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, 1998     Commission file number 0-15786  
     
                 
                                     COMMUNITY BANKS, INC.
                      (Exact name 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, 1999, the aggregate market value (based on recent selling prices)
of the voting stock of the registrant held by its nonaffiliates (5,407,169 
shares) was $141,262,290
     
Indicate the number of shares outstanding of each registrant's classes of common
stock, as of the latest practical date.
     
        6,518,129 shares of common stock outstanding on March 1, 1999
     
                             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 21. This document contains 23 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.  [  ]
                                             
                                                
                                        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 29 offices. There are 58
offices of commercial banks and savings and loan associations within its market
area with which the Corporation competes. Deposits of the Corporation represent
approximately 14% of the total deposits in the market area. The Corporation 
has 1 office in Adams County, 7 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 5 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 Dover, Hanover, and Manchester, 
Pennsylvania. 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 $493,000 for the
year ended December 31, 1998.  During 1985 the Corporation formed CBII to make
investments primarily in equity securities of other banks. Total assets of 
CBII at December 31, 1998 were $4,462,000.

     The Corporation has approximately 400 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 Reserve 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. A minimum required capital ratio
at December 31, 1998, was 8 percent.  The Bank's December 31, 1998 ratio 
approximated 14%. Subsequently, in August 1990 the board announced 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 the 
minimum standard. The Corporation's leverage ratio at December 31, 1998,
approximated 9%. Risk-based capital requirements replace previous capital 
guidelines which established minimum primary and total capital requirements.

                                
       The following summarizes the Corporation's capital adequacy position:
     
                                                         Required             
                                  Bank               Regulatory Capital      
     (in thousands)           December 31, 1998      December 31, 1998     
     
     Risk-based capital       $81,767     14.0%       $46,745     8.0%      
     Leverage ratio                     
     (tier 1 capital)          74,813      8.8%        23,372     4.0%        
                      
                                            -2-                 
     
                            
     Statistical Data:
                 
     Pages 19 through 21 of the Community Banks, Inc. Annual report to 
stockholders dated December 31, 1998 contain information concerning:
     
     Financial Highlights
          
     Average Balances, Effective Interest Differential, and Interest Yields for
the three years ended December 31, 1998.
     
     Rate/Volume Analysis for the two years ended December 31, 1998.
     
     Appendix A attached to Part I contains information concerning:  
     
     Return on Equity and Assets for the five years ended December 31, 1998.
                                   
     Amortized cost and Estimated Market Values of Investment Securities as
        of December 31, 1998, 1997, and 1996. 
     
     Maturity Distribution of Securities as of December 31, 1998 (Market Value).
     
     Loan Account Composition as of December 31, 1998, 1997, 1996, 1995, and
        1994.
     
     Maturities and Sensitivity to Changes in Interest Rates for Commercial,
        Financial, and Agricultural Loans as of December 31, 1998.
     
     Nonperforming Loans as of December 31, 1998, 1997, 1996, 1995, and
        1994.
         
     Loan Loss Experience for the five years ended December 31, 1998.
     
     Loans Charged Off and Recovered for the five years ended December 31, 1998.
     
     Allowance for Loan Losses as of December 31, 1998, 1997, 1996, 1995, and
        1994.
     
     Maturity Distribution of Time Deposits over $100,000 as of 
        December 31, 1998.     
     
     Interest Rate Sensitivity as of December 31, 1998.
     
     
      
                                              -3-

     
Item 2.  Properties:
     
         The Corporation owns no real property except through its subsidiary 
banks.  CBNA  owns the following buildings:  150 Market Street, Millersburg, 
Pennsylvania (its corporate headquarters); 13-23 South Market Street, 
Elizabethville, Pennsylvania; 3679 Peters Mountain Road, Halifax, Pennsylvania;
906 N. River Road, Halifax, Pennsylvania; 800 Peters Mountain Road, Dauphin, 
Pennsylvania; Main and Market Streets, Lykens, Pennsylvania; Route 209, Porter 
Township, Schuylkill County, Pennsylvania; 29 E. Main Street, Tremont, 
Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair, 
Schuylkill County, Pennsylvania; R.D. 3, Mill Creek Manor, Pottsville, 
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; 22 S. Church Street, Hazleton, Luzerne County, Pennsylvania;
702 West Main Street, Valley View, Schuylkill County, Pennsylvania; 735 Center
Street, Ashland, Schuylkill County, Pennsylvania; P.O. Box 44, Gordon, 
Schuylkill County, Pennsylvania; 436 Main Street, Lavelle, Schuylkill County,
Pennsylvania; and 9-11 N. Centre Street, Pottsville, Schuylkill County, 
Pennsylvania; and One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania.
In addition thereto, CBNA leases an office at Main Street, Pillow, 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; and 6700 
Derry Street, Rutherford, Dauphin County, Pennsylvania. 
     
     All the buildings used by CBNA are free-standing and are used exclusively 
for banking purposes with the exception of offices and retail space rented at 
the St. Clair, Milton, Pottsville and Hazleton locations.
     
     PSB owns the following buildings: 100 E. King Street, East Berlin, 
Pennsylvania; and 3421 Carlisle Road, Dover, Pennsylvania. In addition thereto, 
PSB leases and office at 600 Carlisle Street, Hanover, Pennsylvania, pursuant to
a lease which, with renewal options, will extend to the year 2006. PSB also owns
real property through its subsidiary, PSB Realty, at the following locations:
1191 Eichelberger Street, Hanover, Pennsylvania; 155 Glen Drive, Manchester, 
Pennsylvania; and 1345 Baltimore Street, Hanover, 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.
     
     From time to time, the subsidiary banks also acquire real estate by virtue 
of foreclosure proceedings, which 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 1998.
     
     
     
                                                   -4-

                                                                      APPENDIX A
<TABLE>
<CAPTION>
  
                                      RETURN ON EQUITY AND ASSETS
                    FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996, 1995, and 1994      
                                       1998         1997         1996        1995         1994                  
   
<S>                                  <C>          <C>          <C>          <C>          <C>   
Return on average equity              13.04%       11.49%       11.39%       10.36%       10.76%                                    
                                        
Return on average assets               1.31%        1.16%        1.18%        1.06%        1.05%                                 

Average equity to average assets      10.06%       10.12%       10.36%       10.25%        9.74%
                                     
Dividend payout ratio                 40.83%       39.66%       39.02%       42.09%       39.37%

</TABLE>

                                            -5-
                                                       
                                      
                                                                     APPENDIX A
                                                                     Continued

<TABLE>
<CAPTION>
     
                                                         AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
                                                                            SECURITIES
                                                                      (dollars in thousands)
                                                               AT DECEMBER 31, 1998, 1997, and 1996
     
                                                          1998                     1997                     1996          
                                                              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     $ 82,887    $ 83,260     $ 84,568    $ 85,137      $ 73,407   $ 71,984
     U.S. Treasury and U.S. Government agencies     78,800      79,449       66,940      67,389        83,432     83,573
     Obligations of states and political sub-
        divisions                                   85,771      87,676       55,248      56,633        31,144     31,601
     Other securities                               40,858      42,157        7,623      10,125         5,767      6,845    
        Total                                     $288,316    $292,542     $214,379    $219,284      $193,750   $194,003     
                                                  ========    ========     ========    ========      ========   ========
                                                              
</TABLE>
                           
          
<TABLE>
<CAPTION>
                                  COMMUNITY BANKS, INC. and SUBSIDIARIES
                            MATURITY DISTRIBUTION OF SECURITIES (Market Value)
                                          (dollars in thousands)
                                         as of December 31, 1998
                                                     
     
                
                                                        One           Five                                              Weighted   
                                           Within     Through        Through        After                 Average        Average   
                                          One Year   Five Years     Ten Years    Ten Years     Total      Maturity       Yield<F1>
<S>                                        <C>         <C>           <C>         <C>         <C>        <C>                <C>
U.S. Government and agencies               $ 4,547     $14,868       $27,235     $116,059    $162,709   14 yr. 11 mos.     7.51%    
Obligations of states and political
   subdivisions                              3,627      13,119        10,260       60,670      87,676   15 yr.  9 mos.     7.34%    
Other                                       10,466       2,224         2,487       26,980      42,157   13 yr.  1 mos.     5.34% 
                                        
     Total                                 $18,640     $30,211       $39,982     $203,709    $292,542   14 yr. 11 mos.     7.15%
                                           =======     =======       =======     ========    ========

Percentage of total                          6.4%       10.3%         13.7%        69.6%       100.0%  
                                            =====       =====         =====        =====       ======             

Weighted average yield <F1>                 4.23%       6.11%         6.25%        7.75%        7.15%  
                                            =====       =====         =====        =====        =====
     
          
<FN>
<F1> Weighted average yields were computed on a tax equivalent basis using a 
     federal income tax rate of 34%.
</FN>
</TABLE>
     
     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.
     
                                                                            
                                                   -6-              
                                                                     APPENDIX A
                                                                     Continued 
<TABLE>
<CAPTION>

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

                                                                                                                             
                                             1998              1997               1996              1995              1994   
                                       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 $ 65,698   12.8%   $ 53,520   11.8%   $ 52,844   12.6%  $ 45,017   12.3%  $ 37,991   11.9%
Real estate-construction                 17,381    3.4       5,553    1.2       5,724    1.4      5,890    1.6      4,645    1.4
Real estate-mortgage                    324,709   63.4     299,529   65.7     268,276   63.8    229,830   62.8    214,561   67.0
Personal-installment                     97,561   19.0      88,046   19.3      87,381   20.8     78,771   21.5     56,470   17.6
Other                                     6,931    1.4       9,182    2.0       5,982    1.4      6,662    1.8      6,695    2.1
                                        512,280  100.0%    455,830  100.0%    420,207  100.0%   366,170  100.0%   320,362  100.0%
Less:                                             =====             =====              =====             =====             =====
   Unearned discount                    (10,018)           (11,799)           (11,965)          (11,671)           (9,141)
   Reserve for loan losses               (6,954)            (6,270)            (5,561)           (4,955)           (4,407)
                                       $495,308           $437,761           $402,681          $349,544          $306,814
</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 1998 resulted in increases in commercial, financial, 
and agricultural loans and personal-installment loans of 22.8% and 10.8%, 
respectively. Real estate loans increased 12.1% during this same period. 
Commercial, financial, and  agricultural loans represented 12.8% of total loans 
at December 31, 1998 and consist principally of commercial lending secured by 
financial assets of businesses including account receivables, inventories and 
equipment, and, in most cases, include liens or 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 19.0% of total loans at December 31, 1998 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.

<TABLE>
<CAPTION>
              
                            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, 1998   
 
                                                             Maturity Distribution

                                               One Year       One to      Over Five
                                                Or Less      Five Years     Years     Total
<S>                                           <C>            <C>          <C>       <C>                                             
        Commercial, Financial and 
          agricultural                         $29,080        $17,866      $18,752   $65,698 
        Real estate-construction                 8,502          2,064        6,815    17,381       
                                               $37,582        $19,930      $25,567   $83,079  
                                               =======        =======      =======   =======               
</TABLE>
<TABLE>
<CAPTION>
                                                        Interest Sensitivity
  
                                               Variable         Fixed        Total  
<S>                                           <C>             <C>          <C> 
           Due in one year or less             $36,688         $  894       $37,582      
           Due after one year                   44,033          1,464        45,497        
                                               $80,721         $2,358       $83,079
                                               =======         ======       ======= 
</TABLE>
                

                                                                      -7-
                                                            
                                                                     APPENDIX A
                                                                     Continued 
                                                               
<TABLE>
<CAPTION>
                                                               
                                                     NONPERFORMING LOANS <F1>  
                                                     (dollars in thousands)
                                                       as of December 31 
                                                                               
                                                                               
                                                     1998          1997          1996         1995         1994     
<S>                                               <C>           <C>           <C>           <C>          <C> 
     Loans past due 90 days or more:                    
        Commercial, financial and agricultural     $   47        $   53        $   20        $  120       $  152    
        Mortgages                                     353           405           588           558          440        
        Personal installment                           34            72           189           239          226       
        Other                                           7            21            11           ---            1    
                                                      441           551           808           917          819       
                                                       
     Loans renegotiated with the borrowers            248           626           277           494          366
              
     
     Loans on which accrual of interest has
      been discontinued:
        Commercial, financial and agricultural        866            926          791           579           743  
        Mortgages                                   2,282          3,388        3,645         2,346         1,985
        Other                                         282            300          318           252           174
                                                    3,430          4,614        4,754         3,177         2,902
       
     Other real estate owned                          625            866          883           901         1,846    
     Total                                
                                                   $4,744         $6,657       $6,722        $5,489        $5,933
                                                   ======         ======       ======        ======        ======
     
<FN>
<F1> 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.
     
     The approximate amount that would have been accrued on those loans for 
which interest was discontinued in 1998 was $358,000. Interest income from 
these loans would have approximated $425,000 in 1997. 
          
     The change in nonperforming 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>
</TABLE>
     
                                                                            
                                         -8-
                
                                                                     APPENDIX A
                                                                     Continued
<TABLE>
<CAPTION>
                                    
                                                LOAN LOSS EXPERIENCE
                                                                              
                                               (dollars in thousands)
                                                                     
                            For the years ended December 31, 1998, 1997, 1996, 1995, and 1994
                                                                                              
                                                              1998        1997         1996        1995        1994
<S>                                                       <C>          <C>          <C>         <C>        <C>
          Loans at year-end, net of unearned income        $502,262     $444,031     $408,242    $354,499   $311,221
                                                           ========     ========     ========    ========   ========
          Average loans balance <F1>                       $467,094     $421,283     $385,956    $332,630   $299,343
                                                           ========     ========     ========    ========   ========
          Balance, allowance for loan losses,
                 January 1                                 $  6,270     $  5,561     $  4,955    $  4,407   $  4,832
          
          Net charge-offs <F2>                                 (780)        (608)        (961)       (530)    (2,338)
          
          Provision for loan losses                           1,464        1,317        1,567       1,078      1,913

          
          Balance, allowance for loan losses,
               December 31                                 $  6,954     $  6,270     $  5,561    $  4,955   $  4,407
                                                           ========     ========     ========    ========   ========
          Net charge-offs to loans at year end                 .16%         .14%         .24%        .15%       .75%

          Net charge-offs to average loans <F1>                .17          .14          .25         .16        .78
 
          Balance of allowance for loan losses        
               to loans at year end                           1.38         1.41         1.36        1.40       1.42

<FN>
<F1> Averages are a combination of monthly and daily averages.
<F2> For detail, see Schedule of Loans Charged Off and Recovered.
</FN>
</TABLE>
     
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.
     
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 provision for loan losses totalled $1,464,000 for the year ended December 
31, 1998 compared to $1,317,000, $1,567,000, $1,078,000, and $1,912,000 for 
the years ended December 31, 1997, 1996, 1995, and 1994, respectively. The 
relationship of the allowance for loan losses to loans at year end 
approximated 1.38% compared to ratios of 1.36% to 1.42% for the previous four
years.  In reviewing the adequacy of the allowance for loan losses, management 
considered the relationship of nonaccrual loans, other real estate owned, and 
accruing loans contractually past due 90 days or more to total assets. This 
relationship approximated .56%, .93%, 1.03%, .99%, and 1.13% at year-end 1998, 
1997, 1996, 1995, and 1994, respectively.  



                                                     -9-     
     
     
 
                                                                     APPENDIX A
                                                                     Continued



<TABLE>
<CAPTION>
                                                            LOANS CHARGED OFF AND RECOVERED
                                                                (dollars in thousands)
                                           for the years ended December 31, 1998, 1997, 1996, 1995, and 1994
                                                                           
                                                                           
                                                                           
  
                                                    1998          1997          1996         1995        1994
<S>                                              <C>           <C>           <C>           <C>         <C>
Loans charged off:
   Commercial, financial and agricultural         $  138        $   83        $  165        $  135      $  762
 Real estate-mortgage                                223           361           382           298       1,358
   Personal installment                              820           926         1,327           774         806
   Other                                              77            96            93            78         119
Total                                              1,258         1,466         1,967         1,285       3,045

Loans recovered:                                                     
   Commercial, financial and agricultural             53           428           336           234          63
   Real estate-mortgage                              104            63           131           136         169
   Personal installment                              296           343           509           369         443
   Other                                              25            24            30            15          33
      Total                                          478           858         1,006           754         708
         Net charge-offs                          $  780        $  608        $  961        $  531      $2,337
                                                  ======        ======        ======        ======      ======
</TABLE>
                                        
<TABLE>
<CAPTION>
                                                                     ALLOCATION OF
                                                              ALLOWANCE FOR LOAN LOSSES<F1>
                                                                (dollars in thousands)
                                                                   as of December 31

                                                       
                                                       1998         1997          1996          1995           1994
<S>                                                 <C>           <C>           <C>           <C>           <C> 
Loans:
   Commercial, financial and agricultural            $2,199        $1,663        $1,541        $1,268        $1,177
   Real estate-construction                             ---          ---              2           ---             1
   Real estate-mortgage                               1,366         1,780         1,868         1,702         1,532
   Installment                                        1,161         1,458         1,125           841           695
   Unallocated                                        2,228         1,369         1,025         1,144         1,002
Balance                                              $6,954        $6,270        $5,561        $4,955        $4,407
                                                     ======        ======        ======        ======        ======

<FN>
<F1>See Schedule "Loan Account Composition" for the percent of loan 
    classification to total loans.
</FN>
</TABLE>
                                                 MATURITY DISTRIBUTION OF TIME
                                                  DEPOSITS OF $100,000 OR MORE
                                                      (dollars in thousands)
                                                     as of December 31, 1998
Remaining to Maturity:
   Less than three months                                               $ 6,620
   Three months to six months                                             3,117
   Six months to twelve months                                            6,233
   More than twelve months                                                9,697
                                                                        $25,667
                                                                        ======= 

                                                       -10-

                                                
                                                
                                                                      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 negative GAP, the 
amount of income earned on its assets fluctuates less 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 negative GAP will experience a smaller 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 negative GAP face a smaller increase
in the yield on their assets than in the cost of their liabilities. A 
decreasing interest rate environment is favorable to institutions with a 
negative GAP because more of their liabilities than their assets adjust during 
the period and, accordingly, the decrease in the cost of their liabilities is 
greater than the decrease in the yield on their assets.
     
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, 1998.
     
Significant maturity/repricing assumptions (based on internal analysis) include 
the presentation of all savings and NOW accounts as being 62% interest rate 
sensitive. Equity securities are reflected in the shortest time interval. 
Assumed paydowns on mortgage-backed securities and loans have also been 
included in all time intervals.
     
The following table sets forth the scheduled repricing or maturity of the
Corporation's interest-earning assets and interest-bearing liabilities at 
December 31, 1998.
     
<TABLE>
<CAPTION>     
     Interest Rate Sensitivity                                                          
     At December 31, 1998                1-90       90-180      180-365     1 year     Total
     Dollars in thousands                days        days         days     or more          
<S>                                   <C>         <C>         <C>        <C>        <C>                              
     Assets
     Interest-bearing deposits in 
      other banks                      $  1,258        ---         ---         ---   $  1,258
     Investment securities               42,184    $17,125     $26,124    $207,109    292,542  
     Federal funds sold                   2,208        ---         ---         ---      2,208   
     Loans, net of unearned income<F1>  215,540     29,664      53,266     203,792    502,262    
     Loans held for sale                  3,319        ---         ---         ---      3,319
     Total                             $264,509    $46,789     $79,390    $410,901   $801,589
     
     Liabilities
     Savings                           $ 79,935    $32,509    $ 46,250    $ 95,622   $254,316   
     Time                                49,068     48,825      54,324     113,667    265,884
     Time in denominations of
      $100,000 or more                    6,620      3,117       6,233       9,697     25,667
     Short-term borrowings                7,910        ---         ---         ---      7,910
     Long-term debt                      15,000     10,000      14,000     122,000    161,000 
     Total                             $158,533    $94,451    $120,807    $340,986   $714,777
                                     
     Interest Sensitivity Gap
     Periodic                          $105,976   $(47,662)   $(41,417)    $69,915  
     Cumulative                                     58,314      16,897      86,812
     
<FN>
<F1>Does not include nonaccrual loans.
</FN>
</TABLE>

                                                 -11-
     
                                      
     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 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 are interest rate indices of the
     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 sheet
     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 
     
                                   -12-
     
     
     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.
     
          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
     from the difference between the 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
     containing 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 depending on 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 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.
                                    -13-
        

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, primarily deposits and FHLB borrowings, a changing interest rate 
environment may result in different levels of changes in the different 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.

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 hypothetical
higher and lower interest rates at one percent intervals. The present value of  
each major category of financial instrument 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, 1998 consolidated with the estimated present values of other 
financial instruments of the Corporation, at current interest rates and 
hypothetical higher and lower interest rates of one and two percent. 

<TABLE>
<CAPTION>
    
                                                                   Base        
                                          -2%          -1%     Present Value     +1%          +2%
                                                          (dollars in thousands)
           
              Assets
<S>                                  <C>         <C>           <C>          <C>         <C>  
Cash, interest-bearing time deposits,  
   and federal funds sold............ $ 28,502    $ 28,502      $ 28,502     $ 28,502    $ 28,502
Investments securities...............  303,673     297,947       292,542      285,529     271,543  
Loans, net of unearned income........  504,784     501,851       498,552      493,911     489,085 
Loans held for sale..................    3,360       3,341         3,319        3,288       3,256
Other assets.........................   32,003      32,003        32,003       32,003      32,003
      

     Total assets.................... $872,322    $863,644      $854,918     $843,233    $824,389
                                      ========    ========      ========     ========    ========
              Liabilities

Deposits............................. $603,699    $601,143      $598,654     $596,228    $593,864
Short-term borrowings................    7,910       7,910         7,910        7,910       7,910
Long-term debt.......................  174,802     167,530       160,822      155,899     155,129
Other liabilities....................    7,983       7,983         7,983        7,983       7,983

     Total liabilities...............  794,394     784,566       775,369      768,020     764,886  

     Total stockholders' equity......   77,928      79,078        79,549       75,213      59,503

     Total liab. and stockholders'
        equity......................  $872,322    $863,644      $854,918     $843,233    $824,389 
                                      ========    ========      ========     ========    ========
</TABLE>
                                       -14-

                                             
                                       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 3 of the Annual Report to Stockholders for the year ended 
December 31, 1998 (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 21 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 Discussion of Financial Condition and 
Results of Operations" on pages 22 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 14, 1999, are incorporated by 
reference to pages 6 through 20 of the Annual Report.
     
Item 9.  Disagreements on Accounting and Financial Disclosures:
     
      None.
     
     
                                       -15-
 
       
     
                                     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 the Bank, or its wholly-owned subsidiary, 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, 1998.
            
                                                                    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
     
     
Ernest L. Lowe         Chairman-CBI            1990      37,998 (9)     .58%
   Age 62                 Pres/CEO
                          Community Banks, N.A.
                          Prior to 12/31/97
                          Ex. V.P. of CBI
     
Eddie L. Dunklebarger  President/CEO           1998      92,785 (19)   1.42% 
   Age 45                 CBI & PSB    
                          Prior to 3/31/98
                          Pres/CEO of PSB
     
Thomas L. Miller       Retired CEO of          1966      57,721 (10)    .88%
   Age 66              CBI & CBNA
     
     
Kenneth L. Deibler     Self-Employed           1966      34,703 (3)     .53%
   Age 76                Insurance Broker
                         Elizabethville, PA
     
Leon E. Kocher         Chairman of the Board,  1963      27,206         .42%
   Age 86                Kocher Enterprise, Inc.
                         Millersburg, PA
     
Robert W. Rissinger    Sec./Treasurer          1968     242,365 (4)    3.71%
   Age 72                Alvord Polk Tool Co.                   (5)
                         (cutting tools)                                  
                         Engle Rissinger Auto Group
                         Millersburg, PA                         
     
Allen Shaffer          Attorney-at-Law         1961      42,637 (7)     .65%
   Age 73                Millersburg and
                         Harrisburg, PA
     
James A. Ulsh          Attorney-at-Law         1977      16,295         .25%
   Age 52                Mette, Evans &
                         Woodside
                         Harrisburg, PA
     
Samuel E. Cooper       Retired Superintendent  1992       2,069         .03%
   Age 65                Warrior Run
                         School District 
                         Turbotville, PA
                              
Susan K. Nenstiel      Regional Dir. of Dev.   1996         207          --
   Age 47                Lutheran Welfare Serv.
                         Hazleton, PA                   
     
                                         -16-   
                                      

                                                                    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    
               
Ronald E. Boyer        President,              1981      21,725 (6)     .33%
   Age 61                Alvord-Polk Tool Co.
                         (manufacturing of 
                         cutting tools)
                         Millersburg, PA

Peter DeSoto           CEO, J.T. Walker        1981      44,270 (14)    .68%
   Age 59                Industries, Inc.      
                         (manufacturing of metal
                         products)
                         Elizabethville, PA    
                                 
Thomas W. Long         Partner,                1981       9,326         .14%
   Age 69                Millersburg Hardware 
                         Millersburg, PA

Donald L. Miller       President, Miller Bros. 1981      88,003        1.35%
   Age 69                Dairy
                         Millersburg, PA
                         
Ray N. Leidich         Retired Dentist         1985      67,476 (8)    1.03%
   Age 70                Tremont, PA


John W. Taylor, Jr.    President-Air Brake     1998      18,930 (15)    .29%
   Age 68                & Power Equip. Co.

Harry B. Nell           Retired Merchant       1998      34,480 (16)    .53%
   Age 72

Earl L. Mummert         Consulting Actuary     1998      32,643 (17)    .50%
   Age 54                 Conrad M. Siegel, Inc.
                          Harrisburg

Wayne H. Mummert        Retired U.S. Postal    1998      72,548 (18)   1.11%
   Age 65                 Service/Farmer      



(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 as to 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, 1998. Beneficial ownership may be disclaimed 
as to certain of the securities.

(3)  Includes 2,802 shares owned by Mr. Deibler's grandchildren.

(4)  Includes 6,310 shares owned by Alvord-Polk Tool Co., Inc. the stock of 
which is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.


                                           -17- 



(5)  Includes 14,062 shares owned by Engle Ford, Inc., 43,330 shares owned by 
Mr. Rissinger's spouse, Shirley Rissinger, and 10,578 shares owned by Engle 
Ford, Inc. Profit Sharing Plan.

(6)  Includes 6,310 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 496 
shares owned by Mr. Boyer's wife, Judith Boyer.

(7)  Includes 7,270 shares owned by Mr. Shaffer's Retirement plan. 
                                                              
(8)  Includes 33,738 shares owned by Dr. Leidich's wife, Dolores Leidich.

(9)  Includes 180 shares owned by Mr. Lowe's wife, Barbara and 21 shares owned 
by Mr. Lowe's son and incentive stock options to acquire 31,373 shares.

(10)  Includes incentive stock options to acquire 24,964 shares and 788 in his 
IRA.

(11)  Includes incentive stock options to acquire 22,543 shares.

(12)  Includes incentive stock options to acquire 13,068 shares and 142 shares
registered to Mr. Lawley for his minor children.

(13)  Includes incentive stock options to acquire 1,443 shares.   

(14)  Includes 97 shares owned by Mr. DeSoto's son.

(15)  Includes 1,210 shares owned by Mr. Taylor's wife, LouAnn and 865 in his 
IRA.

(16)  Includes 787 shares owned by Mr. Nell's wife, Helen and stock options to 
acquire 2,004 shares. 
        
(17)  Includes stock options to acquire 2,004 shares and 13,723 shares in 
Mr. Mummert's IRA.  

(18)  Includes stock options to acquire 2,004 shares and 16,380 shares owned by 
Mr. Mummert's, wife Shirley. 

(19)  Includes 298 shares owned by Mr. Dunklebarger's wife, Connie, 8,867 shares
owned by Mr. Dunklebarger's children, 7,446 shares in his 401(k) plan, 6,336
shares in his IRA and 45,430 stock options (ISO and NQ's) to acquire shares.

(20)  Includes 4,035 shares in his 401(k) plan and 14,272 (ISO and NQ) stock 
options to acquire shares.

(21)  Includes 3,447 shares in his 401(k) plan and 7,487 shares in his IRA and 
15,930 stock options to acquire shares.  


Section 16(a) Beneficial Ownership Reporting Compliance

  In 1998, to the knowledge of CBI, all  Executive Officers and directors timely
filed all reports with the Securities Exchange Commission, except Peter DeSoto 
who filed one Form 4 report, regarding one transaction two days late.  
   
   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.

     
                                            -18-

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 Bank by each of 
such persons as of December 31, 1998.



                                                        Amount and   Percentage 
                      Principal Occupation               Nature of       of
                       for the Past Five                Beneficial   Outstanding
Name and Age                Years           Term (1)    Ownership(2)Common Stock

Ernest L. Lowe        Chairman-CBI               1985    37,998  (9)    .58%
   Age 62                 Pres/CEO
                          Community Banks, N.A.
                          Prior to 12/31/97
                          Ex. V.P. of CBI 

Eddie L. Dunklebarger President/CEO              1998    92,785  (19)  1.42% 
   Age 45                 CBI & PSB
                          Prior to 3/31/98
                          Pres/CEO of PSB   

Terry L. Burrows      Executive Vice President,  1977    20,251  (13)   .31%
   Age 50                 Chief Financial Officer 

David E. Hawley       Executive Vice President,  1975    23,088  (11)   .35%
   Age 60                 Corporate Property Officer  

Robert W. Lawley      Executive Vice President,  1980    13,266  (12)   .20%
   Age 44                 Chief Lending Officer

Anthony N. Leo        Executive Vice President   1998    25,976  (20)   .40%  
   Age 38

Jeffrey M. Seibert    Executive Vice President   1998    33,998  (21)   .52% 
   Age 39
   

(1)  Initial year employed in this capacity.

          The following is all shares beneficially owned by all directors and 
executive officers of the Bank as a group:
      
                                                  
                                          Amount and Nature
                                            of Beneficial 
                                              Ownership
     
                                                                  Percent
                       Title of Class     Direct     Indirect     of Class
     
                          Common          687,751    365,730       16.16%
     
     
     
                                            -19-  
     
     
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 4, 1999; 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 the 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, 1998, the 
following officers have been credited with the following years of service: 
Ernest L. Lowe-14 years of service, Robert W. Lawley-23 years of service, and
Terry L. Burrows-25 years of service.
               
     The amounts shown on the following table assume an annual retirement 
benefit for an employee who chose a straight-line annuity and who is presently 
50 years old and who will retire at the age of 65 years.

<TABLE>
<CAPTION>
     
                                                   PENSION PLAN TABLE
                                                      Years of Service        
                     
     Remuneration              15         20         25          30            35            40          
<S>                       <C>         <C>        <C>         <C>           <C>          <C>  
     $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 16 through 19.
     
     
     
                                         -20-
     
     
Item 13.  Certain Relationships and Related Transactions:
     
          (a)  Transactions 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 a partner in the law firm of Carlyon & 
McNelis, 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.
                
                                        PART IV
       
Item 14  Exhibits, Financial Statements Schedules and
          Reports on Form 8-K:
                                                            Reference (page) 
                                                                    Annual
                                                              Form  Report to
                                                              10-K  Shareholders
(a) (1)   Consolidated Financial Statements
          Report of Independent Public
             Accountants                                      --          20

          Balance Sheets as of December 31, 1998
             and 1997                                         --           6  

          Statements of Income for each of the three years
             ended December 31, 1998                          --           7  

          Statements of Changes in Stockholders'
             Equity for each of the three years ended
             December 31, 1998                                --           8 

          Statements of Cash Flows for each of the three
             years ended December 31, 1998                    --           9    

          
          Notes to Financial Statements                       --        10-20  
    
     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).

                                         -21-


(b)  The registrant filed Form 8-K, November 23, 1998, subsequent to announcing 
a stock repurchase program effective November 10, 1998. Up to five percent of 
outstanding shares could be repurchased pursuant to the program.  



                    CONSENT OF INDEPENDENT ACCOUNTS


     
     We consent to the incorporation by reference in the registration
     statements of Community Banks, Inc. on Form S-8 (File No. 0-15786
     and File No. 33-24908) of our report, dated January 14, 1999 on 
     our audits of the consolidated financial statements of Community 
     Banks, Inc. as of December 31, 1998 and 1997, and for the years 
     ended December 31, 1998, 1997, and 1996, which report is 
     incorporated by reference in the Annual Report on Form 10-K.
     
                                PricewaterhouseCoopers, LLP
     
     
     One South Market Square
     Harrisburg, Pennsylvania
     March 25, 1999
     
     
     
                                         -22-

                                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:     Ernest L. Lowe       _____
                                (Ernest L. Lowe)  
                             Chairman of the Board
                                 and Director
   
   Date:  March 5, 1999
   
             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.
   
          Signature                   Title                      Date
     
    /S/ Terry L. Burrows          Ex. Vice President and         3/5/99
       (Terry L. Burrows)         Chief Financial Officer
   
    /S/ Ronald E. Boyer           Director                       3/5/99
       (Ronald E. Boyer)
   
    /S/ Samuel E. Cooper          Director                       3/5/99
       (Samuel E. Cooper)
   
    /S/ Kenneth L. Deibler        Director                       3/5/99
       (Kenneth L. Deibler)
   
    /S/ Eddie L. Dunklebarger     President & CEO and            3/5/99
      (Eddie L. Dunklebarger)     Director
   
    /S/ Leon E. Kocher            Director                       3/5/99
       (Leon E. Kocher)
   
    /S/ Ray N. Leidich            Director                       3/5/99
        (Ray N. Leidich)
   
    /S/ Thomas L. Miller          Director                       3/5/99
       (Thomas L. Miller)
   
    /S/ Earl L. Mummert           Director                       3/5/99
       (Earl L. Mummert)
   
    /S/ Wayne H. Mummert          Director                       3/5/99
       (Wayne H. Mummert)
   
    /S/ Harry B. Nell             Director                       3/5/99
       (Harry B. Nell)
   
    /S/ Robert W. Rissinger       Director                       3/5/99
      (Robert W. Rissinger)
      
    /S/ Allen Shaffer             Director                       3/5/99
        (Allen Shaffer)
   
    /S/ John W. Taylor            Director                       3/5/99
       (John W. Taylor) 
   
    /S/ James A. Ulsh       _     Director                       3/5/99
       (James A. Ulsh)
   
                                      -23-