, Dauphin
County,  Pennsylvania;  800 Peters Mountain Road, Dauphin County,  Pennsylvania;
Main and Market Streets, Lykens, Dauphin County, Pennsylvania; Route 209, Porter
Township,  Schuylkill  County,  Pennsylvania;  29  East  Main  Street,  Tremont,
Schuylkill  County,  Pennsylvania;   Second  and  Carroll  Streets,  St.  Clair,
Schuylkill  County,  Pennsylvania;  Port Carbon Highway,  St. Clair,  Schuylkill
County,  Pennsylvania;  300 East Independence Street,  Shamokin,  Northumberland
County,  Pennsylvania;   Route  61,  R.D.  1,  Orwigsburg,   Schuylkill  County,
Pennsylvania;   One  South   Arch   Street,   Milton,   Northumberland   County,
Pennsylvania;  30 S. Church Street, Hazleton, Luzerne County, Pennsylvania;  702
West Main Street, Valley View, Schuylkill County,  Pennsylvania;  Route 25, East
Main Street,  Valley View, Schuylkill County,  Pennsylvania;  735 Center Street,
Ashland, Schuylkill County, Pennsylvania;  300 Hobart Street, Gordon, Schuylkill
County,  Pennsylvania;  9-11 N. Centre Street,  Pottsville,  Schuylkill  County,
Pennsylvania; One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania; and
2796 Old Post Road,  Linglestown,  Dauphin  County,  Pennsylvania.  In  addition
thereto,  CBNA  leases  an  office  at  Main  Street,  Pillow,  Dauphin  County,
Pennsylvania,  pursuant to a lease which,  with renewal options,  will extend to
the year 2008.  Also,  the Bank leases offices at Route 93,  Conyngham,  Luzerne
County,  Pennsylvania;  77 Airport Road, Hazleton, Luzerne County, Pennsylvania;
6700  Derry  Street,  Rutherford,  Dauphin  County,  Pennsylvania;  and 339 Main
Street, LaVelle, Schuylkill County, Pennsylvania.

     All the buildings used by CBNA are  free-standing  and are used exclusively
for banking  purposes  with the  exception of offices at the Pillow,  St. Clair,
Milton, Pottsville, Hazleton, LaVelle, and Valley View locations.

     CBNA also owns or leases the following properties for the purpose of future
expansion: 390 E. Penn Drive, Enola, Cumberland County, Pennsylvania and 201 St.
Johns Church Road, Camp Hill, Hampden Township, Cumberland County, Pennsylvania.

     PSB owns the following  buildings:  100 E. King Street, East Berlin,  Adams
County, Pennsylvania;  and 3421 Carlisle Road, Dover, York County, Pennsylvania.
In addition thereto,  PSB leases offices at 600 Carlisle Street,  Hanover,  York
County,  Pennsylvania,  pursuant to a lease which,  with renewal  options,  will
extend to the year  2006 and 509  Greenbriar  Road,  Gettysburg,  Adams  County,
Pennsylvania,  pursuant to a lease which,  with renewal options,  will extend to
the year 2029. PSB also owns real property  through its subsidiary,  PSB realty,
at the following  locations:  1191 Eichelberger  Street,  Hanover,  York County,
Pennsylvania;  155 Glen  Drive,  Manchester,  York  County,  Pennsylvania;  1345
Baltimore  Street,  Hanover,  York County,  Pennsylvania;  and 29 N.  Washington
Street, Gettysburg, Adams County, Pennsylvania.

     PSB leases the  following  property  for the  purpose of future  expansion:
Kingston Square, York, York County,Pennsylvania.

     All the buildings used by PSB are  free-standing  and are used  exclusively
 for banking  purposes  with the exception of offices and retail space rented at
 the Carlisle Street, Hanover location.

                                    6

<PAGE>



     From time to time, the subsidiary  banks also acquire real estate by virtue
of  foreclosure  proceedings,  such real  estate is disposed of in the usual and
ordinary course of business as expeditiously as is prudently possible.

Item 3.  Legal Proceedings:
---------------------------

     There are no material pending legal actions,  other than routine litigation
incidental to the business of the  Corporation,  to which the  Corporation  is a
party.

Item 4.  Submission of Matters to a Vote of Security Holders:
-------------------------------------------------------------

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 1999.


<TABLE>


                                                                                                         APPENDIX A
                                                                                                         ----------

                                                       RETURN ON EQUITY AND ASSETS
                                    FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997, 1996, AND 1995
                                    -----------------------------------------------------------------
<S>                                       <C>                 <C>                  <C>                 <C>               <C>
                                             1999                1998                1997                1996                1995
                                             ----                ----                ----                ----                ----

Return on average equity                    15.41%              13.04%              11.49%              11.39%              10.36%

Return on average assets                     1.29%               1.31%               1.16%               1.18%               1.06%

Average equity to average assets             8.35%              10.06%              10.12%              10.36%              10.25%

Dividend payout ratio                       36.80%              40.83%              39.66%              39.02%              42.09%

</TABLE>




                                                              7

<PAGE>










<TABLE>


                                                                                                      APPENDIX A
                                                                                                      ----------
                                                                                                      Continued

                                            AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
                                                               SECURITIES
                                                         (dollars in thousands)
                                                  AT DECEMBER 31, 1999, 1998, AND 1997
                                                  ------------------------------------

                                                                1999                        1998                     1997
                                                        ---------------------       ---------------------   ---------------------
                                                                    Estimated                  Estimated                Estimated
                                                        Amortized     Market        Amortized    Market       Amortized   Market
                                                          Cost        Value           Cost       Value          Cost      Value
                                                        ---------------------       ---------------------   ---------------------
<S>                                                     <C>          <C>           <C>         <C>           <C>         <C>
Mortgage backed U.S. Government agencies                 $ 61,788    $ 58,961       $ 82,887    $ 83,260      $ 84,568   $ 85,137
U.S. Treasury and U.S. Government agencies                132,661     123,919         78,800      79,449        66,940     67,389
Obligations of states and political sub-
   divisions                                               84,778      78,853         85,771      87,676        55,248     56,633
Other securities                                           49,536      50,342         40,858      42,157         7,623     10,125
                                                         --------    --------       --------    --------      --------   --------
   Total                                                 $328,763    $312,075       $288,316    $292,542      $214,379   $219,284
                                                         ========    ========       ========    ========      ========   ========
</TABLE>


<TABLE>

                                                 COMMUNITY BANKS, INC. AND SUBSIDIARIES
                                           MATURITY DISTRIBUTION OF SECURITIES (Market Value)
                                                         (dollars in thousands)
                                                         as of December 31, 1999

                                                             One         Five                                              Weighted
                                                Within     Through      Through      After                   Average       Average
                                               One Year   Five Years   Ten Years   Ten Years    Total        Maturity     Yield (a)
                                              --------------------------------------------------------------------------------------
<S>                                           <C>         <C>          <C>         <C>          <C>           <C>         <C>

U.S. Government and agencies                   $ 2,121     $ 5,447      $56,988    $118,324    $182,880    13 yr. 11 mos.    6.65%
Obligations of states and political
   Subdivisions                                  4,824      11,055        5,962      57,012      78,853    14 yr. 11 mos.    6.61%
Other                                           19,467        ----        2,216      28,659      50,342    15 yr.  3 mos.    4.54%
                                               -------     -------      -------    --------    --------

      Total                                    $26,412     $16,502      $65,166     $203,995   $312,075    14 yr.  6 mos.    6.30%
                                               =======     =======      =======     ========   ========
Percentage of total                               8.5%        5.3%        20.9%        65.3%     100.0%
                                                 =====       =====        =====        =====      =====
Weighted average yield (a)                       4.21%       5.85%        6.87%        6.43%      6.30%
                                                 =====       =====        =====        =====      =====
</TABLE>

[FN]
(a) Weighted  average  yields were  computed on a tax  equivalent  basis using a
federal tax rate of 35%.
</FN>

The  Corporation  monitors  investment  performance  and valuation on an ongoing
basis to evaluate  investment  quality.  An investment  which has  experienced a
decline in market value considered to be other than temporary is written down to
its net realizable  value and the amount of the write down is accounted for as a
realized loss.
                                                          8

<PAGE>

<TABLE>




                                                                                                       APPENDIX A
                                                                                                       ----------
                                                                                                       Continued




                                                        LOAN ACCOUNT COMPOSITION
                                                         (dollars in thousands)
                                                            as of December 31
                                                            -----------------


                                                  1999              1998            1997              1996              1995
                                            ----------------------------------------------------------------------------------------
                                             Amount  Percent   Amount  Percent  Amount  Percent   Amount Percent    Amount Percent
                                             ------  -------   ------  ------   ------  -------   ------ -------    ------ -------
<S>                                         <C>        <C>    <C>       <C>    <C>        <C>     <C>       <C>     <C>       <C>
Commercial, financial and agricultural     $100,970   16.9%   $65,698   12.8%  $ 53,520   11.8%  $ 52,844   12.6%    $45,017  12.3%
Real estate-construction                     14,670     2.5    17,381     3.4     5,553     1.2     5,724     1.4      5,890    1.6
Real estate-mortgage                        362,297    60.8   324,709    63.4   299,529    65.7   268,276    63.8    229,830   62.8
Personal-installment                        109,841    18.4    97,561    19.0    88,046    19.3    87,381    20.8     78,771   21.5
Other                                         8,523     1.4     6,931     1.4     9,182     2.0     5,982     1.4      6,662    1.8
                                           --------   ------  -------   -----  --------  ------   -------  ------    -------  -----
                                            596,301   100.0%  512,280   100.0%  455,830  100.0%   420,207  100.0%    366,170 100.0%
                                           --------           -------          --------           -------            -------
                                                      ======            ======           ======            ======            ======

 Less:
   Unearned discount                         (6,986)          (10,018)          (11,799)          (11,965)           (11,671)
   Reserve for loan losses                   (7,456)           (6,954)           (6,270)           (5,561)            (4,955)
                                           --------          --------          --------          --------            -------
                                           $581,859          $495,308          $437,761          $402,681           $349,544
                                           ========          ========          ========          ========            =======
</TABLE>




The Corporation's loan activity is principally with customers located within the
local market area.  The  Corporation  continues to maintain a  diversified  loan
portfolio and has no  significant  loan  concentration  in any economic  sector.
Changes in loan demand in 1999 resulted in increases in  commercial,  financial,
and  agricultural  loans and  personal-  installment  loans of 53.7% and  12.6%,
respectively.   Real   estate   loans   increased   10.2%   during   this   same
period.Commercial,  financial, and agricultural loans represented 16.9% of total
loans at December 31, 1999 and consist principally of commercial lending secured
by financial assets of businesses including accounts receivable, inventories and
equipment,  and,  in most  cases,  include  liens on real  estate.  Real  estate
construction  and mortgage loans are primarily 1 to 4 family  residential  loans
secured by  residential  properties  within the bank's  market  area.  Personal-
installment  loans  comprised  18.4% of total  loans at  December  31,  1999 and
consist  principally  of secured loans for items such as  automobiles,  property
improvement,  household and other consumer goods.  The Corporation  continues to
sell fixed rate mortgages in the secondary market to avoid  associated  interest
rate risk.  Historically,  relative  credit risk of  commercial,  financial  and
agricultural loans has generally been greater than that of other types of loans.

                                       9

<PAGE>



<TABLE>
                                                                                                       APPENDIX A
                                                                                                       ----------
                                                                                                       Continued







                                            MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
                                            RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL
                                                    AND REAL-ESTATE CONSTRUCTION LOANS
                                                         (dollars in thousands)
                                                        as of December 31, 1999
                                                        -----------------------



                                                                      Maturity Distribution
                                                                      ---------------------
                                                       One Year       One to          Over Five
                                                        Or Less     Five Years          Years             Total
                                                       ---------    ----------        ----------          -----
<S>                                                    <C>          <C>               <C>                 <C>
Commercial, Financial and
   Agricultural                                         $47,264      $38,440           $15,266          $100,970
Real estate-construction                                  5,332        3,320             6,018            14,670
                                                        -------      -------           -------          --------
                                                        $52,596      $41,760           $21,284          $115,640
                                                        =======      =======           =======          ========

                                                                       Interest Sensitivity
                                                                       --------------------

                                                      Variable        Fixed        Total
                                                      --------        -----        -----
<S>                                                    <C>             <C>          <C>
Due in one year or less                               $ 50,303        $ 2,293     $ 52,596
Due after one year                                      54,479          8,565       63,044
                                                      --------        -------     --------
                                                      $104,782        $10,858     $115,640
                                                      ========        =======     ========
</TABLE>


                                                           10

<PAGE>










<TABLE>

                                                                                                       APPENDIX A
                                                                                                       ----------
                                                                                                       Continued
                                                NON-PERFORMING LOANS (a)
                                                ------------------------
                                                 (dollars in thousands)
                                                 ----------------------
                                                   as of December 31
                                                   ------------------

                                               1999             1998              1997             1996             1995
                                               ----             ----              ----             ----             ----
<S>                                           <C>               <C>               <C>              <C>              <C>
Loans past due 90 days or more:
   Commercial, financial and agricultural     $ 146            $  47             $  53            $  20            $ 120
   Mortgages                                    147              353               405              588              558
   Personal installment                          73               34                72              189              239
   Other                                         12                7                21               11              ---
                                              -----            -----             -----            -----          -------
                                                378              441               551              808              917
                                              -----            -----             -----            -----           ------

Loans renegotiated with borrowers               254              248               626              277              494

Loans on which accrual of interest has
been discontinued:
    Commercial, financial and agricultural      435              866               926              791              579
     Mortgages                                3,079            2,282             3,388            3,645            2,346
     Other                                      222              282               300              318              252
                                              -----            -----             -----            -----            -----
                                              3,736            3,430             4,614            4,754            3,177
                                              -----            -----             -----            -----            -----
Other real estate owned                         405              625               866              883              901
                                              -----            -----             -----            -----            -----

Total                                        $4,773           $4,744            $6,657           $6,722           $5,489
                                             ======           ======            ======           ======           ======
</TABLE>
[FN]
     (a)  The  determination  to  discontinue  the  accrual  of interest on non-
performing  loans  is  made  on  the  individual case basis. Such factors as the
character and size of the loan,  quality  of  the  collateral and the historical
creditworthiness of the borrower  and/or guarantors are considered by management
in assessing the collectibility of such amounts.

The  approximate  amount  that would have been  accrued on those loans for which
interest was discontinued in 1999 was $305,000. Interest income from these loans
would have approximated $358,000 in 1998.

The  change in  non-performing  loans is  primarily  a result  of the  impact of
economic  conditions  upon the loan  portfolio.  The  economic  outlook  remains
uncertain.  If the economy in the Corporation's trading area improves this could
have a  positive  impact on  delinquency  trends  and  collectibility  of loans.
However,  the commercial  real estate market in the  Corporation's  trading area
remains stagnant.  The ability of borrowers to liquidate collateral is dependent
upon the demand for  commercial  real estate  projects and a buyer's  ability to
finance commercial real estate projects.

</FN>

                                                                   11

<PAGE>

<TABLE>

                                                                                                       APPENDIX A
                                                                                                       ----------
                                                                                                       Continued
                                                 LOAN LOSS EXPERIENCE
                                                (dollars in thousands)
                              For the years ended December 31, 1999, 1998, 1997, 1996 and 1995
                              ----------------------------------------------------------------
                                                         1999             1998              1997            1996             1995
                                                         ----             ----              ----            ----             ----
<S>                                                     <C>              <C>               <C>             <C>              <C>
Loans at year-end, net of unearned income              $598,315         $502,262         $444,031          $408,242       $354,499
                                                       ========         ========         ========          ========       ========
Average loans balance (a)                              $548,293         $467,094         $421,283          $385,956       $332,630
                                                       ========         ========         ========          ========       ========
Balance, allowance for loan losses,
          January 1                                    $  6,954         $  6,270         $  5,561          $  4,955       $  4,407

Net charge-offs (b)                                        (796)            (780)            (608)             (961)          (530)

Provision for loan losses,                                1,298            1,464            1,317             1,567          1,078
                                                       --------         ---------        --------          --------       --------

Balance, allowance for loan losses,
          December 31                                  $  7,456         $  6,954         $  6,270          $  5,561       $  4,955
                                                       ========         ========         ========          ========       ========
Net charge-offs to loans at year end                       .13%             .16%             .14%              .24%           .15%

Net charge-offs to average loans (a)                       .15              .17              .14               .25            .16


Balance of allowance for loan losses
          to loans at year end                            1.25             1.38             1.41              1.36           1.40

</TABLE>
[FN]
(a)  Averages are a combination of monthly and daily averages.

(b) For detail, see Schedule of Loans Charged Off and Recovered.
</FN>


The allowance for loan losses is based upon management's  continuing  evaluation
of the loan  portfolio.  A review  as to loan  quality,  current  macro-economic
conditions and  delinquency  status is performed at least on a quarterly  basis.
The provision for loan losses is adjusted  quarterly  based upon current review.
The table on page 10 presents an allocation by loan  categories of the allowance
for loan  losses at  December 31 for the last five  years.  In  retrospect,  the
specific allocation in any particular category may prove excessive or inadequate
and  consequently  may be  reallocated in the future to reflect the then current
condition.  Accordingly,  the entire  allowance is available to absorb losses in
any category.

                                                                   12

<PAGE>


                                                                    APPENDIX A
                                                                    ----------
                                                                    Continued



As discussed in the Corporation's  Annual Report,  the Corporation  adopted SFAS
114,  as amended by SFAS 118, on January 1, 1995.  The  adoption of SFAS 114 did
not result in any additional provision for loan losses.

The amount of the allowance  assigned to each component of the loan portfolio is
derived from a combination of factors.  Estimation  methods and assumptions used
in the process are received  periodically  by both management and a committee of
the board of directors. In general, the allowance was not materially affected by
changes in these estimation methods and assumptions during 1999.

Specific  allocations are provided for individual loans which are rated below an
acceptable  standard  by  management.  In  addition,  specific  allocations  are
provided  for  individual  loans  which have been placed on  nonaccrual  status.
Additional   allocations  for  loan  components  are  also  dependent  upon  the
delinquencies  of pools of loans.  Analysis of losses by loan  grouping over the
most recent  three year period also impacts  components  of the  allowance.  The
components  which result from these  processes  are combined and compared to the
relationship  of historical  losses and balances of the  allowance  from a total
portfolio perspective. Any necessary difference is categorized as unallocated.

During 1999 management  deemed it appropriate to reduce the relative  portion of
the total allowance allocated to real  estate-mortgage  loans to 16% from 20% at
year-end  1998.  The  corporation  has  accompanied  the downward  trends in the
relationships of net charge-offs to average loans and non-performing  loans with
a reduction in the relationship of the allowance to total loans.

The provision for loan losses totaled $1,298,000 for the year ended December 31,
1999,  compared to $1,464,000,  $1,317,000,  $1,567,000,  and $1,078,000 for the
years  ended  December  31,  1998,  1997,  1996,  and  1995,  respectively.  The
relationship of the allowance for loan losses to loans at year end  approximated
1.25%  compared to ratios of  1.36% to  1.41% for the  previous four  years.  In
reviewing   the  adequacy  of   the  allowance   for   loan  losses,  management
considered the relationship of nonaccrual loans,  renegotiated loans, other real
estate owned,  and  accruing  loans  contractually  past due 90 days or  more to
total assets.  This relationship  approximated .49%, .56%, .93%, 1.03%, and .99%
at year-end 1999, 1998, 1997, 1996, and 1995, respectively.

                                   13

<PAGE>
<TABLE>

                                                                                             APPENDIX A
                                                                                             ----------
                                                                                             Continued
                                              LOANS CHARGED OFF AND RECOVERED
                                                  (dollars in thousands)
                               for the years ended December 31, 1999, 1998, 1997, 1996, and 1995
                               -----------------------------------------------------------------
                                                         1999             1998              1997            1996             1995
                                                         ----             ----              ----            ----             ----
<S>                                                     <C>              <C>               <C>             <C>              <C>
Loans charged off:
   Commercial, financial and agricultural               $  78            $ 138            $  83           $  165            $ 135
   Real estate-mortgage                                   190              223              361              382              298
   Personal installment                                   883              820              926            1,327              774
   Other                                                   81               77               96               93               78
                                                        -----            -----            -----            -----            -----
Total                                                   1,232            1,258            1,466            1,967            1,285
                                                        -----            -----            -----            -----            -----
Loans recovered:
   Commercial, financial and agricultural                 137               53              428              336              234
   Real estate-mortgage                                    43              104               63              131              136
   Personal installment                                   239              296              343              509              369
   Other                                                   17               25               24               30               16
                                                        -----            -----            -----            -----            -----
Total                                                     436              478              858            1,006              755
                                                        -----            -----            -----            -----            -----
    Net charge-offs                                     $ 796            $ 780            $ 608            $ 961            $ 530
                                                        =====            =====            =====            =====            =====


ALLOCATION OF
                                                       ALLOWANCE FOR LOAN LOSSES*
                                                         (dollars in thousands)
                                                            as of December 31

                                                         1999             1998              1997            1996             1995
                                                         ----             ----              ----            ----             ----
Loans:
   Commercial, financial and agricultural              $2,286            $2,199           $1,663          $1,541           $1,268
    Real estate-construction                                2               ---              ---               2              ---
    Real estate-mortgage                                1,178             1,366            1,780           1,868            1,702
    Installment                                         1,203             1,161            1,458           1,125              841
    Unallocated                                         2,787             2,228            1,369           1,025            1,144
                                                        -----             -----            -----           -----            -----
Balance                                                $7,456            $6,954           $6,270          $5,561           $4,955
                                                       ======            ======           ======          ======           ======
</TABLE>

[FN]
*See Schedule "Loan Account  Composition" for the percent of loan classification
to total loans.
</FN>


                                                                   14

<PAGE>

<TABLE>

                                                                                                       APPENDIX A
                                                                                                       ----------
                                                                                                       Continued

                                                      MATURITY DISTRIBUTION OF TIME
                                                      DEPOSITS OF $100,000 OR MORE
                                                         (dollars in thousands)
                                                         as of December 31, 1999
                                                         -----------------------
                                 <S>                                                      <C>

                                 Remaining to Maturity:
                                 Less than three months                                    $  9,251
                                 Three months to six months                                  11,599
                                 Six months to twelve months                                  9,211
                                 More than twelve months                                     12,360
                                                                                             ------
                                                                                           $ 42,421
                                                                                           ========


                                                      MATURITY DISTRIBUTION OF ALL
                                                              TIME DEPOSITS
                                                         (dollars in thousands)
                                                         as of December 31, 1999
                                                         -----------------------


                          Remaining Maturity:
                              One year or less                                              $224,175
                              After one year through two years                                76,724
                              After two years through three years                             23,939
                              After three years through four years                            30,294
                              After four years through five years                             12,380
                              After five years                                                 4,130
                                                                                            --------
                                                                                            $371,642
                                                                                             =======
</TABLE>


                                                                   15

<PAGE>

                                                                APPENDIX A
                                                                ----------
                                                                Continued



                                INTEREST RATE SENSITIVITY

     The excess of  interest-earning  assets over  interest-bearing  liabilities
which are  expected  to  mature or  reprice  within a given  period is  commonly
referred to as the "GAP" for that  period.  For an  institution  with a positive
GAP, the amount of income earned on its assets  fluctuates more than the cost of
its  liabilities  in  response  to changes in the  prevailing  rates of interest
during  the  period.  Accordingly,  in a period of  decreasing  interest  rates,
institutions with a positive GAP will experience a greater decrease in the yield
on their assets than in the cost of their liabilities.  Conversely,  in a period
of  rising  interest  rates,  institutions  with a  positive  GAP face a greater
increase in the yield on their assets than in the cost of their liabilities.  An
increasing  interest  rate  environment  is  favorable  to  institutions  with a
positive GAP because more of their assets than their  liabilities  adjust during
the  period and, accordingly, the  increase  in  the  yield  of  their assets is
greater  than the increase in the cost of their liabilities.

     The  positive  GAP between the  Corporation's  interest-earning  assets and
interest-bearing  liabilities maturing or repricing within one year approximated
2% of total assets at December 31, 1999.

     Significant  maturity/repricing  assumptions  (based on internal  analysis)
include the presentation of all savings, Money Market, and NOW accounts as being
44% interest rate  sensitive . Equity  securities  are reflected in the shortest
time interval.  Assumed pay downs on  mortgage-backed  securities and loans have
also been included in all time intervals.

     The  following  table sets for the  scheduled  repricing or maturity of the
Corporation's   interest-earning  assets  and  interest-bearing  liabilities  at
December 31, 1999.


















                                         16

<PAGE>


<TABLE>
                                                                                                       APPENDIX A
                                                                                                       ----------
                                                                                                       Continued



Interest Rate Sensitivity
---------------------------------------------------------------------------------------------------------------
At December 31, 1999                   1-90          90-180         180-365         1 year
Dollars in thousands                   days           days           days           or more              Total
---------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>            <C>             <C>              <C>
Assets
Interest-bearing deposits in
   Other banks                         $ 1,789          ----            ----           ----            $ 1,789
Investment securities                   16,543       $ 2,998        $ 26,426       $266,108            312,075
Federal funds sold                       2,050          ----            ----           ----              2,050
Loans, net of unearned income*         264,719        36,355          68,363        219,878            589,315
Loans held for sale                      4,004          ----            ----           ----              4,004
---------------------------------------------------------------------------------------------------------------
Total                                 $289,105       $39,353        $ 94,789       $485,986           $909,233
--------------------------------------------------------- -----------------------------------------------------
Liabilities
Savings                               $ 58,987       $19,616        $ 39,233       $148,628           $266,464
Time                                    58,230        50,542          85,887        134,562            329,221
Time in denominations of
   $100,000 or more                      9,251        11,599           9,211         12,360             42,421
Short-term borrowings                    3,338          ----            ----           ----              3,338
Long-term debt                          15,000        39,000           5,000        138,000            197,000
---------------------------------------------------------------------------------------------------------------
Total                                 $144,806      $120,757        $139,331       $433,550           $838,444
---------------------------------------------------------------------------------------------------------------

Interest Sensitivity Gap
Periodic                              $144,299      $(81,404)       $(44,542)      $ 52,436
Cumulative                                            62,895          18,353         70,789

</TABLE>

[FN]
*Does not include nonaccrual loans.
</FN>





                                                                   17

<PAGE>

                                                                APPENDIX A
                                                                ----------
                                                                Continued


Forward-Looking Statements:
--------------------------

     Certain   statements   in   this   document   may  be   considered   to  be
"forward-looking  statements"  as  that  term is  defined  in the  U.S.  Private
Securities  Litigation  Reform Act of 1995,  such as statements that include the
words  "expect",  "estimate",  "project",   "anticipate",   "should",  "intend",
"probability",   "risk",  "target",  "objective",  and  similar  expressions  or
variations  on  such   expressions.   In  particular,   this  document  includes
forward-looking  statements  relating,  but not  limited  to, the  Corporation's
potential  exposures to various types of market risks such as interest rate risk
and credit risk. Such statements are subject to certain risks and uncertainties.
For example,  certain of the market risk  disclosures  are  dependent on choices
about key model  characteristics  and  assumptions  and are  subject  to various
limitations.  By their nature,  certain of the market risk  disclosures are only
estimates and could be  materially  different  from what actually  occurs in the
future. As a result, actual income gains and losses could materially differ from
those that have been estimated. Other factors that could cause actual results to
differ  materially  from  those  estimated  by  the  forward-looking  statements
contained in  this  document include,  but are not limited to:  general economic
conditions  in market  areas  which the  Corporation  has  significant  business
activities or investments;   the  monetary  and in interest rate policies of the
Board of  Governors  of  the  Federal  Reserve  System;  inflation;   deflation;
unanticipated  turbulence  in  interest  rates;  changes in laws,  environments;
natural  disasters;  the  inability to hedge  certain  risks  economically;  the
adequacy of loan reserves; acquisitions or restructurings' technological changes
in consumer  spending and savings habits;  and the success of the Corporation in
managing the risks involved in the foregoing.

Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------

     Community  Banks,  Inc.  has only a  limited  involvement  with  derivative
financial  instruments and does not use them for trading purposes.  The business
of the  Corporation  and  the  composition  of its  balance  sheet  consists  of
investments  in  interest-earning   assets  (primarily  loans,   mortgage-backed
securities   and   investment   securities)   which  are  primarily   funded  by
interest-bearing   liabilities   (deposits  and   borrowings).   Such  financial
instruments  have varying levels of  sensitivity  to changes in market  interest
rates  resulting in market risk.  Other than loans which are originated and held
for sale, all of the financial instruments of the Corporation are for other than
trading purposes.

     Interest rate sensitivity  results when the maturity or repricing intervals
of interest-earning assets,  interest-bearing liabilities, and off-balance sheet
financial  instruments are different,  creating a risk that changes in the level
of market  interest rates will result in  disproportionate  changes in the value
of, and the net earnings  generated  from,  the  Corporation's  interest-earning
assets,   interest-bearing   liabilities,   and  off-balance   sheets  financial
instruments.  The Corporation's exposure to interest rate sensitivity is managed
primarily through the Corporation's strategy of selecting the types and terms of
interest-earning   assets  and   interest-bearing   liabilities  which  generate
favorable earnings,  while limiting the potential negative effects of changes in
market   interest   rates.   Since   the   Corporation's   primary   source   of
interest-bearing  liabilities is customer  deposits,  it's ability to manage the
types and terms of such deposits may be somewhat limited by customer preferences
in the market areas in which it operates. Borrowings, which include Federal Home
Loan Bank (FHLB) advances and short-term  loans,  subordinated  notes, and other
short-term and long-term borrowings are generally structured with specific terms
which in management's judgement,  when aggregated with the terms for outstanding
deposits and matched with  interest-earning  assets,  mitigate the Corporation's
exposure to interest rate sensitivity.


                                      18

<PAGE>



                                                                APPENDIX A
                                                                ----------
                                                                Continued


     The  rates,   terms  and  interest   rate  indices  of  the   Corporation's
interest-earning assets result primarily from its strategy on investing in loans
and securities (a substantial portion of which have adjustable-rate terms) which
permit the  Corporation  to limit its  exposure  to interest  rate  sensitivity,
together with credit risk, while at the same time achieving a positive  interest
rate spread compared to the cost of interest-bearing liabilities.

Significant Assumptions Utilized in Managing Interest Rate Sensitivity
----------------------------------------------------------------------

     Managing the Corporation's  exposure to interest rate sensitivity  involves
significant   assumptions  about  the  exercise  of  imbedded  options  and  the
relationship of various interest rate indices of certain financial instruments.


Imbedded Options
----------------

     A  substantial  portion  of the  Corporation's  loans  and  mortgage-backed
securities and residential  mortgage loans contain significant  imbedded options
which permit the borrower to prepay the  principal  balance of the loan prior to
maturity  ("prepayments") without penalty. A loan's propensity for prepayment is
dependent  upon a number of factors,  including  the current  interest  rate and
interest rate index (if any) of the loan, the financial  ability of the borrower
to refinance, the economic benefit to be obtained from refinancing, availability
of  refinancing  at attractive  terms,  as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property.  In a changing interest rate environment,  prepayments may increase or
decrease on fixed and  adjustable-rate  loans  pursuant to the current  relative
levels and  expectations of future short and long-term  interest rates.  Since a
significant  portion  of  the  Corporation's  loans  are  variable  rate  loans,
prepayments on such loans generally  increase when long-term interest rates fall
or are at historically  low levels relative to short-term  interest rates making
fixed-rate loans more desirable.

     Investment securities, other than mortgage-backed securities and those with
early call provisions,  generally do not have  significant  imbedded options and
repay  pursuant to specific  terms until  maturity.  While  savings and checking
deposits  generally may be withdrawn upon the customer's  request  without prior
notice, a continuing  relationship  with customers  resulting in future deposits
and  withdrawals  is  generally   predictable  resulting  in  a  dependable  and
uninterrupted  source of funds.  Time deposits  generally have early  withdrawal
penalties,  while term FHLB  borrowings and  subordinated  notes have prepayment
penalties,  which discourage customer withdrawal of time deposits and prepayment
of FHLB borrowings and subordinated notes prior to maturity.

Interest Rate Indices
---------------------

     The  Corporation's  loans  and  mortgage-backed  securities  are  primarily
 indexed to the national interest indices.  When such loans and  mortgage-backed
 securities are funded by interest - bearing liabilities which are determined by
other indices,  usually deposits and FHLB borrowings,  a changing  interest rate
environment may result in different  levels of changes in the indices leading to
disproportionate  changes in the value of, and net earnings  generated from, the
Corporation's  financial instruments.  Each index is unique and is influenced by
different external factors,  therefore,  the historical relationships in various
indices  may not be  indicative  of the  actual  change  which  may  result in a
changing interest rate environment.

                                           19

<PAGE>

                                                                  APPENDIX A
                                                                  ----------
                                                                  Continued


Interest Rate Sensitivity Measurement

In  addition   to   periodic   gap  reports   comparing   the   sensitivity   of
interest-earning assets and interest-bearing  liabilities to changes in interest
rates,   management  also  utilizes  a  quarterly   report  which  measures  the
Corporation's  exposure to interest rate risk. The model  calculates the present
value of  assets,  liabilities  and  equity at current  interest  rates,  and at
hypothetically  higher and lower  interest rates at one percent  intervals.  The
present value of each major  category of financial  instruments is calculated by
the model using  estimated cash flows based on prepayments,  early  withdrawals,
weighted  average  contractual  rates and terms,  and discount rates for similar
financial  instruments.  The resulting  present value of longer term  fixed-rate
financial instruments are more sensitive to change in a higher or lower interest
rate scenario, while adjustable-rate  financial instruments largely reflect only
a change in present value  representing  the difference  between the contractual
and discounted rates until the next interest rate repricing date.

     The  following  table  reflects  the  estimated  present  value of  assets,
liabilities  and  equity  financial  instruments  using the model for  Community
Banks,  Inc. as of December 31, 1999  consolidated  with the  estimated  present
values of other financial  instruments of the  Corporation,  at current interest
rates  and  hypothetically,  higher  and  lower  interest  rates  of one and two
percent.

<TABLE>


                                                                                           Base
                                                           -2%               -1%       Present Value         +1%             +2%
                                                     ------------------------------------------------------------------------------
                                                                                  (dollars in thousands)
<S>                                                    <C>             <C>              <C>              <C>             <C>
            Assets
Cash, interest-bearing time deposits,
    and federal funds sold.......................      $  32,933        $  32,933       $  32,933         $  32,933       $  32,933
Investment securities............................        342,360          328,973         312,075           294,473         277,935
Loans, net of unearned income....................        587,736          582,921         577,458           570,519         563,325
Loans held for sale..............................          4,075            4,042           4,004             3,956           3,906
Other assets.....................................         40,953           40,953          40,953            40,953          40,953
                                                       ---------        ---------       ---------         ---------       ---------

     Total assets................................     $1,008,057         $989,822        $967,423          $942,834        $919,052
                                                      ==========         ========        ========          ========        ========
               Liabilities
Deposits.........................................       $697,605         $694,343        $691,186          $688,129        $685,167
Short-term borrowings............................          3,338            3,338           3,338             3,338           3,338
Long-term debt...................................        209,090          198,913         193,769           192,898         191,397
Other liabilities................................          6,969            6,969           6,969             6,969           6,969
                                                      ----------         --------        --------          --------        --------

     Total liabilities...........................        917,002          903,563          895,262           891,334        886,871
                                                      ----------         --------        ---------         ---------       --------

     Total stockholders' equity..................         91,055           86,259           72,161            51,500         32,181
                                                      ----------         --------        ---------         ---------       --------
     Total liab. and stockholders'
        equity...................................     $1,008,057         $989,822         $967,423          $942,834       $919,052
                                                                         ========        =========         =========       ========
</TABLE>


                                                                   20

<PAGE>



                                 PART II


Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters:
-------  ---------------------------------------------------------------------
          Incorporated  by  reference  is the  information  appearing  under the
heading "Market for the Corporation's Common Stock and Related Securities Holder
Matters"  on page 26 of the  Annual  Report to  Stockholders  for the year ended
December 31, 1999 (hereafter referred to as the "Annual Report").

Item 6.  Selected Financial Data

          Incorporated  by  reference  is the  information  appearing  under the
heading "Financial Highlights" on page 5 of the Annual Report.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations:
--------------
          Incorporated  by  reference  is the  information  appearing  under the
headings   "Rate/Volume   Analysis";   "Average  Balances,   Effective  Interest
Differential and Interest Yields";  and "Management's's  Discussion of Financial
Condition  and  Results  of  Operations"  on pages 21  through  26 of the Annual
Report.

Item 8.  Financial Statements and Supplementary Data:

          The  consolidated  financial  statements,  together  with  the  report
thereon of  PricewaterhouseCoopers  LLP dated January 20, 2000, are incorporated
by references to pages 6 through 20 of the Annual Report.

Item 9.  Disagreements on Accounting and Financial Disclosures:
-------  ------------------------------------------------------

          None.



                                   PART III

Item 10.  Directors and Executive Officers of the Registrant:
--------  ---------------------------------------------------

     The  following  table  sets  forth  the  name and age of each  director  of
Community Banks, Inc. as well as the director's business  experience,  including
occupation  for the past 5 years,  the  period  during  which he has served as a
director of Community  Banks,  N.A.  (Formerly Upper Dauphin National Bank), and
the number and  percentage  of  outstanding  shares of Common  Stock of the Bank
beneficially owned by said directors as of December 31, 1999.

                                        21

<PAGE>


<TABLE>
                                                                                             Percentage
                         Business Experience                          Amount and                   of
                         Including Principal                          Nature of                Outstanding
                         Occupation for the         Director        Beneficial               Common Stock
Name and Age             Past Five Years            Since (1)       Ownership (2)               Owned
-------------            ---------------            ---------       -------------            ------------
<S>                      <C>                        <C>             <C>                      <C>
Ernest L. Lowe           Chairman-CBI/CBNA/           1990              44,348                   .65%
   Age 63                PSB                                               (8)
                         Community Banks, N.A.
                         Prior to 12/31/97
                         Ex. V.P. of CBI

Eddie L. Dunklebarger
   Age 46                President/CEO                1998             125,714                  1.83%
                         CBI/CBNA/PSB                                     (18)
                         Prior to 3/31/98
                         Pres/CEO PSB

Thomas L. Miller         Retired CEO of               1966              67,545                   .99%
   Age 67                CBI & CBNA                                        (9)


Kenneth L. Deibler       Self-Employed                1966              33,653                   .49%
   Age 77                Insurance Broker
                         Elizabethville, PA


Leon E. Kocher           Chairman of the Board        1963              28,565                   .42%
   Age 87                Kocher Enterprises, Inc.
                         Millersburg, PA

Robert W. Rissinger      Sec./Treasurer               1968             255,060                  3.75%
   Age 73                Alvord Polk Tool Co.                          (3) (4)
                         (Cutting Tools)
                         Engle Rissinger Auto Group
                         Millersburg, PA

Allen Shaffer            Attorney-at-Law              1961              44,768                   .66%
   Age 74                Millersburg and                                   (6)
                         Harrisburg, PA
</TABLE>


                                                   22

<PAGE>


<TABLE>
                                                                                              Percentage
                         Business Experience                         Amount and                   of
                         Including Principal                          Nature of               Outstanding
                         Occupation for the         Director         Beneficial               Common Stock
Name and Age             Past Five Years            Since (1)       Ownership (2)                Owned
-------------            ---------------            ---------       -------------             ------------
<S>                      <C>                        <C>             <C>                      <C>
James A. Ulsh            Attorney-at-Law              1977              17,109                    .25%
   Age 53                Mette, Evans &
                         Woodside
                         Harrisburg, PA


Samuel E. Cooper         Retired Superintendent       1992               2,231                    .03%
   Age 66                Warrior Run School
                         District
                         Turbotville, PA

Susan K. Nenstiel        Regional Dir. Of  Dev.       1966                 218                     ---
   Age 48                Lutheran Welfare Serv.
                         Hazleton, PA

Ronald E. Boyer          President,                   1981              23,850                    .35%
   Age 60                Alvord-Polk Tool Co.                              (5)
                         (Manufacturing of Cutting tools)
                         Millersburg, PA.

Peter DeSoto             CEO, J.T. Walker             1981              46,481                    .68%
   Age 60                Industries, Inc.                                 (13)
                         (manufacturing of metal
                         products)
                         Elizabethville, PA

Thomas W. Long           Partner                      1981               9,843                    .14%
   Age 70                Millersburg Hardware
                         Millersburg PA

Donald  L. Miller        President, Miller Bros.      1981              92,403                   1.36%
   Age 70                Dairy
                         Millersburg, PA

Ray N. Leidich           Retired Dentist              1985              70,848                   1.04%
   Age 71                Tremont, PA                                       (7)


</TABLE>


                                                                   23

<PAGE>



<TABLE>
                                                                                           Percentage
                         Business Experience                         Amount and                of
                         Including Principal                          Nature of            Outstanding
                         Occupation for the         Director         Beneficial            Common Stock
Name and Age             Past Five Years            Since (1)       Ownership (2)             Owned
-------------            ---------------            ---------       -------------          ------------
<S>                      <C>                        <C>             <C>                      <C>
John W. Taylor, Jr.      President-Air Brake        1998            20,529                  .30%
   Age 69                & Power Equip. Co.                           (14)

Harry B. Nell            Retired Merchant           1998            33,875                  .50%
   Age 73                                                                                   (15)

Earl L. Mummert          Consulting Actuary         1998            30,664                  .45%
   Age 55                Conrad M. Siegel, Inc/                       (16)

Wayne H. Mummert         Retired U.S. Postal        1998            76,173                 1.12%
   Age 66                Service/Farmer                               (17)

</TABLE>

[FN]
(1) Includes  service as a director of CBNA  (formerly  Upper  Dauphin  National
Bank),  a  wholly-owned  subsidiary of the bank,  prior to 1983 and service as a
director of the bank after 1983.

(2) The  securities  "beneficially  owned" by an  individual  are  determined in
accordance  with the  definition  of  "beneficial  ownership"  set  forth in the
regulations  of the Securities and Exchange  Commission.  Accordingly,  they may
include  securities  owned by or for, among others,  the wife and/or children of
the individual and any other relative who has the same home as such  individual,
as well as other  securities  which  the  individual  has or  shares  voting  or
investment  power or has the right to acquire  under  outstanding  stock options
within 60 days after December 31, 1999.  Beneficial  ownership may be disclaimed
as to certain of the securities.

(3) Includes 6,805 shares owned by Alvord-Polk Tool Co., Inc. the stock of which
is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.

(4) Includes 15,166 shares owned by Engle Ford, Inc., 45,496 shares owned by Mr.
Rissinger's  spouse,  Shirley Rissinger,  and 11,106 shares owned by Engle Ford,
Inc. Profit Sharing Plan.

(5) Includes  6,805 shares owned by  Alvord-Polk  Tool Co.,  Inc.,  the stock of
which is held 50% by Robert W.  Rissinger  and 50% by Ronald E.  Boyer,  and 535
shares owned by Mr. Boyer's wife, Judith Boyer.
</FN>




                                                     24

<PAGE>



[FN]
(6) Includes 7,633 shares owned by Mr. Shaffer's Retirement plan.

(7) Includes 35,424 shares owned by Dr. Leidich's wife, Dolores Leidich.

(8) Includes 192 shares owned by Mr. Lowe's wife, Barbara and 23 shares owned by
Mr. Lowe's son and incentive stock options to acquire 32,107 shares.

(9) Includes  incentive  stock  options to acquire  33,457 shares and 846 in his
IRA.

(10) Includes incentive stock options to acquire 19,828 shares.

(11) Includes  incentive  stock options to acquire  16,751 shares and 153 shares
registered to Mr. Lawley for his minor children.

(12) Includes incentive stock options to acquire 3,511 shares.

(13) Includes 101 shares owned by Mr. DeSoto's  son.

(14) Includes  1,270 shares owned by Mr.  Taylor's  wife,  LouAnn and 908 in his
IRA.

(15)  Includes 848 shares owned by Mr.  Nell's wife,  Helen and stock options to
acquire 2,103 shares.

(16)  Includes  stock  options to acquire  2,103 shares and 19,492 shares in Mr.
Mummert's IRA.

(17)  Includes  stock options to acquire 2,103 shares and 17,671 shares owned by
Mr. Mummert's wife Shirley.

(18) Includes 321 shares owned by Mr. Dunklebarger's wife, Connie, 10,161 shares
owned by Mr.  Dunklebarger's  children,  9,075 shares in his 401(k) plan,  7,607
shares in his IRA and 72,094 stock options (ISO and NQ's) to acquire shares.

(19)  Includes  4,760  shares in his  401(k)  plan and 7,435  (ISO and NQ) stock
options to acquire shares.

(20)  Includes  4,491  shares in his 401(k) plan and 7,861 shares in his IRA and
24,392 stock options to acquire shares.
</FN>

Section 16(a) Beneficial Ownership Reporting Compliance

          In 1999, to the knowledge of Corporation,  all Executive  Officers and
directors timely filed all reports with the Securities and Exchange Commission.


          None of the  directors  or nominee  directors  are  directors of other
companies  with a class of securities  registered  pursuant to Section 12 of the
Securities Exchange Act of 1934.


                                        25

<PAGE>




Executive Officers:
-------------------

           The following  table sets forth the  executive  officers of Community
Banks,  Inc.,  their ages,  their positions with Community  Banks,  Inc. and the
beneficial ownership (as determined in accordance with the rules and regulations
of the  Securities and Exchange  Commission) of Common Stock of the  Corporation
owned by each of such persons as of December 31, 1999.


<TABLE>
                                                                                              Percentage
                         Business Experience                         Amount and                   of
                         Including Principal                          Nature of               Outstanding
                         Occupation for the                          Beneficial               Common Stock
Name and Age             Past Five Years            Term (1)       Ownership (2)                 Owned
-------------            ---------------            ---------       -------------             ------------
<S>                      <C>                        <C>             <C>                      <C>
Ernest L. Lowe           Chairman-CBI/              1985            44,348                  .65%
   Age 63                CBNA/PSB                                      (8)
                         Prior to 12/31/97
                         Ex. V.P. of CBI


Eddie L. Dunklebarger    President/CEO              1998           125,714                 1.83%
   Age 46                CBI/CBNA/PSB                                 (18)
                         Prior to 3/31/98
                         Pres/CEO of PSB

Terry L. Burrows         Executive Vice President   1977            24,686                  .36%
   Age 51                Chief Financial Officer                      (12)

David E. Hawley          Executive Vice President   1975            23,209                  .34%
   Age 61                                                             (10)

Robert W. Lawley         Executive Vice President   1980            16,965                  .25%
   Age 45                                                             (11)

Anthony N. Leo           Executive Vice President   1998            24,488                  .36%
   Age 39                                                             (19)

Jeffrey M. Seibert       Executive Vice President   1998            44,438                  .65%
   Age 40                                                             (20)

</TABLE>

[FN]
(1) Initial year employed in this capacity.
</FN>





                                                                 26

<PAGE>






          The  following is all shares  beneficially  owned by all directors and
executive officers of the Bank as a group:

<TABLE>


                                                                        Amount and Nature
                                                                          of Beneficial
                                                                            Ownership
                                                                            ---------
                                                                                                                   Percent
              Title of Class                                Direct                             Indirect            of Class
              --------------                                ------                             --------            --------
              <S>                                           <C>                                <C>                 <C>
                 Common                                     984,501                            166,357              16.32%

</TABLE>


Item 11.  Executive Compensation:
-------   ----------------------

          Information  regarding  executive  compensation  is omitted  from this
report as the holding  company will file a definitive  proxy  statement  for its
annual  meeting  of  shareholders  to be held May 2, 2000;  and the  information
included therein with respect to this item is incorporated herein by reference.

Pension Plan:
-------------

          CBNA maintains a pension plan for its employees. An employee becomes a
participant  in the pension plan on January 1 or July 1 after  completion of one
year of service (12 continuous  months) and attainment of the age 21 years.  The
cost of the pension is  actuarially  determined  and paid by CBNA. The amount of
monthly  pension is equal to 1.15% of average  monthly pay up to $650, plus .60%
of average  monthly pay in excess of $650,  multiplied by the number of years of
service  completed  by an  employee.  The years of  service  for the  additional
portion are limited to a maximum of 37. Average  monthly pay is based upon the 5
consecutive plan years of highest pay preceding  retirement.  The maximum amount
of annual compensation used in determining  retirement  benefits is $160,000.  A
participant is eligible for early  retirement  after attainment of the age of 60
years and the completion of 5 years of service.  The early retirement benefit is
the actuarial equivalent of the pension accrued to the date of early retirement.
As of December  31, 1999 the  following  officers  have been  credited  with the
following  years of  service:  Ernest L.  Lowe-15  years of  service,  Robert W.
Lawley-24 years of service, and Terry L. Burrows-26 years of service.

In 1999, the Board of Directors  amended the plan so that pension  benefits will
be offset by employer  contributions  to the CBI 401(k)  Plan.  Employees  hired
after  12/31/98  are not  eligible to  participate  in the CBNA Pension Plan The
amounts shown on the following table assumes an annual retirement benefit for an
employee who chose a straight  life annuity and who will retire at age 65. These
amounts are offset for the employer contribution in the 401(k) Plan.







                                                                 27

<PAGE>




<TABLE>

                                                                         PENSION PLAN TABLE
                                                                          Years of Service
------------------------------------------------------------------------------------------------------------------------------------
                                     15                 20                25               30               35                40
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>              <C>                <C>              <C>             <C>
Remuneration
------------

$35,000......................      $  8,486           $11,314          $14,143           $16,971          $19,800          $ 22,138
$55,000......................       $13,736           $18,314          $22,893           $27,471          $32,050          $ 35,778
$75,000......................       $18,986           $25,314          $31,643           $37,971          $44,300          $ 49,418
$95,000......................       $24,236           $32,314          $40,393           $48,471          $56,550          $ 63,058
$115,000.....................       $29,486           $39,314          $49,143           $58,971          $68,800          $ 76,698
$135,000.....................       $34,736           $46,314          $57,893           $69,471          $81,050          $ 90,338
$150,000.....................       $38,673           $51,564          $64,455           $77,346          $90,237          $100,568
$175,000.....................       $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$200,000.....................       $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$225,000.....................       $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$250,000.....................       $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$275,000.....................       $41,298           $55,064          $68,830           $82,596          $96,362          $107,388

</TABLE>


Directors' Compensation:
------------------------

          Each director of CBI is paid a quarterly fee of $750.00.  In addition,
each outside  director  receives a fee of $250.00 for  attendance at the regular
quarterly meetings of the Board of Directors of CBI. Each director who is not an
executive officer also receives $250.00 for attendance at each committee meeting
of CBI.

Item 12.  Security Ownership of Certain Beneficial Owners and Management:
--------  ---------------------------------------------------------------

          Refer to Item 10 on pages 20 through 26.

Item 13.  Certain Relationships and Related Transactions:
--------  -----------------------------------------------

          (a) Transaction with Management and Others
              --------------------------------------

          Incorporated  by  reference  is the  information  appearing in Note 12
(Related  Parties) of Notes to Consolidated  Financial  Statements on page 16 of
the Annual Report.

          (b) Certain Business Relationships
              ------------------------------
     Allen Shaffer,  a director of CBI, is an attorney  practicing in Harrisburg
and Millersburg,  Pennsylvania, who has been retained in the last fiscal year by
CBI and who CBI proposes to retain in the current fiscal year.  James A. Ulsh, a
director of CBI, is a  shareholder/employee  of the law firm of Mette,  Evans, &
Woodside,  Harrisburg,  Pennsylvania,  which CBI has retained in the last fiscal
year and proposes to retain in the current  fiscal year.  Thomas J.  Carlyon,  a
director of CBNA , is partner in the law firm of Carlyon & McNelis,


                                           28

<PAGE>


Hazleton,  Pennsylvania,  which CBI has  retained  in the last  fiscal  year and
proposes to retain in the current  fiscal year.  Earl L. Mummert,  a director of
CBI,  is an  actuarial  consultant  with  Conrad M.  Siegel,  Inc.,  Harrisburg,
Pennsylvania, which provides actuarial services to CBI.

           All loans to  directors  and  their  business  affiliates,  executive
officers and their  immediate  families were made by the subsidiary  bank in the
ordinary  course of business,  at the  subsidiary  bank's  normal  credit terms,
including  interest  rates  and  collateralization  prevailing  at the  time for
comparable  transactions  with other non- related persons,  and do not represent
more than a normal risk of collection.

<TABLE>

                                      PART IV

Item 14.  Exhibits, Financial Statements Schedules and Reports on Form 8-K:
--------  -----------------------------------------------------------------
<S>                                                                       <C>        <C>
                                                                               Reference (page)
                                                                           Form         Annual Report to
(a) (1)    Consolidated Financial Statements                               10-K           Shareholders
           Report of Independent Public                                    ----           ------------
                  accountants                                               ---                20

              Balance Sheets as of December 31, 1999
                  and 1998                                                  ---                 6

              Statements of Income for each of the three years
                  ended December 31, 1999                                   ---                 7

              Statements of Changes in Stockholders' Equity
                 for each of the three years ended December
                 31, 1999.                                                  ---                 8

             Statements of Cash Flows for each of the three
                 years ended December 31, 1999.                             ---                 9

             Notes to Financial Statements                                  ---               10-20

</TABLE>

             All other  schedules are omitted since the required  information is
not applicable or is not present in amounts  sufficient to require submission of
the schedule.
          (3)    Exhibits

                  (3) Articles of  Incorporation  and By-Laws.  Incorporated  by
reference  to the Proxy  Statements  dated April 14, 1987 and April 12, 1988 and
Amendment 2 to Form S-2 dated May 13, 1987.
                (13)  Portions  of  the  Annual   Report  to  Security   Holders
incorporated by reference within this document is filed as part of this report.
                (21) Subsidiaries of the Registrant (See Item 1, pages 2 and 3.)
                (b) The  registrant  did not file on Form 8-K  during the fourth
calendar quarter of the year ending December 31, 1999


                                                         29

<PAGE>




                               CONSENT OF INDEPENDENT ACCOUNTS
                               -------------------------------

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements  on Form  S-8(File  No. 0- 15786 and File No.  33-24908) of Community
Banks,  Inc. of our report  dated  January 20,  2000  relating to the  financial
statements,  which  appears  in the  Annual  Report  to  Shareholders,  which is
incorporated in this Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

One South Market Square
Harrisburg, Pennsylvania
March 24, 2000



















                                               30

<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 Banks, Inc.

                                              By:  /s/ Ernest L. Lowe
                                                 ------------------------
                                                     (Ernest L. Lowe)
                                             Chairman of the Board and Director

Date: March 6, 2000

          Pursuant to the  requirements of the Securities  Exchange Act 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>

                Signature                                   Title                                        Date

        /s/ Terry L. Burrows                         Ex. Vice President and                             2/8/00
--------------------------------------               Chief Financial Officer
            (Terry L. Burrows)

        /s/ Ronald E. Boyer           .              Director                                           2/8/00
--------------------------------------
            (Ronald E. Boyer)

        /s/ Samuel E. Cooper                         Director                                           2/8/00
--------------------------------------
            (Samuel E. Cooper)

        /s/ Kenneth L. Deibler                       Director                                           2/8/00
--------------------------------------
            (Kenneth L. Deibler)

        /s/ Eddie L. Dunklebarger                    President & CEO and                                2/8/00
--------------------------------------               Director
            (Eddie L. Dunklebarger)

        /s/ Leon E. Kocher                           Director                                           2/8/00
--------------------------------------
            (Leon E. Kocher)

        /s/ Ray N. Leidich                           Director                                           2/8/00
--------------------------------------
            (Ray N. Leidich)

        /s/ Thomas W. Long                           Director                                           2/8/00
--------------------------------------
            (Thomas W. Long)

        /s/ Donald L. Miller                         Director                                           2/8/00
--------------------------------------
            (Donald L. Miller)

</TABLE>


                                        31
<PAGE>

<TABLE>
<S>                                                  <C>                                                <C>

        /s/ Thomas L. Miller                         Director                                           2/8/00
--------------------------------------
            (Thomas L. Miller)

        /s/ Earl L. Mummert                          Director                                           2/8/00
--------------------------------------
            (Earl L. Mummert )

        /s/ Wayne H. Mummert                         Director                                           2/8/00
--------------------------------------
            (Wayne H. Mummert)

        /s/ Susan K. Nenstiel                        Director                                           2/8/00
--------------------------------------
            (Susan K. Nenstiel)

        /s/ Robert W. Rissinger                      Director                                           2/8/00
--------------------------------------
            (Robert W. Rissinger)

        /s/ Allen Shaffer                            Director                                           2/8/00
--------------------------------------
            (Allen Shaffer)

        /s/ John W. Taylor, Jr.                      Director                                           2/8/00
--------------------------------------
            (John W. Taylor, Jr.)

        /s/ James A. Ulsh                            Director                                           2/8/00
--------------------------------------
            (James A. Ulsh)


</TABLE>











                                                                 32

<PAGE>





                  Report of Independent Accountants


Board of Directors and Shareholders
Community Banks, Inc.
Millersburg, Pennsylvania


In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows  present  fairly,  in all material  respects,  the  financial  position of
Community Banks,  Inc.  (Corporation)  and its subsidiaries at December 31, 1999
and 1998,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1999,  in  conformity  with
accounting  principles  generally accepted in the United States. These financial
statements  are  the  responsibility  of  the  Corporation's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing standards  generally accepted in the United States,  which 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,   assessing  the  accounting  principles  used  and
significant  estimates made by management,  and evaluating the overall financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for the opinion expressed above.



                             PRICEWATERHOUSECOOPERS, L.L.P


One South Market Square
Harrisburg, PA 17101
January 20, 2000



<PAGE>




Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 1999 and 1998
(dollars in thousands except per share data)

<TABLE>


                                                                          1999         1998
                                                                         --------------------
<S>                                                                      <C>           <C>
ASSETS

Cash and due from banks..............................................   $ 29,094     $ 25,036
Interest-bearing time deposits in other banks........................      1,789        1,258
Investment securities, available for sale (market value).............    312,075      292,542
Federal funds sold...................................................      2,050        2,208
Loans................................................................    596,301      512,280
Less:    Unearned income.............................................     (6,986)     (10,018)
         Allowance for loan losses...................................     (7,456)      (6,954)
                                                                        ---------    ---------
         Net loans...................................................    581,859      495,308
Premises and equipment, net..........................................     15,385       14,203
Goodwill.............................................................        424          665
Other real estate owned..............................................        405          625
Loans held for sale..................................................      4,004        3,319
Accrued interest receivable and other assets.........................     24,739       16,510
                                                                        --------     ---------
     Total assets....................................................   $971,824     $851,674
                                                                        ========     =========

LIABILITIES

Deposits:
     Demand (Non-interest bearing)...................................   $ 55,330     $ 50,038
     Savings.........................................................    266,464      254,316
     Time............................................................    329,221      265,884
     Time in denominations of $100,000 or more.......................     42,421       25,667
                                                                        --------     --------
     Total deposits..................................................    693,436      595,905
Short-term borrowings................................................      3,338        7,910
Long-term debt.......................................................    197,000      161,000
Accrued interest payable and other liabilities.......................      6,969        7,983
                                                                        --------     --------
     Total liabilities...............................................    900,743      772,798
                                                                        --------     --------

STOCKHOLDERS' EQUITY

Preferred stock, no par value;
     500,000 shares authorized;
     no shares issued and outstanding................................        ---         ---
Common stock,  $5.00 par value; 20,000,000 shares
     authorized; 6,976,000  and 6,631,000 shares
     issued in 1999 and 1998, respectively...........................     34,878      33,157
Surplus..............................................................     24,259      17,989
Retained earnings....................................................     26,379      27,023
Accumulated other comprehensive income (loss), net
     of tax (benefit) of  $(5,841,000) and $1,437,000,
     respectively....................................................    (10,847)      2,789
Less: Treasury stock of 175,000  and 105,000
     shares at cost..................................................     (3,588)     (2,082)
                                                                         --------     -------
     Total stockholders' equity......................................     71,081      78,876
                                                                         --------     -------
     Total liabilities and stockholders' equity......................   $971,824    $851,674
                                                                        ========    ========

</TABLE>

[FN]
All periods reflect the combined data of Community Banks, Inc. and Peoples State
Bank. The accompanying notes are an integral part of the consolidated  financial
statements.
</FN>


<PAGE>




Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998, 1997
(dollars in thousands except per share data)

<TABLE>

                                                                          1999                  1998                  1997
                                                                        ----------------------------------------------------
<S>                                                                     <C>                   <C>                   <C>
Interest income:
     Interest and fees on loans......................................   $46,405               $41,306               $38,095
     Interest and dividends on investment securities:
         Taxable.....................................................    14,844                11,325                11,382
         Exempt from federal income tax..............................     4,709                 3,795                 2,422
     Other interest income...........................................        78                    80                    84
     Fed funds interest..............................................       228                   494                   304
                                                                        -------               -------               -------
         Total interest income.......................................    66,264                57,000                52,287
                                                                        -------               -------               -------

Interest expense:
     Interest on deposits:
         Savings.....................................................     5,575                 5,479                 5,556
         Time........................................................    15,501                13,459                13,420
         Time in denominations of $100,000 or more...................     1,914                 1,580                 1,578
     Interest on short-term borrowings and
         long-term debt..............................................     7,670                 4,975                 2,627
     Fed funds purchased and repo interest...........................     1,553                 1,394                 1,242
                                                                         ------                ------                ------
         Total interest expense......................................    32,213                26,887                24,423
                                                                         ------                ------                ------
         Net interest income.........................................    34,051                30,113                27,864
Provision for loan losses............................................     1,298                 1,464                 1,317
                                                                         ------                ------                ------
         Net interest income after provision for
           loan losses...............................................    32,753                28,649                26,547
                                                                         ------                ------                ------

Other income:
     Trust department income.........................................       458                   302                   317
     Service charges on deposit accounts.............................     2,077                 1,584                 1,338
     Other service charges, commissions and fees.....................       984                   731                   627
     Investment security gains.......................................       251                   575                   770
     Income on insurance premiums....................................       710                   661                   576
     Gains on mortgage sales.........................................       607                   634                   283
     Other income....................................................       581                   473                   318
                                                                          -----                 -----                 -----
         Total other income..........................................     5,668                 4,960                 4,229
                                                                          -----                 -----                 -----

Other expenses:
     Salaries and employee benefits..................................    12,436                10,380                 9,679
     Net occupancy expense...........................................     3,377                 3,202                 2,797
     Operating expenses of insurance subsidiary......................       497                   472                   365
     Other operating expense.........................................     6,627                 5,971                 6,519
                                                                         -------               ------                ------
         Total other expenses........................................    22,937                20,025                19,360
                                                                         -------               ------                ------
         Income before income taxes..................................    15,484                13,584                11,416
Provision for income taxes...........................................     3,681                 3,534                 3,491
                                                                         -------               ------                ------
         Net income..................................................    $11,803              $10,050               $ 7,925
                                                                         =======              =======               =======

Basic earnings per share.............................................1]   $ 1.73               $ 1.47                $ 1.16
                                                                          ======               ======                ======

Diluted earnings per share...........................................1]   $ 1.70               $ 1.43                $ 1.13
                                                                          ======               ======                ======

</TABLE>

[FN]
1] Per share data for all periods has been restated to reflect  stock  dividends
and splits.
All periods reflect the combined data of Community Banks, Inc. and Peoples State
Bank. The accompanying notes are an integral part of the consolidated  financial
statements.
</FN>



<PAGE>



Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended  December 31,  1999,  1998,  and 1997
(dollars in thousands except per share data)

<TABLE>

                                                -----------------------------------------------------------------------------------
                                                                                        Accumulated
                                                                                           Other                         Total
                                                  Common                  Retained      Comprehensive    Treasury     Stockholders'
                                                  Stock       Surplus     Earnings         Income          Stock         Equity
                                                -----------------------------------------------------------------------------------
<S>                                               <C>        <C>       <C>                <C>              <C>        <C>

Balance, December 31, 1996...................... $20,933      $21,645      $21,756         $  166         $ (421)        $64,079
     Comprehensive income:
         Net income.............................                             7,925                                         7,925
         Change in unrealized gain (loss) on
         securities, net of tax of $1,582 and
         reclassification adjustment of $770                                                3,071                          3,071
                                                                                                                         -------
         Total comprehensive income.............                                                                          10,996
Cash dividends ($.46 per share).................                            (3,143)                                       (3,143)
5% stock dividend (145,000 shares)..............     723        3,905       (4,628)
Purchases of treasury stock (23,000 shares).....                                                            (695)           (695)
Issuance of additional shares (74,000 shares)...     372        3,095         (691)                                        2,776
                                                 -------     --------      -------         ------          -----         -------

Balance, December 31, 1997......................  22,028       28,645       21,219          3,237         (1,116)         74,013
     Comprehensive income:
         Net income.............................                            10,050                                        10,050
         Change in unrealized gain (loss) on
         securities, net of tax of $(231) and
         reclassification adjustment of $575                                                 (448)                          (448)
                                                                                                                         -------
         Total comprehensive income.............                                                                           9,602
Cash dividends ($.59 per share) ................                            (4,103)                                       (4,103)
3 for 2 stock split (2,205,000 shares)..........  11,024      (11,024)
Purchases of treasury stock (40,000 shares).....                                                            (966)           (966)
Issuance of additional shares (21,000 shares)...     105          368         (143)                                          330
                                                  ------      -------       ------         ------        -------         -------

Balance, December 31, 1998......................  33,157       17,989       27,023          2,789         (2,082)         78,876
     Comprehensive income:
         Net income.............................                            11,803                                        11,803
         Change in unrealized gain (loss) on
         securities, net of tax of $(7,278) and
         reclassification adjustment of $251                                              (13,636)                       (13,636)
                                                                                                                         -------
         Total comprehensive income (loss)......                                                                          (1,833)
Cash dividends ($.63 per share).................                            (4,343)                                       (4,343)
5% stock dividend (323,000 shares)..............   1,616        6,080       (7,696)
Purchases of treasury stock (82,000 shares).....                                                          (1,885)         (1,885)
Issuance of additional shares (21,000 shares)...     105          190         (408)                          379             266
                                                 -------      -------      -------        -------        -------         -------

Balance, December 31, 1999...................... $34,878      $24,259      $26,379       $(10,847)       $(3,588)        $71,081
                                                 =======      =======      =======       ========        =======         =======
</TABLE>

[FN]
Per share data for all periods has been restated to reflect stock  dividends and
splits.  All periods  reflect the  combined  data of Community  Banks,  Inc. and
Peoples  State  Bank.  The  accompanying  notes  are  an  integral  part  of the
consolidated financial statements.
</FN>


<PAGE>



<TABLE>

Community Banks, Inc and Subsidiaries
CONSOLIDATED  STATEMENTS  OF CASH FLOWS
For the Years Ended  December  31, 1999, 1998, and 1997
(in thousands)

                                                                          ---------------------------------------------------
                                                                           1999                   1998                  1997
                                                                          ---------------------------------------------------
<S>                                                                      <C>                    <C>                   <C>
Operating Activities:
     Net income.................................................         $11,803                $10,050               $ 7,925
     Adjustments to reconcile net income to net
         cash provided by operating activities:
         Provision for loan losses..............................           1,298                  1,464                 1,317
         Provision for depreciation and amortization............           1,706                  1,656                 1,450
         Amortization of goodwill...............................             241                    241                   241
         Investment security gains..............................            (251)                  (575)                 (770)
         Loans originated for sale..............................         (33,285)               (38,348)              (14,017)
         Proceeds from sales of loans...........................          33,207                 38,304                16,281
         Gains on mortgage sales................................            (607)                  (634)                 (283)
         Change in other assets, net............................          (1,587)                (3,769)                 (456)
         Increase in accrued interest payable and other
           liabilities, net.....................................             423                    340                   781
                                                                         -------                -------               -------
              Net cash provided by operating activities.........          12,948                  8,729                12,469
                                                                         -------                -------               -------

Investing Activities:
     Net decrease (increase) in interest-bearing time
       deposits in other banks..................................            (531)                 1,148                  (900)
     Proceeds from sales of investment securities...............          38,136                 25,310                30,525
     Proceeds from maturities of investment securities..........          26,984                 80,425                44,612
     Purchases of investment securities.........................        (105,316)              (179,097)              (94,995)
     Net increase in total loans................................         (88,430)               (59,991)              (36,380)
     Net increase in premises and equipment.....................          (2,888)                (1,896)               (3,445)
                                                                        --------               --------               -------
              Net cash used in investing activities.............        (132,045)              (134,101)              (60,583)
                                                                        --------               --------              --------

Financing Activities:
     Net increase in total deposits.............................          97,531                 46,150                27,153
     Net increase (decrease) in short-term borrowings...........          (4,572)                (2,630)                7,439
     Proceeds from issuance of long-term debt...................          40,000                 88,720                25,000
     Repayment of long-term debt................................          (4,000)                (5,000)               (4,000)
     Cash dividends.............................................          (4,343)                (4,103)               (3,143)
     Purchases of treasury stock................................          (1,885)                  (966)                 (695)
     Proceeds from issuance of common stock.....................             266                    330                 2,776
                                                                        --------               --------               -------
              Net cash provided by financing activities.........         122,997                122,501                54,530
                                                                        --------               --------               -------
              Increase (decrease) in cash and cash equivalents..           3,900                 (2,871)                6,416

Cash and cash equivalents at beginning of year..................          27,244                 30,115                23,699
                                                                        --------               --------               -------
Cash and cash equivalents at end of year........................         $31,144                $27,244               $30,115
                                                                        ========               ========               =======
</TABLE>


[FN]
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.  All periods reflect the combined data of Community Banks,  Inc. and
Peoples State Bank.
</FN>





<PAGE>




Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization and Basis of Presentation:
----------------------------------------------

     Community  Banks,  Inc.  (Corporation)  is a  bank  holding  company  whose
wholly-owned  subsidiaries  include Community Banks, N.A. (CBNA),  Peoples State
Bank (PSB),  Community Banks  Investments,  Inc. (CBII) and Community Banks Life
Insurance Company (CBLIC). All significant  intercompany  transactions have been
eliminated.  The Corporation operates through its main office in Millersburg and
through  32  branch  banking   offices   located  in  Dauphin,   Northumberland,
Schuylkill, Luzerne, Snyder, Adams, and York Counties in Pennsylvania. Community
Banks, Inc.'s primary source of revenue is derived from loans to customers,  who
are predominantly middle-income individuals.

2.   Summary of Significant Accounting Policies:
------------------------------------------------

     The more significant accounting policies of the Corporation are:

                                Investment Securities:
     The   Corporation   classifies   debt  and  equity   securities  as  either
"held-to-maturity,"  "available-for-sale,"  or "trading."  Investments for which
management  has the intent,  and the  Corporation  has the  ability,  to hold to
maturity are carried at the lower of cost or market adjusted for amortization of
premium and accretion of discount.  Amortization  and  accretion are  calculated
principally on the interest method. Securities bought and held primarily for the
purpose  of  selling  them in the near  term are  classified  as  "trading"  and
reported  at fair value.  Changes in  unrealized  gains and losses on  "trading"
securities are recognized in the Consolidated  Statements of Income. At December
31, 1999 and 1998, there were no securities  identified as "held-to-maturity" or
"trading."  All other  securities  are  classified as  "available-for-sale"  and
reported  at  fair   value.   Changes  in   unrealized   gains  and  losses  for
"available-for-sale"  securities,  net of  applicable  taxes,  are recorded as a
component of shareholders' equity.

     Securities   classified   as   "available-for-sale"   include   investments
management intends to use as part of its  asset/liability  management  strategy,
and that  may be sold in  response  to  changes  in  interest  rates,  resultant
prepayment  risk and other  factors.  Realized  gains and  losses on the sale of
securities  are  recognized  using the  specific  identification  method and are
included in Other Income in the Consolidated Statements of Income.

                                Allowance for Loan Losses:
     The Corporation  maintains an allowance for loan losses at an amount which,
in management's judgement, should be adequate to absorb losses on existing loans
that  may  become  uncollectible.  Management's  judgement  in  determining  the
adequacy of the  allowance  is based on  evaluations  of the  collectibility  of
loans.  The evaluations take into  consideration  such factors as changes in the
nature and volume of the loan portfolio,  current  economic  conditions that may
affect the borrowers'  ability to pay, overall  portfolio  quality and review of
specific problem loans.

                                Premises and Equipment:
     Premises and equipment are stated at cost, less  accumulated  depreciation.
Depreciation is calculated using accelerated and straight-line  methods over the
estimated  useful lives of the assets.  Maintenance  and repairs are expensed as
incurred,  while major additions and improvements are capitalized.  Gain or loss
on retirement or disposal of individual  assets is recorded as income or expense
in the period of retirement or disposal.

                                        Goodwill:
     Goodwill,   which   represents  the  excess  of  purchase  price  including
acquisition  costs over the fair market value of net assets  acquired  under the
purchase  method of  accounting,  is amortized on a straight  line basis over 15
years.

                                      Pension Plan:
     The Corporation has a noncontributory defined benefit pension plan covering
substantially all CBNA employees.  Pension costs are funded currently subject to
the full funding  limitation  imposed under federal income tax regulations.  The
defined  benefit pension plan was amended during 1999 to disallow the admittance
of any future  participants into the plan;  however,  previous plan participants
are still accruing  benefits under the plan. The Corporation  maintains a 401(k)
savings

<PAGE>




plan covering  substantially  all employees  which allows  employees to invest a
percentage  of their  earnings,  matched to a certain  amount  specified  by the
Corporation.  Contributions  to the savings  plan which are included in salaries
and  benefits  expense  amounted  to $645,000  in 1999,  $212,000  in 1998,  and
$175,000 in 1997.

                                       Income Taxes:
     Deferred  income taxes are accounted for by the liability  method,  wherein
deferred tax assets and liabilities  are calculated on the  differences  between
the basis of assets and liabilities for financial  statement purposes versus tax
purposes (temporary  differences) using enacted tax rates in effect for the year
in which the differences are expected to reverse.  Tax expense in the statements
of income is equal to the sum of taxes currently  payable,  including the effect
of the  alternative  minimum  tax, if any,  plus an amount  necessary  to adjust
deferred tax assets and  liabilities to an amount equal to period-end  temporary
differences at prevailing tax rates. (See Note 10).

                                Interest Income on Loans:
     Interest income on commercial,  consumer, and mortgage loans is recorded on
the interest method. Nonaccrual loans are those on which the accrual of interest
has ceased and where all  previously  accrued and unpaid  interest is  reversed.
Loans, other than consumer loans, are placed on nonaccrual status when principal
or interest is past due 90 days or more and the  collateral may be inadequate to
recover principal and interest, or immediately, if in the opinion of management,
full  collection  is  doubtful.  Generally,  the  uncollateralized  portions  of
consumer loans past due 90 days or more are  charged-off.  Interest  accrued but
not collected as of the date of placement on  nonaccrual  status is reversed and
charged  against current  income.  Subsequent cash payments  received either are
applied to the  outstanding  principal  balance or recorded as interest  income,
depending  upon  management's  assessment  of  the  ultimate  collectibility  of
principal and  interest.  (See also Note 5). Loan  origination  fees and certain
direct  origination costs are capitalized and recognized as an adjustment of the
yield on the related loan.

                                Other Real Estate Owned:
     Real estate  acquired  through  foreclosure  is carried at the lower of the
recorded amount of the loan for which the foreclosed  property previously served
as  collateral or the current  appraised  value of the property at transfer date
less estimated  selling cost.  Prior to foreclosure,  the recorded amount of the
loan is written down, if necessary, to the appraised value of the real estate to
be acquired by charging the allowance for loan losses.  During 1999,  1998,  and
1997 non-cash  transactions  related to real estate acquired through foreclosure
totalled $581,000, $980,000, and $1,163,000, respectively.

     Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of real estate acquired through foreclosure are credited or
charged to noninterest  expense.  Costs of maintaining and operating  foreclosed
property are expensed as incurred. Expenditures to improve foreclosed properties
are capitalized only if expected to be recovered; otherwise, they are expensed.

                                Statement of Cash Flows:
     Cash and cash  equivalents  included  cash and due from  banks and  federal
funds sold. The Corporation  made cash payments of $3,805,000,  $4,436,000,  and
$3,071,000, and $31,786,000,  $26,011,000,  and $24,085,000 for income taxes and
interest, respectively, in 1999, 1998, and 1997.



<PAGE>




                         Recent Accounting Pronouncements:
       During 1998, the Corporation  adopted  Statement of Financial  Accounting
Standards  No. 130,  "Comprehensive  Income" (SFAS No. 130),  which  established
standards  for the  reporting and  disclosure  of  comprehensive  income and its
components (revenues,  expenses,  gains, and losses). SFAS 130 requires that all
items  required to be  recognized  under  accounting  standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
a reclassification  adjustment for net realized investment gains included in net
income of $251,000,  $575,000,  and  $770,000  for the years ended  December 31,
1999, 1998, and 1997,  respectively.  The new standard  requires only additional
disclosures  in the  consolidated  financial  statement:  it does not affect the
Corporation's financial position of results of operation.

     During 1998, the Corporation also adopted Statement of Financial Accounting
Standards   No.  132,   "Employers'   Disclosures   about   Pensions  and  Other
Postretirement  Benefits" (SFAS No. 132), which revises  employers'  disclosures
about pensions and other  postretirement  benefit  plans.  It  standardizes  the
disclosure  requirement  for pensions and other  postretirement  benefits to the
extent practicable,  requires  additional  information on changes in the benefit
obligations  and fair  values  of plan  assets  that will  facilitate  financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous pronouncements.

     The  Financial  Accounting  Standards  Board  (FASB)  issued  Statement  of
Financial  Accounting  Standards  (SFAS) No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities",  as amended by SFAS 137,  "Accounting for
Derivative Instruments and Hedging  Activities-Deferral of the Effective Date of
FASB Statement No. 133." SFAS 133 establishes standards for recording derivative
financial  instruments on the balance sheet at their fair value.  This Statement
requires  changes in the fair value of  derivatives  be recorded  each period in
current  earnings  or  other  comprehensive  income,   depending  on  whether  a
derivative is designated as part of a hedge  transaction and, if it is, the type
of hedge  transaction.  As amended , this  Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.  Management  anticipates
that  the  adoption  of  SFAS  133  will  not  have  a  material  effect  on the
Corporation's financial condition or results of operations.

     The  Financial  Accounting  Standards  Board issued  Statement of Financial
Standards  No.  131,  Disclosure  About  Segments of an  Enterprise  and Related
Information"  (SFAS 131) in 1997. SFAS 131 establishes  standards for disclosure
about products,  services,  geographic  areas, and major customers.  SFAS 131 is
effective for fiscal years  beginning  after  December 15, 1997.  Management has
reviewed SFAS 131 and determined  that the  Corporation  only has one qualifying
segment and no additional disclosure is required.

     SFAS 134  "Accounting  for  Mortgage-Backed  Securities  Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
requires that after a securitization  of mortgage loans held for sale, an entity
engaged in mortgage banking  activities  classify the resulting  mortgage-backed
securities or other retained interest based on its ability and intent to sell or
hold those investments. The Statement was effective for the first fiscal quarter
of 1999 and had no effect as the  Corporation  has not  securitized any mortgage
loans.

         Use of Estimates in the Preparation of Financial Statements:
     The  preparation  of financial  statements  in  accordance  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and reported  amounts of revenues and expenses  during the reporting
period. Actual results could differ from those estimates.


<PAGE>



<TABLE>

3.   Investment Securities:
--------------------------

     The  amortized  cost and  market  value  of all  investment  securities  at
December 31, 1999 and 1998 are as follows:

                                      ----------------------------------------------------------------------------------------------
                                                          1999                                              1998
                                      ----------------------------------------------------------------------------------------------
                                                   Gross        Gross                                Gross        Gross
                                      Amortized  Unrealized   Unrealized    Market      Amortized  Unrealized   Unrealized    Market
                                         Cost      Gains        Losses      Value         Cost       Gains        Losses      Value
                                      ----------------------------------------------------------------------------------------------
                                                                               (in thousands)

<S>                                   <C>         <C>         <C>           <C>         <C>        <C>          <C>           <C>
U.S. government corporations and
  agencies..........................  $132,661     $  336     $ (9,078)      $123,919   $ 78,800   $  845      $  (196)     $ 79,449
Mortgage-backed U.S. government
  agencies..........................    61,788         40       (2,867)        58,961     82,887      568         (195)       83,260
Obligations of states and political
  subdivisions......................    84,778        214       (6,139)        78,853     85,771    2,211         (306)       87,676
Corporate securities................    31,739        333         (196)        31,876     27,574      225         (340)       27,459
Equity securities...................    17,797      1,015         (346)        18,466     13,284    1,565         (151)       14,698
                                      --------     ------     --------       --------   --------   ------       ------      --------

      Total.........................  $328,763     $1,938     $(18,626)      $312,075   $288,316   $5,414      $(1,188)     $292,542
                                      ========     ======     ========       ========   ========   ======      =======      ========
</TABLE>

[FN]
      The  amortized  cost and  market  value of all  investment  securities  at
December 31, 1999 by contractual maturity,  are shown below. Expected maturities
will differ from contractual  maturities because borrowers may have the right to
call or repay obligations with or without call or prepayment penalties.
</FN>



<TABLE>

                                                      Amortized                     Market
                                                         Cost                       Value
                                                     ---------------------------------------
                                                                   (in thousands)
<S>                                                  <C>                          <C>

Due in one year or less....................          $  8,039                     $  7,946
Due after one year through five years......            16,657                       15,911
Due after five years through ten years.....            60,247                       57,197
Due after ten years........................           164,235                      153,594
                                                     --------                     --------
                                                      249,178                      234,648
Mortgage-backed securities.................            61,788                       58,961
Equity securities..........................            17,797                       18,466
                                                     --------                     --------
                                                     $328,763                     $312,075
                                                     ========                     ========
</TABLE>



     Proceeds from sales of investments  in debt  securities  were  $37,628,000,
$24,279,000  and  $29,319,000  in 1999,  1998,  and  1997,  respectively.  Gross
investment security gains and losses of $607,000 and $356,000, respectively were
recognized   in  1999.   Gross  gains  and  losses  of  $592,000   and  $17,000,
respectively,  were  recognized in 1998.  Gross gains and losses of $887,000 and
$117,000, respectively were recognized in 1997.

     At December 31, 1999 and 1998,  investment securities with carrying amounts
of approximately  $154,984,000 and $104,186,000,  respectively,  were pledged to
collateralize public deposits and for other purposes as provided by law.

     Equity securities include Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB)  stock which  represents  equity  interests  in the FHLB and the FRB,
however, it does not have a readily determinable fair value because ownership is
restricted  and can be sold back only to the FHLBs,  FRB,  or to another  member
institution.





<PAGE>





4.   Loans:
-----------

     The  composition  of loans  outstanding  by  lending  classification  is as
follows:
<TABLE>


                                                             December 31
                                                     -----------------------------
                                                         1999             1998
                                                     -----------------------------
                                                            (in thousands)
<S>                                                   <C>               <C>

Commercial, financial and agricultural........        $ 100,970         $ 65,698
Real-estate-construction......................           14,670           17,381
Real-estate-mortgage..........................          362,297          324,709
Personal installment..........................          109,841           97,561
Other.........................................            8,523            6,931
                                                      ---------         --------
                                                      $ 596,301         $512,280
                                                      =========         ========
</TABLE>

     Loans held for resale amounted to $4,004,000 and $3,319,000 at December 31,
1999 and 1998, respectively.  These loans are primarily fixed-rate mortgages and
education loans.



<PAGE>



<TABLE>

5.   Allowance for Loan Losses:
-------------------------------

     Changes in the allowance for loan losses are as follows:


                                                                            December 31
                                                     -----------------------------------------------------
                                                           1999                1998              1997
                                                     -----------------------------------------------------
                                                                           (in thousands)

<S>                                                       <C>                 <C>               <C>
Balance, January 1..................................      $6,954              $6,270            $5,561
Provision for loan losses...........................       1,298               1,464             1,317
Loan charge-offs....................................      (1,232)             (1,258)           (1,466)
Recoveries..........................................         436                 478               858
                                                          ------              ------            ------
Balance, December 31................................      $7,456              $6,954            $6,270
                                                          ======              ======            ======
</TABLE>


<TABLE>

                                                          NONPERFORMING LOANS (a)
                                                           AND OTHER REAL ESTATE


                                                                December 31
                                                          -----------------------
                                                            1999           1998
                                                          -----------------------
                                                               (in thousands)

<S>                                                        <C>            <C>
Loans past due 90 days or more
  and still accruing interest:
     Commercial, financial and agricultural.........       $  146         $   47
     Mortgages......................................          147            353
     Personal installment...........................           73             34
     Other..........................................           12              7
                                                           ------         ------
                                                              378            441
                                                           ------         ------

Restructured Loans                                            254            248
                                                           ------         ------

Loans on which accrual of interest has been
  discontinued:
     Commercial, financial and agricultural.........          435            866
     Mortgages......................................        3,079          2,282
     Other..........................................          222            282
                                                           ------         ------
                                                            3,736          3,430
                                                           ------         ------
Other real estate...................................          405            625
                                                           ------         ------
     Total..........................................       $4,773         $4,744
                                                           ======         ======
</TABLE>

[FN]
(a) The  determination  to discontinue the accrual of interest on  nonperforming
loans is made on the  individual  case basis.  Such factors as the character and
size of the loan, quality of the collateral and the historical  creditworthiness
of the borrower and/or  guarantors are considered by management in assessing the
collectibility of such amounts.
</FN>


<PAGE>



Impaired Loans
--------------
     Loans are considered impaired,  based on current information and events, if
it is probable  that the  Corporation  will be unable to collect  the  scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement.  Larger groups of smaller-balance  loans such as residential
mortgage  and  installment  loans are  collectively  evaluated  for  impairment.
Management has established a smaller-dollar-value  threshold of $250,000 for all
loans.   Loans  exceeding  this  threshold  are  evaluated  in  accordance  with
accounting  standards and the bank's lending policy.  An insignificant  delay or
shortfall  in the  amount of  payments,  when  considered  independent  of other
factors, would not cause a loan to be rendered impaired. Insignificant delays or
shortfalls  may include,  depending on specific facts and  circumstances,  those
that are associated with temporary  operational  downturns or seasonal  business
delays.

     Management  performs  periodic  reviews of its loans to  identify  impaired
loans.  The  measurement  of  impaired  loans is based on the  present  value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent  loans are measured for impairment based on
the fair value of the collateral.

     Loans  continue to be classified as impaired  unless they are brought fully
current and the  collection  of scheduled  interest and  principal is considered
probable.  When an impaired loan or portion of impaired loan is determined to be
uncollectible,  the portion deemed  uncollectible is charged against the related
valuation  allowance  and  subsequent  recoveries,  if any,  are credited to the
valuation  allowance.  The company does not accrue  interest on impaired  loans.
While a loan is  considered  impaired,  cash  payments  received  are applied to
principal or interest  depending  upon  management's  assessment of the ultimate
collectibility of principal and interest.

     At December 31, 1999,  the  Corporation  recorded no investment in impaired
loans with no related  valuation  allowance.  For the years ended  December  31,
1999, 1998, and 1997, the average balance of impaired loans was negligible.  The
company recognized no interest on impaired loans on the cash basis.





<PAGE>



<TABLE>

6.   Premises and Equipment:
----------------------------

     Premises and equipment are comprised of the following:
                                                                             December 31
                                                                      ---------------------------
                                                                         1999             1998
                                                                      ---------------------------
                                                                            (in thousands)

<S>                                                                     <C>              <C>
Banking premises.........................................              $16,885           $15,504
Furniture, fixtures, and equipment.......................               12,510            11,110
Leasehold improvements...................................                  439               369
                                                                       -------           -------
                                                                        29,834            26,983
Less accumulated depreciation and amortization...........              (14,449)          (12,780)
                                                                       -------           -------
                                                                       $15,385           $14,203
                                                                       =======           =======
</TABLE>

     Depreciation  expense  charged  to  operations  amounted  to  approximately
$1,706,000, $1,656,000, and $1,450,000 in 1999, 1998, and 1997, respectively.


<TABLE>

7.  Short-Term Borrowings and Long-Term Debt:
---------------------------------------------

     Short-term borrowings consist of the following:
                                                                             December 31
                                                                      ---------------------------
                                                                         1999             1998
                                                                      ---------------------------
                                                                            (in thousands)

<S>                                                                     <C>              <C>
Securities sold under agreements to repurchase,
     4.41% and 3.40% in 1999 and 1998, respectively......               $1,328           $1,188
Federal funds purchased, 4.96% in 1998...................                  ---            6,400
Treasury tax and loan note option account,
     4.54% and 4.34% in 1999 and 1998, respectively......                2,010              322
                                                                        ------           ------
                                                                        $3,338           $7,910
                                                                        ======           ======
</TABLE>

     Interest   incurred  on  Federal  funds  purchased  and  other   short-term
borrowings  amounted to  $386,000,  $298,000,  and  $331,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.

     At December 31, 1999,  long-term  debt consists of long-term  advances from
the  FHLB  of  Pittsburgh  totalling   $177,000,000  and  repurchase  agreements
totalling  $20,000,000.  The long-term  advances were issued under  variable and
fixed  rates  and are due to  mature  from  2000 to 2009.  Monthly  payments  of
interest are required to be paid to the Federal Home Loan Bank at rates  ranging
from 4.06% to 5.60% for variable  advances and fixed rates presently 6.56%, with
principal  due at  maturity.  The FHLB has the option to convert  the fixed rate
advances  to  variable  rates at any point  prior to  maturity  of the  advance.
Quarterly  payments  of  interest  are  required  to be paid  on the  repurchase
agreements at a fixed rate,  presently  5.76%,  with  principal due at maturity.
Interest on long-term  debt amounted to $8,837,000,  $6,071,000,  and $3,538,000
for the years ended December 31, 1999, 1998, and 1997, respectively.

     Maturities on long-term debt at December 31, 1999 are as follows:

     2000..........................................  $  4,000,000
     2001..........................................  $ 15,000,000
     2002..........................................  $ 35,000,000
     2003..........................................  $ 15,000,000
     2004..........................................           ---
     Subsequent to 2004............................  $128,000,000


<PAGE>


<TABLE>

8.   Pension Plan:
------------------

     The following table sets forth the pension plan's funded status and pension
cost at and for the years ended December 31, 1999 and 1998.

                                                                             ---------------------------------------------
                                                                                1999              1998             1997
                                                                             ---------------------------------------------
                                                                                             (in thousands)
<S>                                                                            <C>               <C>              <C>
Changes in benefit obligation:
Projected benefit obligation at beginning of year....................          $5,934            $4,461           $3,933
Service cost.........................................................             130               244              222
Interest cost........................................................             300               310              293
Distributions........................................................            (171)             (128)             (49)
Change due to change in assumptions..................................            (369)              299              (66)
Change due to plan amendment.........................................          (1,235)              215              ---
Experience (gain) or loss............................................             490               533              128
                                                                               ------            ------           ------
Projected benefit obligation at end of year..........................          $5,079            $5,934           $4,461
                                                                               ======            ======           ======
Change in plan assets:
Fair value of plan assets at beginning of year.......................          $5,070            $4,546           $3,626
Employer contributions...............................................             ---               355              360
Actual return on assets..............................................             299               297              609
Distributions........................................................            (171)             (128)             (49)
                                                                               ------            ------           ------
Fair value of plan assets at end of year, primarily listed stocks,
     corporate, and US bonds.........................................          $5,198            $5,070           $4,546
                                                                               ======            ======           ======
Funded status at end of year.........................................          $  119            $ (864)          $   85
Unrecognized net transition (asset) or obligation....................             (21)              (29)             (38)
Unrecognized prior service cost......................................            (997)              128              (97)
Unrecognized net (gain) or loss......................................           1,820             1,679              775
                                                                               ------            ------           ------
End of year (accrued) or prepaid pension cost........................          $  921            $  914           $  725
                                                                               ======            ======           ======

Discount rate........................................................            7.0%              6.5%             7.0%
Expected return on plan assets.......................................            9.0%              9.0%             9.0%
Rate of compensation increase........................................            4.0%              4.0%             4.5%

Components of net periodic benefit cost:
Service cost.........................................................          $  130            $  244           $  221
Interest cost........................................................             300               310              293
Actual return on plan assets.........................................            (299)             (297)            (609)
Amortization of unrecognized net transition (asset) or obligation....              (8)               (8)              (8)
Amortization of unrecognized prior service cost......................            (110)               (8)              (8)
Amortization of unrecognized net (gain) or loss......................             119                48               42
Asset gain or (loss) deferred........................................            (139)             (119)             272
                                                                               ------            ------           ------
Net periodic pension cost (benefit) for the year.....................          $   (7)           $  170           $  203
                                                                               ======            ======           ======
</TABLE>



<PAGE>


<TABLE>

9.   Earnings Per Share:
------------------------

The  following  table  sets  forth the  calculation  of Basic and Fully  Diluted
Earnings Per Share for the years ended below.


                                      For the Year Ended 1999        For the Year Ended 1998        For the Year Ended 1997
                                     -------------------------     --------------------------     ----------------------------
                                                                                     Per-Share                       Per-Share
                                      Income   Shares   Amount     Income   Shares     Amount     Income    Shares     Amount
                                      ------   ------   ------     ------   ------     ------     ------    ------     ------
                                                            (in thousands except for per share data)

<S>                                  <C>       <C>      <C>        <C>      <C>      <C>          <C>       <C>      <C>
Basic EPS:

Income available to common
     stockholders................... $11,803   6,833    $1.73      $10,050  6,859    $1.47        $7,925    6,842    $1.16
                                     =======            =====      =======           =====        ======             =====
Effect of Dilutive Securities:

Incentive stock options
     outstanding....................             124                          158                             172
                                               -----                        -----                           -----

Diluted EPS:

Income available to common
     stockholders and assumed
     conversion..................... $11,803   6,957    $1.70      $10,050  7,017    $1.43        $7,925    7,014    $1.13
                                     =======            =====      =======           =====        ======             =====

</TABLE>






<PAGE>


<TABLE>

10.   Income Taxes:
-------------------

     The provision for income taxes consists of the following:

                                                                              --------------------------------------------------
                                                                                 1999                1998                1997
                                                                              --------------------------------------------------
                                                                                                 (in thousands)
<S>                                                                           <C>                    <C>                 <C>

         Current.................................................             $3,866                 $4,004              $3,775
         Deferred................................................               (185)                  (470)               (284)
                                                                              ------                 ------              ------
                                                                              $3,681                 $3,534              $3,491
                                                                              ======                 ======              ======


     The components of the net deferred tax asset (liability) as of December 31,
1999, 1998, and 1997 were as follows:

                                                                              --------------------------------------------------
                                                                                 1999                1998                1997
                                                                              --------------------------------------------------
                                                                                                 (in thousands)

Deferred tax assets:
     Loan loss provision.........................................             $1,881                $1,531               $1,183
     Non-accrual loan interest income............................                357                   363                  264
     Unrealized loss on investment securities....................              5,841                   ---                  ---
     Miscellaneous...............................................                119                   121                  291
     Deferred compensation.......................................                198                   296                  176
                                                                              ------                ------               ------
         Total deferred tax assets...............................             $8,396                $2,311               $1,914
                                                                              ------                ------               ------

Deferred tax liabilities:
     Depreciation................................................             $  532                $  560               $  583
     Accretion of discount.......................................                226                   176                  239
     Pension expense.............................................                322                   285                  246
     Unrealized gain on marketable equity securities.............                ---                 1,437                1,671
     Miscellaneous...............................................                ---                   ---                   23
                                                                              ------               -------               ------
         Total deferred tax liability............................              1,080                 2,458                2,762
                                                                              ------               -------               ------
         Net deferred asset (liability)..........................             $7,316               $  (147)              $ (848)
                                                                              ======               =======               ======


                                                                              --------------------------------------------------
                                                                                 1999                1998                1997
                                                                              --------------------------------------------------
                                                                                                 (in thousands)

Computed "expected" tax provision................................             $5,419               $4,615                $3,882
Effect of tax-exempt municipal bond and loan
     interest, net of interest expense disallowance..............             (1,571)              (1,230)                 (784)
Goodwill amortization............................................                 94                   92                    82
Nondeductible expense related to acquisition.....................                ---                   49                   252
Other, net.......................................................               (163)                  61                    59
Deferred compensation............................................                (98)                 (53)                  ---
                                                                              ------               ------                ------
Total provision for income taxes.................................             $3,681               $3,534                $3,491
                                                                              ======               ======                ======
</TABLE>



<PAGE>




11.   Stock Options, Preferred Stock, and Common Stock:
-------------------------------------------------------

     The  Corporation  has a Long Term Incentive Plan whereby awards in the form
of Incentive  Stock Options , Nonqualified  Stock Options or Stock  Appreciation
Rights  may be granted to certain  Executive  Officers  and other key  employees
selected by a committee  of the Board of  Directors.  The price at which  common
stock can be purchased  pursuant to the exercise of options  cannot be less than
100% in the case of Incentive  Stock Options and 80% in the case of Nonqualified
Stock  Options,  of the fair market value of the common stock on the date of the
grant of the option.  Options are exercisable starting one year from the date of
grant to the extent of 20.0% to 33.3% a year on a cumulative basis and expire no
later than ten years after the date of grant.  Incentive  stock  options  issued
under the plan totalled 88,000,  119,926,  and 86,070,  in 1999, 1998, and 1997,
respectively.

     A summary of the status of the Bank's Plan as of December 31,  1999,  1998,
and 1997 and changes during the years ending on those dates is presented below:


<TABLE>
                                                                                                                    Weighted
                                                                                                                  Average Fair
                                               Shares        Shares          Weighted            Options        Value of Options
                                               Under        Available        Average           Exercisable       Granted During
                                               Option      For Option    Exercisable Price     at Year-end          The Year
                                               ------      ----------    -----------------     -----------          --------
<S>                                            <C>         <C>           <C>                   <C>                   <C>
Balance, December 31, 1996...............      404,481     1,168,946          $12.32            162,218

Options granted..........................       86,070       (86,070)         $19.91                                  $ 8.43
Options exercised........................      (92,059)          ---          $10.59
Options cancelled or expired.............       (1,923)        1,923          $14.92
                                               -------     ---------          ------            -------
Balance, December 31, 1997                     396,569     1,084,799          $13.99            151,129
Options granted..........................      119,926      (119,926)         $24.02                                  $ 5.05
Options exercised........................      (28,374)          ---          $10.82
Options cancelled or expired.............       (1,914)        1,914          $20.00
                                               -------     ---------          ------            -------
Balance, December 31, 1998                     486,207       966,787          $17.07            279,320
Options granted..........................       88,000       (88,000)         $22.50                                  $ 5.45
Options exercised........................      (37,185)          ---          $ 9.96
Options cancelled or expired.............          ---           ---
                                               -------     ---------          ------            -------
Balance, December 31, 1999                     537,022       878,787          $17.71            330,620
                                               =======     =========          ======            =======
</TABLE>


     On  January  1,  1996,  the  Corporation  adopted  Statement  of  Financial
Accounting  Standards No. 123,  "Accounting for Stock Based  Compensation" (SFAS
123). As permitted by SFAS 123, the  Corporation has chosen to apply APB Opinion
No.25,  "Accounting  for  Stock  issued  to  Employees"  (APB  25)  and  related
interpretations in accounting for its Plans.  Accordingly,  no compensation cost
has been  recognized for options granted under the Plan. Had  compensation  cost
for the Corporation's  Plan been determined based on the fair value at the grant
date for  awards  under the Plan  consistent  with the  method of SFAS 123,  the
impact on the  Corporation's  net income  and net  income  per share  would have
approximated  $(195,000)  and $(.03),  respectively  in 1999.  The impact on net
income and net income per share in 1998 would have been  $(267,000)  and $(.04),
respectively.  The  impact on net  income and net income per share in 1997 would
have been $(96,000) and $(.01), respectively.


     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions  used for grants in 1999,  1998,  and 1997,  respectively;  dividend
yield of 2.9%,  2.5%, and 1.0%;  expected  volatility of 23%, 23%, and 20%; risk
free interest rates of 6.1%, 4.8%, and 6.1%; and expected lives of 5.5, 6, and 6
years.




<PAGE>



12.   Related Parties:
----------------------

     Certain directors and their business  affiliates (defined as the beneficial
ownership  of at least a 10  percent  interest),  executive  officers  and their
families are  indebted to  Community  Banks,  N.A.  and Peoples  State Bank.  At
December 31, 1999,  1998,  and 1997,  loans to these persons and their  business
affiliates amounted to $8,479,000, $6,548,000, and $6,367,000, respectively.

     In the opinion of management,  such loans are consistent with sound banking
practices and are within applicable regulatory lending limitations.

<TABLE>


                                                                 ----------------------------------------
                                                                   1999            1998            1997
                                                                 ----------------------------------------
                                                                              (in thousands)

<S>                                                               <C>             <C>             <C>
              Balance beginning of period..................       $6,548          $6,367          $4,012
              Additions....................................        5,255           2,003           4,884
              Amounts collected............................       (3,324)         (1,822)         (2,529)
              Amounts written off..........................          ---             ---             ---
                                                                  ------          ------          ------
              Balance end of period........................       $8,479          $6,548          $6,367
                                                                  ======          ======          ======
</TABLE>







<PAGE>


<TABLE>

13.   Condensed Financial Information of Community Banks, Inc.  (Parent Only):
------------------------------------------------------------------------------
                                                                                ---------------------------
                                                                                    1999          1998
                                                                                ---------------------------
                                                                                      (in thousands)
<S>                                                                               <C>            <C>
Condensed Balance Sheets:
           Cash and investments........................................           $    50        $   150
           Investment in Community Banks, N.A. ........................            42,799         49,537
           Investment in Peoples State Bank............................            25,620         24,348
           Investment in nonbank subsidiaries..........................             2,064          4,209
           Other assets................................................               754          1,023
                                                                                  -------        -------
           Total assets................................................           $71,287        $79,267
                                                                                  =======        =======
           Other liabilities...........................................           $   206        $   391
           Stockholders' equity........................................            71,081         78,876
                                                                                  -------        -------
           Total liabilities and stockholders' equity..................           $71,287        $79,267
                                                                                  =======        =======


                                                                              -----------------------------------------------
                                                                                 1999              1998               1997
                                                                              -----------------------------------------------
                                                                                              (in thousands)
Condensed Statements of Income:
     Dividends from:
           Community Banks, N.A. ......................................           $ 5,415        $ 5,279            $ 3,010
           Peoples State Bank..........................................               ---            285                ---
           Nonbank subsidiaries........................................             1,854            ---                ---
     Other income (expense)............................................              (491)          (546)              (335)
                                                                                  -------        -------            -------
Income before equity in undistributed earnings of subsidiaries.........             6,778          5,018              2,675
                                                                                  -------        -------            -------
Equity in undistributed earnings of:
     Community Banks, N.A. ............................................             1,901          1,483              3,240
     Peoples State Bank................................................             4,685          3,118              1,342
     Nonbank subsidiaries..............................................            (1,561)           431                668
                                                                                  -------        -------            -------
                                                                                    5,025          5,032              5,250
                                                                                  -------        -------            -------
Net income.............................................................           $11,803        $10,050            $ 7,925
                                                                                  =======        =======            =======
Condensed Statements of Cash Flows:
Operating activities:
     Net income........................................................           $11,803        $10,050            $ 7,925
         Adjustments to reconcile net cash provided by
            operating activities:
         Undistributed earnings of:
              Community Banks, N.A. ...................................            (1,901)        (1,483)            (3,240)
              Peoples State Bank.......................................            (4,685)        (3,118)            (1,342)
              Nonbank subsidiaries.....................................             1,561           (431)              (668)
         Other, net....................................................                84           (266)            (1,615)
                                                                                  -------        -------            -------
              Net cash provided by operating activities................             6,862          4,752              1,060
Investing activities:
         Additional investment in Peoples State Bank...................            (1,000)           ---                ---
                                                                                  -------        -------            -------
              Net cash used in investment activities...................            (1,000)           ---                ---
                                                                                  -------        -------            -------

Financing Activities:
     Proceeds from issuance of common stock............................               266            330              2,776
     Purchase of Treasury Stock........................................            (1,885)          (966)              (695)
     Dividends paid....................................................            (4,343)        (4,103)            (3,143)
                                                                                  -------        -------            -------
              Net cash used by financing activities....................            (5,962)        (4,739)            (1,062)
                                                                                  -------        -------            -------
              Net change in cash and cash equivalents..................              (100)            13                 (2)
     Cash and cash equivalents at beginning of year....................               150            137                139
                                                                                  -------        -------            -------
     Cash and cash equivalents at end of year..........................           $    50        $   150            $   137
                                                                                  =======        =======            =======
</TABLE>



<PAGE>




14.  Regulatory Restrictions of Banking Subsidiaries:
-----------------------------------------------------

     CBNA and PSB are subject to legal limitations as to the amount of dividends
that can be paid to its shareholder (the  Corporation).  The approval of certain
banking  regulatory  authorities  is  required  if the  total  of all  dividends
declared by the bank exceeds  limits as defined by the  regulatory  authorities.
CBNA and PSB could  declare  dividends  in 1999 without  regulatory  approval of
$11,187,000  plus an additional  amount equal to the bank's retained net profits
in 2000 up to the date of any dividend declaration.

     Included in cash and due from banks are balances  required to be maintained
by subsidiary banking companies on deposit with the Federal Reserve. The amounts
of such reserves are based on percentages of certain  deposit types and totalled
$440,000 and $265,000 at December 31, 1999 and 1998, respectively.



15.  Financial Instruments with Off-Balance Sheet Risk:
-------------------------------------------------------

     The Corporation is party to financial  instruments with  off-balance  sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers  and to reduce its own  exposure to  fluctuations  in interest  rates.
These financial  instruments  include commitments to originate loans and standby
letters of credit.  The instruments  involve,  to varying  degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
consolidated  statement of condition.  The contract or notional amounts of those
instruments  reflect the extent of involvement the Corporation has in particular
classes of financial instruments.

     Financial instruments with off-balance sheet risk at December 31, 1999, are
as follows:
<TABLE>

                                                                              Contract or Notional Amount
                                                                              ---------------------------
                                                                                    (in thousands)
<S>                                                                                    <C>
     Financial instruments whose contract amounts represent credit risk:
         Commitments to originate loans......................................           $78,102
         Unused lines of credit..............................................           $27,042
         Standby letters of credit...........................................           $ 7,185
         Unadvanced portions of construction loans...........................               ---
</TABLE>

     Commitments  to  originate  loans  are  agreements  to lend  to a  customer
provided  there is no violation of any  condition  established  in the contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire  without  being  drawn  upon,  the  total  commitment   amount  does  not
necessarily  represent future cash requirements.  Lines of credit are similar to
commitments  as they  have  fixed  expiration  dates and are  driven by  certain
criteria  contained  within the loan agreement.  Lines of credit normally do not
extend beyond a period of one year. The  Corporation  evaluates each  customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed  necessary  by the  Corporation  upon  extension  of credit,  is based on
management's credit evaluation of the borrower.

     Standby  letters  of  credit  are  conditional  commitments  issued  by the
Corporation  to guarantee the  performance  by a customer to a third party.  The
credit risk  involved in issuing  letters of credit is  essentially  the same as
that involved in extending loan facilities to customers.





<PAGE>



<TABLE>

16.  Quarterly Results of Operations (Unaudited):
-------------------------------------------------

     The following is a summary of the quarterly  results of operations  for the
years ended December 31, 1999 and 1998:


                                                                               Three Months Ended
                                           -----------------------------------------------------------------------------------------
                                                              1999                                          1998

                                            Mar. 31    June 30    Sept. 30    Dec. 31      Mar. 31    June 30    Sept. 30    Dec. 31
                                           -----------------------------------------------------------------------------------------
                                                                    (dollars in thousands except per share data)

<S>                                         <C>        <C>        <C>         <C>          <C>        <C>        <C>         <C>
Interest income...........................  $15,479    $16,188    $16,764     $17,833      $13,456    $13,702    $14,542     $15,300
Interest expense..........................    7,523      7,839      8,116       8,735        6,235      6,330      6,917       7,405
                                            -------    -------    -------     -------      -------    -------    -------     -------
Net interest income.......................    7,956      8,349      8,648       9,098        7,221      7,372      7,625       7,895
Provision for loan losses.................      276        291        220         511          193        231        487         553
                                            -------    -------    -------     -------      -------    -------    -------     -------
Net interest income after provision for
     loan losses..........................    7,680      8,058      8,428       8,587        7,028      7,141      7,138       7,342
Other income..............................    1,029      1,229      1,336       1,216          845        913        971       1,022
Investment security gains  (losses).......      153        (29)         3         124          270         73        224           8
Gains on mortgage sales...................      276        138         94          99          142        142        131         219
Other expenses............................    5,592      5,542      5,885       5,918        4,932      4,885      5,020       5,188
                                            -------    -------    -------     -------      -------    -------    -------     -------
Income before income taxes................    3,546      3,854      3,976       4,108        3,353      3,384      3,444       3,403
Income taxes..............................      864        935        869       1,013          976        920        868         770
                                            -------    -------    -------     -------      -------    -------    -------     -------
Net income................................  $ 2,682    $ 2,919    $ 3,107     $ 3,095      $ 2,377    $ 2,464    $ 2,576     $ 2,633
                                            =======    =======    =======     =======      =======    =======    =======     =======

Basic earnings per share..................  $   .39    $   .43    $   .46     $   .45      $   .35    $   .36    $   .37     $   .38
Diluted earnings per share...............   $   .38    $   .42    $   .45     $   .45      $   .33    $   .36    $   .37     $   .37
Dividends per share.......................  $   .15    $   .16    $   .16     $   .16      $   .13    $   .15    $   .15     $   .15
</TABLE>




Per share data has been restated to reflect stock dividends and splits.





<PAGE>




17.  Fair Values of Financial Instruments:
------------------------------------------

     The following methodologies and assumptions were used by the Corporation to
estimate its fair value disclosures:

Cash, interest-bearing time deposits, and federal funds sold:
     The carrying values for cash,  interest-bearing time deposits,  and federal
funds sold equal those assets' fair values.

Investment securities:
     Fair values for  investment  securities  are based on quoted market prices,
where  available.  If quoted  market prices are not  available,  fair values are
based on quoted market prices of comparable instruments.

Loans:
     For variable-rate  loans that reprice frequently with no significant change
in credit risk, fair value equals carrying value. The fair values for fixed-rate
residential  mortgage  loans,  consumer loans,  commercial,  and commercial real
estate loans are estimated by discounting the future cash flows using comparable
current  rates at which  similar  loans  would be made to  borrowers  at similar
credit risk.  The carrying  value of accrued  interest  adjusted for credit risk
equals its fair value.  The fair value of loans held for sale is based on quoted
market prices for similar loans sold in securitization transactions.

Deposit liabilities:
     The fair values of demand and savings deposits equal their carrying values.
Adjusting  such  fair  value  for  any  value  from   retaining   those  deposit
relationships  in the future is prohibited.  That component,  known as a deposit
intangible,  is not considered in the value  disclosed nor is it recorded in the
balance  sheet.  The  carrying  values for variable  rate money market  accounts
approximate  their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using rates currently  offered for similar
deposits.

Short-term borrowings:
     The fair values of short-term borrowings approximate their carrying values.

Long-term borrowings:
     The fair values of the  Corporation's  long-term  borrowings  are estimated
using  discounted  cash  flows  analyses,   based  on  rates  available  to  the
Corporation for similar types of borrowings.

Off-balance-sheet instruments:
     Fair values for the Corporation's unused commitments to originate loans and
unused lines of credit are deemed to be the same as their carrying values.

     The  following  table  summarizes  the  carrying  values and fair values of
financial instruments at December 31, 1999 and 1998:

<TABLE>

                                                                                     December 31,
                                                                  ---------------------------------------------------
                                                                             1999                      1998
                                                                  ---------------------------------------------------
                                                                   Carrying      Fair         Carrying      Fair
                                                                    Value        Value         Value        Value
                                                                  ---------------------------------------------------
                                                                                    (in thousands)

<S>                                                                <C>           <C>          <C>           <C>
              Financial assets:
              Cash, interest-bearing time deposits,
                  and federal funds sold....................      $ 32,933      $ 32,933    $ 28,502     $ 28,502
              Investment securities.........................       312,075       312,075     292,542      292,542
              Loans, net of unearned income.................       589,315       577,458     502,262      498,552
              Less:    Allowance for loan losses............        (7,456)          ---      (6,954)         ---
                                                                  --------      --------    --------     --------
                     Net loans..............................       581,859       577,458     495,308      498,552
              Loans held for sale...........................         4,004         4,004       3,319        3,319
                                                                  --------      --------    --------     --------
                 Total......................................      $930,871      $926,470    $819,671     $822,915
                                                                  ========      ========    ========     ========
              Financial liabilities:
              Deposits......................................      $693,436      $691,186    $595,905     $598,654
              Short-term borrowings.........................         3,338         3,338       7,910        7,910
              Long-term debt................................       197,000       193,769     161,000      160,822
                                                                  --------      --------    --------     --------
                 Total......................................      $893,774      $888,293    $764,815     $767,386
                                                                  ========      ========    ========     ========
</TABLE>



<PAGE>



18.  Completed Acquisition:
---------------------------

     On March 31, 1998 Community Banks, Inc. (Community) completed its merger of
The Peoples State Bank  (Peoples).  Peoples had six banking  offices  located in
York and Adams Counties,  Pennsylvania.  Community  issued  1,325,330  shares of
common  stock  for  all  of  the  outstanding  common  stock  of  Peoples.  This
transaction  was accounted for as a pooling of interests and combined  unaudited
financial information is included in this report.

     A  summary  of  unaudited  pro forma  combined  financial  information  for
Community and Peoples follows:

<TABLE>
              ----------------------------------------------------------------------------------------------------------------------
              Year Ended December 31                                               1997                           1996
              ----------------------------------------------------------------------------------------------------------------------
                                                                               (dollars in thousands except per share data)



                                                                                          Community/                    Community/
                                                                           Community      Peoples        Community       Peoples
                                                                         As Reported      Combined      As Reported      Combined
                                                                         -----------      --------      -----------      --------

<S>                                                                      <C>              <C>           <C>              <C>
              Net interest income.............................             $19,381           $27,864      $17,906         $24,607
              Provision for loan losses and lease losses......                 717             1,317        1,042           1,567
              Other income....................................               3,375             4,229        2,754           3,171
              Other expenses..................................              13,443            19,360       12,017          16,534
                                                                           -------           -------      -------         -------
              Income before taxes.............................               8,596            11,416        7,601           9,677
              Taxes...........................................               2,626             3,491        1,969           2,693
                                                                           -------           -------      -------         -------
              Net income......................................             $ 5,970           $ 7,925      $ 5,632         $ 6,984
                                                                           =======           =======      =======         =======
              Basic earnings per share........................             $  1.26           $  1.16      $  1.19         $  1.02
              Diluted earnings per share......................             $  1.23           $  1.13      $  1.17         $  1.00
                                                                           =======           =======      =======         =======

</TABLE>

              Per share data for all periods has been  restated to reflect stock
dividends and split.












<PAGE>