Financial Trends
                              Community Banks, Inc.
                                       And
                                  Subsidiaries


<TABLE>
<CAPTION>

                                                                                          Percent Change
                                               2002         2001          2000        2002/2001   2001/2000
----------------------------------------------------------------------------------------------------------------------------
Per-Share Data
----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>           <C>             <C>         <C>
Net income (basic)                           $   2.00      $  1.48       $  1.52         35.1%       (2.6)%
Net income (diluted)                             1.95         1.45          1.50         34.5        (3.3)
Cash dividends                                    .72          .64           .57         12.5        12.3


Balance Sheet Data -At Year End                          (dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------
Total assets                               $1,679,898   $1,509,734    $1,308,713         11.3%        15.4%
Total loans                                   904,568      857,278       814,874          5.5          5.2
Deposits                                    1,132,913    1,003,225       919,241         12.9          9.1
Core (Tier 1) capital                         134,354      113,383       103,613         18.5          9.4


Profitability Ratios
----------------------------------------------------------------------------------------------------------------------------
Return on average assets                         1.17%         .97%         1.12%
Return on average stockholders' equity          15.46%       12.21%        15.08%
Efficiency ratio                                56.81%       59.77%        55.42%


Asset Quality Ratios
----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to
     total loans                                 1.36%        1.42%         1.27%
Allowance for loan losses to
     non-accrual loans                            131%         109%          171%
Non-performing assets to
     total assets                                 .63%         .78%          .49%
</TABLE>



                                 Graphs

 Diluted Earnings Per Share ($)          Return on Average Assets (%)

1.19   1.42   1.50  1.45  1.95          1.21   1.22  1.12   .97   1.17

 98     99     00    01    02            98     99    00     01    02


 Cash Dividends Per Share ($)             Total Deposits ($000,000's)

 .49   .52    .57   .64   .72           728    826   919   1,003  1,133

  98    99     00    01    02            98     99    00     01    02


Return on Average Equity (%)               Total Loans ($000,000's)

12.22   14.40  15.08  12.21  15.46      620    708   815    857    905

 98       99     00    01     02         98     99    00     01    02

<PAGE>

Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 2002 and 2001
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
                                                            ---------------------------------
                                                                2002                  2001
                                                            ---------------------------------
ASSETS

<S>                                                         <C>                   <C>
Cash and due from banks..............................       $    36,137           $    44,764
Interest-bearing time deposits in other banks........               951                 1,372
Investment securities, available for sale............           667,801               543,901
Loans................................................           904,568               857,278
     Less: Allowance for loan losses.................           (12,343)              (12,132)
                                                            -----------               -------
         Net loans...................................           892,225               845,146
Premises and equipment, net..........................            24,209                22,640
Goodwill ............................................             1,031                   151
Identifiable intangible assets.......................               729                   817
Other real estate owned..............................             1,183                   631
Loans held for sale..................................            11,483                10,479
Accrued interest receivable and other assets.........            44,149                39,833
                                                            -----------           -----------
     Total assets....................................       $ 1,679,898           $ 1,509,734
                                                            ===========           ===========

LIABILITIES

Deposits:
     Demand (non-interest bearing)...................       $   168,277           $   160,387
     Savings.........................................           345,598               309,913
     Time............................................           506,991               453,533
     Time in denominations of $100,000 or more.......           112,047                79,392
                                                            -----------           -----------
     Total deposits..................................         1,132,913             1,003,225
Short-term borrowings................................            69,125                60,002
Long-term debt.......................................           320,533               322,155
Subordinated debentures..............................            15,000                   ---
Accrued interest payable and other liabilities.......            13,165                13,103
                                                            -----------           -----------
     Total liabilities...............................         1,550,736             1,398,485
                                                            -----------           -----------

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; 9,410,000  and 9,416,000 shares
     issued in 2002 and 2001, respectively...........            47,053                44,839
Surplus..............................................            46,418                35,906
Retained earnings....................................            35,344                36,923
Accumulated other comprehensive income (loss),
     net of tax (benefit) of $3,520 and $(2,167),
     respectively....................................             6,538                (4,024)
Less: Treasury stock of  258,000 and 125,000
     shares, at cost, respectively...................            (6,191)               (2,395)
                                                            -----------           -----------
     Total stockholders' equity......................           129,162               111,249
                                                            -----------           -----------
     Total liabilities and stockholders' equity......       $ 1,679,898           $ 1,509,734
                                                            ===========           ===========
</TABLE>


Issued and treasury shares in 2001 have been restated to reflect stock
dividends. The accompanying notes are an integral part of the consolidated
financial statements.


<PAGE>


Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001,
and 2000 (dollars in thousands except per share data)
<TABLE>
<CAPTION>
                                                             --------------------------------------
                                                                2002           2001          2000
                                                             --------------------------------------
<S>                                                          <C>            <C>            <C>
Interest income:
     Interest and fees on loans......................        $ 67,158       $ 69,925       $ 66,791
     Interest and dividends on investment securities:
         Taxable.....................................          19,602         20,075         20,570
         Exempt from federal income tax..............           9,721          7,172          4,812
     Federal funds interest..........................             193            800            750
     Other interest income...........................              26            103             71
                                                             --------       --------       --------
         Total interest income.......................          96,700         98,075         92,994
                                                             --------       --------       --------

Interest expense:
     Interest on deposits:
         Savings.....................................           4,151          6,820          6,954
         Time........................................          20,721         24,461         23,712
         Time in denominations of $100,000 or more...           3,777          4,270          4,013
     Interest on short-term borrowings and
         long-term debt..............................          16,970         15,683         13,228
     Interest on subordinated debentures.............              26            ---            ---
     Federal funds purchased and repo interest.......             567            906          1,292
                                                             --------       --------       --------
         Total interest expense......................          46,212         52,140         49,199
                                                             --------       --------       --------
         Net interest income.........................          50,488         45,935         43,795
Provision for loan losses............................           3,350          5,080          2,863
                                                             --------       --------       --------
         Net interest income after provision for
           loan losses...............................          47,138         40,855         40,932
                                                             --------       --------       --------

Other income:
     Investment management and trust services........             993            740            527
     Service charges on deposit accounts.............           3,440          3,023          2,380
     Other service charges, commissions and fees.....           2,471          1,783          1,577
     Investment security gains.......................           1,034          1,704            469
     Insurance premium income and commissions........           2,016          1,483          1,331
     Gains on loan sales.............................           1,221          1,367            404
     Other income....................................           2,800          2,041          1,460
                                                             --------       --------       --------
         Total other income..........................          13,975         12,141          8,148
                                                             --------       --------       --------

Other expenses:
     Salaries and employee benefits..................          21,636         18,528         16,466
     Net occupancy expense...........................           6,051          5,267          4,504
     Merger and restructuring related expenses.......             ---          1,968            ---
     Other operating expense.........................          11,613         10,758          9,493
                                                             --------       --------       --------
         Total other expenses........................          39,300         36,521         30,463
                                                             --------       --------       --------
         Income before income taxes..................          21,813         16,475         18,617
Income taxes.........................................           3,367          2,879          4,702
                                                             --------       --------       --------
         Net income..................................        $ 18,446       $ 13,596       $ 13,915
                                                             ========       ========       ========


Basic earnings per share............................         $   2.00       $   1.48       $   1.52
                                                             ========       ========       ========

Diluted earnings per share...........................        $   1.95       $   1.45       $   1.50
                                                             ========       ========       ========
</TABLE>


Per share data for all periods has been restated to reflect stock dividends. The
accompanying notes are an integral part of the consolidated financial
statements.


<PAGE>


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

For the Years Ended December 31, 2002, 2001, and 2000 (dollars in thousands
except per share data)

<TABLE>
<CAPTION>

                                             -------------------------------------------------------------------------------
                                                                                 Accumulated
                                                                                   Other                          Total
                                                Common               Retained   Comprehensive    Treasury      Stockholders'
                                                 Stock     Surplus   Earnings      Income         Stock          Equity
                                             -------------------------------------------------------------------------------



<S>                                             <C>        <C>        <C>         <C>            <C>           <C>
Balance, December 31, 1999...................   $40,903    $24,259    $36,432     $(11,697)      $(3,588)      $ 86,309
     Comprehensive income:
         Net income..........................                          13,915                                    13,915
         Change in unrealized gain (loss) on
           securities, net of tax of $5,925 and
           reclassification adjustment of $469                                      11,003                       11,003
                                                                                                               --------

     Total comprehensive income..............                                                                    24,918
Cash dividends ($.57 per share)..............                          (5,216)                                   (5,216)
5% stock dividend  (348,000 shares)..........     1,740      4,612     (6,352)
Net increase in treasury stock (125,000 shares)                                                   (2,344)        (2,344)
Issuance of additional shares (16,000 shares).       83        284        (56)                       311
                                                -------    -------    -------     --------       -------       --------

Balance, December 31, 2000...................    42,726     29,155     38,723         (694)       (5,932)       103,978
     Comprehensive income:
         Net income..........................                          13,596                                    13,596
         Change in unrealized gain (loss) on
           securities, net of tax of $(1,297) and
           reclassification adjustment of $1,704                                    (2,408)       (2,408)
         Change in unfunded pension liability,
           net of tax of $(497)..............                                         (922)                        (922)
                                                                                                               --------
     Total comprehensive income..............                                                                    10,266
Cash dividends ($.64 per share)..............                          (5,880)                                   (5,880)
5% stock dividend (426,000 shares)...........     2,130      6,773     (8,903)
Purchases of treasury stock (28,000 shares)..                                                       (689)          (689)
Issuance of additional shares (209,000 net
     shares of treasury stock reissued and
     3,000 shares of common stock canceled)..      (17)       (22)       (613)                     4,226          3,574
                                                -------    ------- ----------     --------       -------       --------

Balance, December 31, 2001...................    44,839     35,906     36,923       (4,024)       (2,395)       111,249
Comprehensive income:
         Net income..........................                          18,446                                    18,446
         Change in unrealized gain (loss) on
           securities, net of tax of $6,004 and
           reclassification adjustment of $1,034                                    11,151                       11,151
         Change in unfunded pension liability,
           net of tax of $(317)..............                                         (589)                        (589)
                                                                                                               --------
Total comprehensive income...................                                                                    29,008
Cash dividends ($.72 per share)..............                          (6,654)                                   (6,654)
5% stock dividend (440,000 shares)..........      2,241     10,177    (12,418)
Purchases of treasury stock (224,000 shares).                                                     (5,828)        (5,828)
Issuance of additional shares (93,000 net
shares of treasury stock reissued and
 5,000 shares of common stock canceled)......       (27)       335       (953)                     2,032          1,387
                                                -------    -------    -------     --------       -------       --------
Balance, December 31, 2002...................   $47,053    $46,418    $35,344     $  6,538       $(6,191)      $129,162
                                                =======    =======    =======     ========       =======       ========
</TABLE>

Per share data for all periods has been restated to reflect stock dividends. The
accompanying notes are an integral part of the consolidated financial
statements.


<PAGE>


Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002,
2001, and 2000 (in thousands)

<TABLE>
<CAPTION>

                                                                        -------------------------------------------
                                                                          2002              2001              2000
                                                                        -------------------------------------------

Operating Activities:
<S>                                                                     <C>              <C>               <C>
     Net income...............................................          $ 18,446         $ 13,596          $ 13,915
     Adjustments to reconcile net income to net
         cash provided by operating activities:
         Provision for loan losses............................             3,350            5,080             2,863
         Depreciation and amortization........................             3,320            3,081             3,615
         Investment security gains............................            (1,034)          (1,704)             (469)
         Loans originated for sale............................           (66,158)         (94,933)          (23,440)
         Proceeds from sales of loans.........................            66,375           88,540            25,125
         Gains on loan sales..................................            (1,221)          (1,367)             (404)
         Change in other assets, net..........................            (7,191)             243           (13,653)
         Change in accrued interest payable and other
           liabilities, net...................................             (527)            4,237             1,533
                                                                        --------         --------          --------
              Net cash provided by operating activities.......            15,360           16,773             9,085
                                                                        --------         --------          --------

Investing Activities:
     Net (increase) decrease in interest-bearing time
       deposits in other banks................................               421            1,196              (447)
     Proceeds from sales of investment securities.............           147,610          124,490            28,343
     Proceeds from maturities of investment securities........            83,605          134,308            15,708
     Purchases of investment securities.......................          (337,706)        (417,679)          (57,486)
     Net increase in total loans..............................           (54,094)         (46,343)         (108,924)
     Net increase in premises and equipment...................            (4,037)          (3,532)          (5,868)
     Other    ................................................              (880)            (335)              ---
                                                                        --------         --------          --------
              Net cash used in investing activities...........          (165,081)        (207,895)         (128,674)
                                                                        --------         --------          --------

Financing Activities:
     Net increase in total deposits...........................           129,688           83,984            93,074
     Net increase in short-term borrowings....................             9,123           23,909            19,345
     Proceeds from issuance of long-term debt.................            34,767           83,236           160,757
     Proceeds from issuance of subordinated debt..............            15,000              ---               ---
     Repayment of long-term debt..............................           (36,389)            (694)         (135,009)
     Cash dividends...........................................            (6,654)          (5,880)           (5,216)
     Purchases of treasury stock..............................            (5,828)            (689)           (2,344)
     Proceeds from issuance of common stock...................             1,387            3,574               311
                                                                        --------         --------          --------
              Net cash provided by financing activities.......           141,094          187,440           130,918
                                                                        --------         --------          --------
              Increase (decrease) in cash and cash equivalents            (8,627)          (3,682)           11,329

Cash and cash equivalents at beginning of year................            44,764           48,446            37,117
                                                                        --------         --------          --------
Cash and cash equivalents at end of year......................          $ 36,137         $ 44,764          $ 48,446
                                                                        ========         ========          ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.




<PAGE>


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

1.     ORGANIZATION AND BASIS OF PRESENTATION:

     Community Banks,  Inc.  ("Community" or the  "Corporation")  is a financial
holding  company  whose  wholly-owned   subsidiaries  include  Community  Banks,
Community Bank Investments,  Inc. (CBII), Community Banks Life Insurance Company
(CBLIC) and CMTY  Capital  Trust I. On January 1, 2002,  Community  combined its
former two separate banks into a single charter, Community Banks. The two former
banks were  Community  Banks,  N.A.,  and Peoples  State Bank.  All  significant
intercompany transactions have been eliminated in consolidation. The Corporation
operates through its executive office in Harrisburg,  Pennsylvania,  and through
44 branch  banking  offices  located  in Adams,  Cumberland,  Dauphin,  Luzerne,
Northumberland,  Schuylkill,  Snyder,  and York  Counties  in  Pennsylvania  and
Carroll  County in Maryland.  Community  Banks provides a wide range of services
through its network of offices.  Lending  services include secured and unsecured
commercial  loans,  residential  and  commercial  mortgages and various forms of
consumer lending. Deposit services include a variety of checking,  savings, time
and money market deposits.  The Corporation also provides  specialized  services
through its wholly-owned subsidiaries.

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, 2002 and 2001, there were no securities  identified as "held-to-maturity" or
"trading."  All  other   securities   are  classified  as   "available-for-sale"
securities  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 stockholders'  equity.  Quoted market values,  when available,  are
used to  determine  the fair  value of  "available-for-sale".  If quoted  market
prices are not available,  then fair values are estimated using quoted prices of
instruments with similiar characteristics.

     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  allowance  for loan losses is  established  as losses are estimated to
have  occurred  through a provision  for loan losses  charged to earnings.  Loan
losses  are  charged  against  the  allowance  when   management   believes  the
uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any,
are credited to the allowance.

     The  allowance  for  loan  losses  is  evaluated  on a  quarterly  basis by
management using a systemic methodology that incorporates management's judgments
about the credit  quality of the loan  portfolio  through a disciplined  process
that is consistently  applied.  Management considers all known relevant internal
and external factors that may affect loan collectibility,  as well as particular
risks indigenous to specific types of lending.  The final results of the process
are  reviewed  and  approved by  executive  management.  Results are  constantly
validated by a review of trends associated with loan volume, delinquencies,  and
other factors that may influence the methodology  used to estimate the allowance
for loan  losses.  This  evaluation  is  inherently  subjective  as it  requires
estimates that are susceptible to significant revision as additional information
becomes available.

<PAGE>

     A loan is  considered  impaired  when,  based on  current  information  and
events,  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.  Factors  considered by management in
determining  impairment  include  payment  status,  collateral  value,  and  the
probability of collecting  scheduled  principal and interest  payments when due.
Loans  that  experience  insignificant  payment  delays and  payment  shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment  shortfalls on a case-by-case  basis,  taking into
consideration  all of the  circumstances  surrounding the loan and the borrower,
including  the length of the delay,  the reasons for the delay,  the  borrower's
prior  payment  record,  and the  amount of the  shortfall  in  relation  to the
principal and interest owed.  Impairment is measured on a loan by loan basis for
commercial and  construction  loans over $250,000 by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's  obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.

     Large  groups  of  smaller  balance   homogeneous  loans  are  collectively
evaluated for  impairment.  Accordingly,  the  Corporation  does not  separately
identify individual consumer and residential loans for impairment disclosures.

     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 an 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.

                             PREMISES AND EQUIPMENT:
     Premises and equipment are stated at cost,  less  accumulated  depreciation
and amortization. Depreciation is calculated using accelerated and straight-line
methods  over the  estimated  useful  lives of the  related  assets as  follows:
banking premises, 20 to 40 years,  furniture,  fixtures,  and equipment,  3 to 5
years.  Leasehold  improvements are amortized over the shorter of the lease term
or 20 years.  Long-lived  assets are reviewed for impairment  whenever events or
changes in business  circumstances indicate the carrying value of the assets may
not be recovered.  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 AND IDENTIFIABLE INTANGIBLE ASSETS:
     The costs of acquired  companies  in excess of the fair value of net assets
at acquisition date is recorded as goodwill. Through December 31, 2001, goodwill
was amortized on a straight-line basis over 15 years. Subsequent to December 31,
2001,  goodwill is not amortized but,  instead,  is tested at least annually for
impairment.  Identifiable  intangible  assets relate to  acquisitions  of branch
offices from other banks and are amortized over their assumed useful lives.

                              LOANS HELD FOR SALE:
     Loans held for sale are  valued at the lower of cost or market,  determined
on an aggregate basis.

                                  PENSION PLAN:
     The Corporation has a noncontributory defined benefit pension plan covering
current and former  employees of a  predecessor  bank.  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 2001 to
discontinue 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 plan covering substantially all employees
which allows  employees to invest a percentage of their  earnings,  matched to a
certain amount specified by the Corporation. The expense related to this savings
plan was  $1,349,000  in 2002,  $938,000 in 2001,  and $865,000 in 2000,  and is
included in salaries and benefits expense.


<PAGE>

                                  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 11).

                            INTEREST INCOME ON LOANS:
     Interest  income on loans is recorded on the interest  method.  Non-accrual
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 non-accrual  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  non-accrual  status is reversed  and charged  against  current
income.  Subsequent cash payments received are applied either 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 being
deferred  and the net  amount  amortized  as an  adjustment  of the yield on the
related loan under the interest method, generally over the contractual life.

                            STOCK-BASED COMPENSATION:
     At December 31, 2002, the Corporation has a stock-based  compensation plan,
which is described more fully in Note 12. The Corporation accounts for this plan
under the recognition and measurement  principle of APB No. 25,  "Accounting for
Stock  Issued  to  Employees,"  and  related  Interpretations.   No  stock-based
compensation  cost is reflected in net income, as all options granted under this
plan had an exercise  price equal to the market value of the  underlying  common
stock on the date of grant.  The following  table  illustrates the effect on net
income and  earnings  per share if the  Corporation  had  applied the fair value
recognition   provisions   of  FASB  No.  123,   "Accounting   for   Stock-Based
Compensation," to stock-based compensation.

<TABLE>
<CAPTION>

                                                                                   Years Ended December 31,
                                                                             (In Thousands, Except Per Share Data)
                                                                       ---------------------------------------------
                                                                          2002              2001              2000
                                                                       ---------------------------------------------
<S>                                                                      <C>              <C>               <C>
        Net income, as reported                                          $18,446          $13,596           $13,915
        Deduct:  Total stock-based
           compensation expense determined under fair
           value based method for all awards, net of
           related tax effects                                              (419)            (362)             (385)
                                                                       ---------        ---------         ---------

        Pro forma net income                                             $18,027          $13,234           $13,530
                                                                         =======          =======           =======

        Earnings per share:
           Basic-as reported                                               $2.00            $1.48             $1.52
                                                                           =====            =====             =====
           Basic-pro forma                                                 $1.95            $1.44             $1.48
                                                                           =====            =====             =====

           Diluted-as reported                                             $1.95            $1.45             $1.50
                                                                           =====            =====             =====
           Diluted-pro forma                                               $1.91            $1.41             $1.46
                                                                           =====            =====             =====
</TABLE>



                            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 2002,  2001,  and
2000 transfers from loans to real estate acquired  through  foreclosure  totaled
$3,665,000, $663,000, and $555,000, respectively.

<PAGE>

     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 non-interest 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 $4,304,000,  $3,610,000,  and
$5,035,000, and $46,617,000,  $52,112,000,  and $48,491,000 for income taxes and
interest, respectively, in 2002, 2001, and 2000.

                              COMPREHENSIVE INCOME:
     The Corporation reports  comprehensive  income in accordance with Statement
of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive  Income."
Components of comprehensive  income, as detailed in the Consolidated  Statements
of  Changes  in  Stockholders'  Equity,  are  net of tax.  Comprehensive  income
includes  a  reclassification  adjustment  for  net  realized  investment  gains
included in net income of  $1,034,000,  $1,704,000,  and  $469,000 for the years
ended December 31, 2002, 2001, and 2000, respectively.

                               SEGMENT REPORTING:
     Statement of Financial  Accounting  Standards No. 131,  "Disclosures  about
Segments of an Enterprise and Related Information" ("SFAS 131") became effective
in 1998.  This  statement  requires  that  public  business  enterprises  report
financial and descriptive  information about its reportable  operating segments.
Based on the guidance by the statement,  the Corporation has determined its only
reportable   segment  is  community  banking.   The  Corporation's   non-banking
activities  have  been  determined  to be  insignificant  and do not  require  a
separate disclosure.

                        RECENT ACCOUNTING PRONOUNCEMENTS:
     SFAS No. 145,  "Rescission of FASB Statements No. 4, 44, and 64,  Amendment
of FASB Statement No. 13, and Technical  Corrections," was issued in April 2002.
SFAS  145  updates,   clarifies,  and  simplifies  certain  existing  accounting
pronouncements  beginning  at  various  dates in 2002 and  2003.  The  statement
rescinds  SFAS 4 and SFAS 64,  which  required  net  gains  or  losses  from the
extinguishment  of debt to be classified as an extraordinary  item in the income
statement.  These gains and losses will now be classified as extraordinary  only
if they meet the criteria for such classification as outlined in APB Opinion 30,
which  allows  for  extraordinary  treatment  if the item is  material  and both
unusual and infrequent in nature. The statement also rescinds SFAS 44 related to
the accounting  for  intangible  assets for motor carriers and amends SFAS 13 to
require  certain  lease  modifications  that have  economic  effects  similar to
sale-leaseback transactions to be accounted for as such. The changes required by
SFAS 145 are not  expected to have a material  impact on results of  operations,
financial position, or liquidity.

     SFAS No.  146,  "Accounting  for Costs  Associated  with  Exit or  Disposal
Activities,"  was issued in July 2002 and becomes  effective for the Corporation
beginning  January 1, 2003.  This statement  requires a cost  associated with an
exit  or  disposal  activity,  such  as the  sale  or  termination  of a line of
business,  the closure of business  activities  in a particular  location,  or a
change in management structure, to be recorded as a liability at fair value when
it becomes  probable  the cost will be incurred and no future  economic  benefit
will be gained by the company for such cost.  Applicable  costs include employee
termination  benefits,  contract  termination  costs,  and costs to  consolidate
facilities  or relocate  employees.  SFAS 146  supersedes  EITF Issue No.  94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit  an  Activity,"  which  in  some  cases  required  certain  costs  to be
recognized  before a  liability  was  actually  incurred.  The  adoption of this
standard  is not  expected to have a material  impact on results of  operations,
financial position, or liquidity.

<PAGE>

     SFAS No. 147, "Acquisitions of Certain Financial  Institutions," was issued
in  October  2002.  SFAS  147  provides  guidance  on  the  accounting  for  the
acquisition of a financial institution and supersedes the specialized accounting
guidance provided in SFAS 72, "Accounting for Certain Acquisitions of Banking or
Thrift  Institutions."  SFAS 147 became  effective  upon  issuance  and requires
companies to cease  amortization of unidentified  intangible  assets  associated
with certain branch  acquisitions and reclassify these assets to goodwill.  SFAS
147   also   modifies   SFAS   144   to   include   in   its   scope   long-term
customer-relationship intangible assets and thus subject those intangible assets
to the same  undiscounted  cash flow  recoverability  test and  impairment  loss
recognition and measurement  provisions  required for other  long-lived  assets.
While SFAS 147 may affect how future business combinations,  if undertaken,  are
accounted for and disclosed in the financial statements, the issuance of the new
guidance  had no  effect  on  results  of  operations,  financial  position,  or
liquidity.

     SFAS No. 148,  "Accounting  for  Stock-Based  Compensation - Transition and
Disclosure,"  was issued in December 2002. SFAS 148 provides  guidance on how to
transition  from the  intrinsic  value  method  of  accounting  for  stock-based
employee  compensation  under  APB  25  to  SFAS  123's  fair  value  method  of
accounting, if a company so elects. Community intends to continue to account for
stock-based  compensation under the intrinsic value method of accounting for the
foreseeable  future.  If Community elects or is required to adopt the fair value
method  under SFAS 123 at some future date,  consideration  will be given to the
transition alternatives made available under SFAS 148, as appropriate.


          USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
     The  preparation  of financial  statements  in accordance  with  accounting
principles   generally  accepted  in  the  United  States  of  America  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.

                               RECLASSIFICATIONS:
     Certain amounts  reported in prior years have been  reclassified to conform
with  the  2002  presentation.   These  reclassifications  did  not  impact  the
Corporation's financial condition or results of operations.



<PAGE>


3.    INVESTMENT SECURITIES:

     The amortized cost and fair value of investment securities at December 31,
2002 and 2001 are as follows:

<TABLE>
<CAPTION>



                                                            2002                                         2001
                                         -----------------------------------------------------------------------------------------
                                                      Gross       Gross                             Gross       Gross
                                         Amortized  Unrealized  Unrealized    Fair    Amortized   Unrealized  Unrealized    Fair
                                           Cost       Gains       Losses      Value      Cost       Gains       Losses      Value
                                         -----------------------------------------------------------------------------------------
                                                                              (in thousands)

<S>                                       <C>       <C>         <C>        <C>        <C>          <C>       <C>         <C>
U.S. Treasury  and federal agencies...... $130,947  $  3,391    $     (4)  $ 134,334  $ 144,640    $   316   $ (2,412)   $ 142,544
Mortgage-backed U.S. government agencies.  206,450     4,375         ---     210,825     74,403        423       (456)      74,370
Obligations of states and political
       subdivisions......................  172,391     5,252        (508)    177,135    172,223      1,911     (4,141)     169,993
Corporate securities.....................   95,022     2,003      (3,931)     93,094     99,561      1,732     (2,888)      98,405
Equity securities........................   50,610     1,858         (55)     52,413     57,846        872       (129)      58,589
                                          --------  --------    --------    --------  ---------    -------   --------    ---------

       Total                              $655,420  $ 16,879    $ (4,498)  $ 667,801  $ 548,673    $ 5,254   $(10,026)   $ 543,901
                                          ========  ========    ========   =========  =========    =======   ========    =========
</TABLE>

     The amortized cost and fair value of all investment  securities at December
31, 2002, 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.



<TABLE>
<CAPTION>
                                                     Amortized              Fair
                                                       Cost                 Value
                                                    ------------------------------
                                                             (in thousands)

<S>                                                 <C>                  <C>
Due in one year or less........................     $   14,208           $  14,252
Due after one year through five years..........         44,639              45,822
Due after five years through ten years.........        112,374             116,371
Due after ten years............................        227,139             228,118
                                                    ----------           ---------
                                                       398,360             404,563
Mortgage-backed securities.....................        206,450             210,825
Equity securities..............................         50,610              52,413
                                                    ----------           ---------
                                                    $  655,420           $ 667,801
                                                    ==========           =========

</TABLE>



     Proceeds from sales of investments in debt  securities  were  $147,089,000,
$124,238,000  and  $27,565,000  in 2002,  2001,  and 2000,  respectively.  Gross
investment  security gains and losses of $1,899,000  and $865,000,  respectively
were  recognized  in 2002.  Gross gains and losses of  $2,064,000  and $360,000,
respectively,  were  recognized in 2001.  Gross gains and losses of $722,000 and
$253,000, respectively were recognized in 2000.

     At December 31, 2002 and 2001,  investment securities with carrying amounts
of approximately  $222,151,000 and $224,057,000,  respectively,  were pledged to
collateralize public deposits and for other purposes as provided by law.

     Equity  securities  include Federal Home Loan Bank (FHLB) stock at December
31,  2002,  and FHLB and Federal  Reserve Bank (FRB) stock at December 31, 2001,
which  represents  equity  interests in the FHLB and the FRB. Such securities do
not have a readily  determinable  fair value because ownership is restricted and
can be sold back only to the FHLB, FRB, or to another member institution.


<PAGE>



4.   LOANS:

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


                                                             December 31
                                                     ---------------------------
                                                       2002              2001
                                                     ---------------------------
                                                            (in thousands)

Commercial.......................................... $ 295,506         $ 291,474
Real estate:
   Residential......................................   109,497           136,990
   Commercial ......................................   246,533           199,142
Consumer............................................   253,032           229,672
                                                     ---------         ---------
                                                     $ 904,568         $ 857,278
                                                     =========         =========



     Loans held for sale amounted to $11,483,000 and $10,479,000 at December 31,
2002 and 2001, respectively.  These loans are primarily fixed-rate mortgages and
education  loans.  Loans  serviced  for others on a  nonrecourse  basis  totaled
$59,058,000 and $71,764,000 at December 31, 2002 and 2001, respectively.






5.   ALLOWANCE FOR LOAN LOSSES:

     Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>

                                                                           December 31
                                                             ----------------------------------------
                                                                2002            2001           2000
                                                             ----------------------------------------
                                                                          (in thousands)


<S>                                                          <C>             <C>            <C>
Balance, January 1....................................       $  12,132       $  10,328      $   8,976
Provision for loan losses.............................           3,350           5,080          2,863
Loan charge-offs......................................          (4,180)         (3,776)        (1,925)
Recoveries............................................           1,041             500            414
                                                             ---------       ---------      ---------
Balance, December 31..................................       $  12,343       $  12,132      $  10,328
                                                             =========       =========      =========
</TABLE>


<PAGE>




                                  RISK ELEMENTS


<TABLE>
<CAPTION>
                                                                    December 31
                                                             -------------------------
                                                                2002           2001
                                                             -------------------------
                                                                      (in thousands)

Loans on which accrual of interest has been discontinued:
<S>                                                          <C>             <C>
     Commercial.......................................       $     757       $   3,783
     Residential and commercial mortgages.............           8,250           6,952
     Other ...........................................             386             355
                                                             ---------       ---------
                                                                 9,393          11,090
                                                             ---------       ---------

Other real estate.....................................           1,183             631
                                                             ---------       ---------

     Total non-performing assets......................          10,576          11,721
                                                             ---------       ---------

Loans past due 90 days or more and still accruing interest:
     Commercial.......................................             817           1,003
     Residential and commercial mortgages.............              49             388
     Consumer.........................................              95             268
                                                             ---------       ---------
                                                                   961           1,659
                                                             ---------       ---------

     Total risk elements..............................       $  11,537       $  13,380
                                                             =========       =========

</TABLE>





                                 IMPAIRED LOANS
     At December 31, 2002 and 2001, the recorded  investments in loans for which
impairment has been recognized totaled $6,994,000 and $8,558,000. Impaired loans
are included in non-accrual  loans.  The valuation  allowance for impaired loans
totaled $326,000 and $1,835,000 at December 31, 2002 and 2001, respectively. For
the years ended December 31, 2002 and 2001, the average recorded  investments in
impaired loans approximated  $6,622,000 and $7,303,000,  respectively.  Interest
recognized on impaired loans on the cash basis for the years ending December 31,
2002 and 2001, was not significant.



<PAGE>




6.   PREMISES AND EQUIPMENT:

     Premises and equipment are comprised of the following:
<TABLE>
<CAPTION>
                                                                           December 31
                                                                     ------------------------
                                                                       2002            2001
                                                                     ------------------------
                                                                          (in thousands)

<S>                                                                  <C>             <C>
Banking premises.................................................    $ 23,224        $ 23,727
Furniture, fixtures, and equipment...............................      19,993          18,773
Leasehold improvements...........................................       1,485             440
Construction-in-progress.........................................       1,813             ---
                                                                     --------        --------
                                                                       46,515          42,940
Less accumulated depreciation and amortization..................      (22,306)        (20,300)
                                                                     --------        --------
                                                                     $ 24,209        $ 22,640
                                                                     ========        ========
</TABLE>


     Depreciation  and  amortization  expense charged to operations  amounted to
approximately  $2,468,000,  $2,497,000,  and $2,212,000 in 2002, 2001, and 2000,
respectively.

7.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT:

     Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
                                                                                         December 31
                                                                       ----------------------------------------------
                                                                          2002       Rate        2001       Rate
                                                                       ----------------------------------------------
                                                                                    (dollars in thousands)

<S>                                                                     <C>          <C>       <C>          <C>
Securities sold under agreements to repurchase....................      $ 31,694     1.73%     $  4,466     1.03%
Federal funds purchased...........................................           ---        -%       54,871     1.88%
Treasury tax and loan note........................................         1,891     1.02%          665     1.57%
FHLB borrowings...................................................        35,540     1.31%          ---        -%
                                                                        --------               --------
                                                                        $ 69,125               $ 60,002
                                                                        ========               ========
</TABLE>

     Interest   incurred  on  Federal  funds  purchased  and  other   short-term
borrowings  amounted to  $977,000,  $240,000,  and  $564,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.

     Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                                       December 31,
                                                                                                ------------------------
                                                                                                  2002            2001
                                                                                                ------------------------
                                                                                                      (in thousands)
<S>                                                                                             <C>             <C>
     Long-term advances from the FHLB of Pittsburgh. The long-term advances were issued
under variable and fixed rates and are due to mature from 2003 to 2016.  The
Corporation pledged investments totaling $103,182,000 and $114,412,000 at December 31,
2002 and 2001, respectively, as required under the terms of the credit facility with the
FHLB. Monthly payments of interest are required to be paid to the Federal Home Loan Bank
at rates presently ranging from 3.31% to 6.66% for variable advances and fixed rates
ranging from 2.85% to 5.65%, 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.                                                                                        $320,533        $300,788

     Repurchase agreements.                                                                          ---          21,367
                                                                                                --------        --------

                                                                                                $320,533        $322,155
                                                                                                ========        ========
</TABLE>
<PAGE>


     Interest on  long-term  debt  amounted  to  $16,560,000,  $16,349,000,  and
$13,956,000 for the years ended December 31, 2002, 2001, and 2000, respectively.

     Maturities on long-term debt at December 31, 2002 are as follows:

     2003.............................         $  5,000
     2004.............................         $    ---
     2005.............................         $    ---
     2006.............................         $    ---
     2007.............................         $    ---
     Subsequent to 2007...............         $315,533

8.  SUBORDINATED DEBENTURES:

     In December  2002,  the  Corporation  issued  $15,000,000  of floating rate
junior subordinated  deferrable interest debentures to CMTY Capital Trust I (the
Trust),  a Delaware  Business Trust,  in which the  Corporation  owns all of the
common equity.  The debentures are the sole asset of the Trust. The Trust issued
$15,000,000  preferred  securities to investors.  The Corporation's  obligations
under the debentures and related  documents,  taken together,  constitute a full
and unconditional  guarantee by the Corporation of the Trust's obligations under
the preferred  securities.  The junior subordinated debt securities pay interest
quarterly at 3 month LIBOR + 3.35%.  The preferred  securities are redeemable by
the  Corporation  on or after January 7, 2008 at 100% of principal  plus accrued
interest.  The  preferred  securities  must be  redeemed  upon  maturity  of the
debentures on January 7, 2033. All $15,000,000 of the debentures qualify as Tier
1 capital for regulatory purposes.

<PAGE>


9.   PENSION PLAN:
<TABLE>
<CAPTION>

     The following table sets forth the pension plan's funded status at December 31, 2002 and 2001 and pension cost at and for the
years ended December 31, 2002, 2001, and 2000.

----------------------------------------------------------------------------------------------------------------------------------
(in thousands)                                                                            2002             2001
----------------------------------------------------------------------------------------------------------------------------------


<S>                                                                                     <C>              <C>
Changes in benefit obligation:
   Projected benefit obligation, beginning of year................................      $ 5,842          $ 5,420
     Service cost.................................................................          107              130
     Interest cost................................................................          401              373
     Benefits paid................................................................         (269)            (214)
     Amendments...................................................................           93               73
     Experience loss..............................................................           64               60
                                                                                        -------          -------
   Projected benefit obligation, end of year......................................      $ 6,238          $ 5,842
                                                                                        =======          =======

Change in plan assets:
   Fair value of plan assets, beginning of year...................................      $ 5,083          $ 5,394
     Actual return on plan assets.................................................         (454)             (97)
     Employer contributions.......................................................          151              ---
     Benefits paid................................................................         (269)            (214)
                                                                                        -------          -------
   Fair value of plan assets, end of year.........................................      $ 4,511          $ 5,083
                                                                                        =======          =======

Funded status, end of year........................................................      $(1,727)         $  (759)
     Unrecognized net transition asset............................................          ---               (4)
     Unrecognized prior service cost..............................................         (600)            (704)
     Unrecognized net cost........................................................        3,248            2,342
     Recognition of additional minimum liability..................................       (2,325)          (1,419)
                                                                                        -------          -------
Prepaid pension cost (accrued pension liability), end of year.....................      $(1,404)         $  (544)
                                                                                        =======          =======
</TABLE>
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)                                                                    2002             2001              2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>              <C>               <C>
Periodic pension cost:
     Weighted average discount rate...............................................         7.0%             7.0%              7.0%
     Expected long-term rate of return............................................         9.0%             9.0%              9.0%
     Rate of increase in future compensation levels...............................         4.0%             4.0%              4.0%

Components of net periodic benefit cost:
     Service cost benefit earned during year......................................      $   107          $   130           $   109
     Interest cost on projected benefit obligation................................          401              373               349
     Expected return on plan assets...............................................         (453)            (477)             (459)
Net amortization:
     Net transition asset ........................................................           (4)              (9)               (8)
     Prior service cost...........................................................         (103)            (110)             (110)
     Net loss.....................................................................          156              130               130
                                                                                        -------          -------           -------
     Pension cost ................................................................      $   104          $    37           $    11
                                                                                        =======          =======           =======
</TABLE>


<PAGE>


10.   EARNINGS PER SHARE:

The following table sets forth the calculation of Basic and Diluted Earnings Per
Share for the years ended below.
<TABLE>
<CAPTION>


                                            For the Year Ended 2002        For the Year Ended 2001         For the Year Ended 2000
                                            -----------------------        -----------------------         -----------------------
                                                              Per-Share                     Per-Share                      Per-Share
                                           Income   Shares     Amount      Income  Shares     Amount     Income    Shares     Amount
                                           ------   ------     ------      ------  ------     ------     ------    ------     ------
                                                                    (in thousands except  per share data)


Basic EPS:

<S>                                      <C>         <C>       <C>        <C>        <C>       <C>      <C>         <C>        <C>
  Income available to common
     stockholders....................    $18,446     9,225     $ 2.00     $13,596    9,233     $1.48    $13,915     9,130      $1.52
                                         =======               ======     =======              =====    =======                =====

Effect of Dilutive Securities:

  Incentive stock options
     outstanding.....................                  217                             186                            115
                                                     -----                           -----                          -----

Diluted EPS:

  Income available to common
     stockholders and assumed
     conversion......................    $ 18,446    9,442     $ 1.95     $13,596    9,419     $1.45    $13,915     9,245      $1.50
                                         ========              ======     =======              =====    =======                =====
</TABLE>

<PAGE>


11.   INCOME TAXES:

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>

                                                                                -------------------------------------
                                                                                 2002           2001            2000
                                                                                -------------------------------------
                                                                                        (in thousands)

<S>                                                                             <C>            <C>             <C>
         Current...................................................             $3,559         $3,785          $5,442
         Deferred..................................................               (192)          (906)           (740)
                                                                                ------         ------          ------
                                                                                $3,367         $2,879          $4,702
                                                                                ======         ======          ======

</TABLE>


     The components of the net deferred tax asset as of December 31, 2002, 2001,
and 2000 were as follows:
<TABLE>
<CAPTION>


                                                                              ---------------------------------------
                                                                                 2002           2001            2000
                                                                              ---------------------------------------
                                                                                           (in thousands)
<S>                                                                            <C>            <C>            <C>
Deferred tax assets:
     Loan loss provision...........................................            $ 4,197        $ 4,088        $  3,069
     Non-accrual loan interest income..............................                235            294             310
     Unrealized loss on available for sale securities..............                ---          1,670             373
     Unfunded pension adjustment...................................                814            497             ---
     Deferred loan fees............................................                240             79              47
     Miscellaneous.................................................                 74             93             100
     Deferred compensation.........................................                539            485             393
                                                                               -------        -------        --------
         Total deferred tax assets.................................            $ 6,099        $ 7,206        $  4,292
                                                                               -------        -------        --------

Deferred tax liabilities:
     Depreciation..................................................            $   934        $   591        $    624
     Unrealized gain on available for sale securities..............              4,333            ---             ---
     Accretion of discount.........................................                 19            750             336
     Pension expense...............................................                351            319             319
     Life insurance company reserves...............................                410            ---             ---
     Miscellaneous.................................................                ---            ---             167
                                                                               -------        -------        --------
         Total deferred tax liabilities............................              6,047          1,660           1,446
                                                                               -------        -------        --------
         Net deferred tax asset ...................................            $    52        $ 5,546        $  2,846
                                                                               =======        =======        ========
</TABLE>

A  reconciliation  of income tax expense  and the amounts  which would have been
recorded based upon statutory rates (35%) is as follows:

<TABLE>
<CAPTION>
                                                                               --------------------------------------
                                                                                 2002           2001            2000
                                                                               --------------------------------------
                                                                                           (in thousands)

<S>                                                                            <C>            <C>            <C>
Provision on pre-tax income at statutory rate......................            $ 7,635        $ 5,766        $  6,501
Effect of tax-exempt interest income...............................             (2,939)        (2,379)         (1,643)
Goodwill amortization..............................................                ---             64              84
Nondeductible expense related to acquisition.......................                ---            163             ---
Other, net.........................................................               (848)          (371)            (62)
Officer life insurance, net........................................               (481)          (364)           (178)
                                                                               -------        -------        --------
Total provision for income taxes...................................            $ 3,367        $ 2,879        $  4,702
                                                                               =======        =======        ========
</TABLE>



<PAGE>


12. STOCK-BASED COMPENSATION:

     The Corporation has a Long-term Incentive Plan (the "Plan") that allows the
Corporation to grant to employees, executive officers and directors stock awards
in the form of Incentive  Stock  Options,  Nonqualified  Stock  Options or Stock
Appreciation  Rights.  The stock options are granted at prices not less than the
fair market value in the case of Incentive  Stock  Options and not less than 80%
of the  fair  market  value  in the  case of  Nonqualified  Stock  Options.  The
Corporation has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting   for  Stock   Issued  to   Employees"   ("APB  25"),   and  related
interpretations  in accounting for its stock-based  compensation  and to provide
the  disclosures  required  under  SFAS No.  123,  "Accounting  for Stock  Based
Compensation"  ("SFAS  123").  Accordingly,  no  compensation  expense  has been
recognized for stock options issued under the Plan.

     As of December 31, 2002,  shares  totaling  882,669 were authorized but not
awarded under the Plan. The stock options  generally vest from one to five years
from the date of grant,  and  expire no later  than ten years  after the date of
grant. The changes in outstanding options are as follows:

<TABLE>
<CAPTION>


                                                                              Weighted
                                                                              Average
                                                      Shares Under         Exercise Price
                                                        Option                Per Share
--------------------------------------------------------------------------------------------

<S>                                                     <C>                   <C>
Balance December 31, 1999                               644,292               $15.14
Issued                                                  127,785                18.31
Exercised                                               (36,491)               10.10
Forfeited                                                (2,758)               22.61
--------------------------------------------------------------------------------------------
Balance December 31, 2000                               732,828               $15.92
Issued                                                  115,500                25.14
Exercised                                               (99,441)               12.12
Forfeited                                                  (443)               18.73
--------------------------------------------------------------------------------------------
Balance December 31, 2001                               748,444               $17.85
Issued                                                  125,000                27.86
Exercised                                               (83,394)               14.84
Forfeited                                                (3,653)               21.66
--------------------------------------------------------------------------------------------
Balance December 31, 2002                               786,397               $19.74
--------------------------------------------------------------------------------------------

</TABLE>




<PAGE>


The following table provides certain information about stock options outstanding
and exercisable at December 31, 2002:
<TABLE>
<CAPTION>

                                                        Options Outstanding                       Options Exercisable
                                        -----------------------------------------------------------------------------------
                                                             Weighted        Weighted                           Weighted
                                                              Average        Average                             Average
                                                             Exercise       Remaining                            Exercise
                                            Number             Price        Contractual           Number          Price
Range of exercise prices per share       Outstanding         Per Share     Life in Years       Exercisable      Per Share
---------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>               <C>              <C>             <C>
Under $8.36                                 14,192            $ 8.08            2.2              14,192          $ 8.08
$8.37-$11.14                                79,980            $ 9.82            3.3              79,980          $ 9.82
$11.15-$13.93                               59,304            $12.32            2.8              59,304          $12.32
$13.94-$16.72                               26,322            $15.68            5.5              26,322          $15.68
$16.73-$19.50                              195,096            $18.49            6.6             122,063          $18.57
$19.51-$22.29                              131,104            $19.78            5.2             116,883          $19.80
$22.30-$25.08                               41,731            $22.56            3.3              41,731          $22.56
$25.09-$27.86                              238,668            $26.56            9.4              31,811          $25.14
---------------------------------------------------------------------------------------------------------------------------
$8.08 - $27.86                             786,397            $19.74            6.3             492,286          $17.00
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Options  exercisable  at the end of 2001  and 2000  were  480,495  and  439,060,
respectively.

In electing to follow APB 25 for expense recognition  purposes,  the Corporation
is obliged to  provide  the  expanded  disclosures  required  under SFAS 123 for
stock-based  compensation  granted.  The weighted average fair values at date of
grant for options granted during fiscal 2002, 2001, and 2000 were $7.48,  $7.88,
and $3.48,  respectively,  and were  estimated  using the  Black-Scholes  option
valuation model with the following weighted average  assumptions for 2002, 2001,
and 2000,  respectively:  dividend yield of 2.6%, 2.6%, and 3.3%;  volatility of
26%,  26%,  and 21%;  risk free  interest  rates of 3.8%,  5.5%,  and 5.6%;  and
expected life in years of 8.4, 8.7, and 4.9.


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

<TABLE>
<CAPTION>



                                                                   2002          2001         2000
                                                                ------------------------------------
                                                                           (in thousands)

<S>                                                               <C>          <C>          <C>
              Balance, beginning of year......................    $14,142      $11,035      $ 8,888
              Additions.......................................      1,546       10,311        2,537
              Amounts collected...............................     (2,311)      (7,204)        (390)
                                                                  -------      -------      -------
              Balance, end of year............................    $13,377      $14,142      $11,035
                                                                  =======      =======      =======

</TABLE>

<PAGE>







14.  GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:

     In September 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business  Combinations",  and SFAS No. 142, "Goodwill and Other Intangible
Assets".  SFAS  No.  141  requires  companies  to use  the  purchase  method  of
accounting  for all  business  combinations  initiated  after June 30,  2001 and
addresses  the  initial  recognition  and  measurement  of  goodwill  and  other
intangible  assets acquired in a business  combination.  SFAS No. 142, which the
Corporation  adopted on January 1, 2002,  addresses the initial  recognition and
measurement of intangible assets acquired outside a business combination and the
recognition and measurement of goodwill and other intangible  assets  subsequent
to  acquisition.  Under the new standard,  goodwill is no longer  amortized but,
instead,  is tested at least annually for impairment.  Other  intangible  assets
continue to be amortized  over their useful lives.  During the second quarter of
2002, the  Corporation  assessed its goodwill and  determined  that there was no
impairment of the recorded amount, which was not considered material.

Goodwill

     The costs of acquired  companies  in excess of the fair value of net assets
at acquisition date is recorded as goodwill.  As of December 31, 2002,  goodwill
of $1,031,000 was included on the consolidated balance sheets.  Through December
31, 2001,  goodwill was amortized on a  straight-line  basis over 15 years.  The
following table sets forth reported net earnings and EPS, as adjusted to exclude
goodwill  amortization  expense, for the years ended December 31, 2001 and 2000:
(in thousands, except per share data)
<TABLE>
<CAPTION>

                                                             2001                  2000
                                                             ----                  ----

<S>                                                       <C>                   <C>
       Net earnings, as reported                          $  13,596             $  13,915
       Net earnings, as adjusted............                 13,784                14,156
       EPS, as reported:
          Basic.............................              $    1.48             $    1.52
          Diluted...........................                   1.45                  1.50
       EPS, as adjusted:
          Basic.............................              $    1.49             $    1.55
          Diluted...........................                   1.46                  1.53
</TABLE>

       Per share data has been restated to reflect the 5% stock dividend paid
April 30, 2002.

Identifiable Intangible Assets

       The following table sets forth the gross carrying amount, accumulated
amortization and net carrying amount of identifiable intangible assets as of:
<TABLE>
<CAPTION>

                                                              December 31,
                                                     -----------------------------------
                                                          2002                   2001
                                                     -----------------------------------
                                                              (in thousands)
<S>                                                  <C>                     <C>
       Gross carrying amount................         $   1,101               $   1,116
       Accumulated amortization.............              (372)                   (299)
                                                     ---------               ---------
       Net carrying amount..................         $     729               $     817
                                                     =========               =========
</TABLE>

     Identifiable intangible assets relate to acquisition of branch offices from
other banks and are amortized over their assumed useful lives.

     Amortization  expense  associated with  identifiable  intangible assets was
$73,000 for each of the years ended December 31, 2002 and 2001. Estimated annual
amortization expense for existing identifiable  intangible assets is $73,000 for
years 2003 through 2010 thereafter decreasing through December 31, 2014.




<PAGE>


15.   CONDENSED FINANCIAL INFORMATION OF COMMUNITY BANKS, INC.  (PARENT ONLY):

<TABLE>
<CAPTION>

                                                                                 2002        2001
                                                                            -------------------------------------
                                                                                   (in thousands)
Condensed Balance Sheets:
<S>                                                                           <C>          <C>
     Cash  ................................................................   $    658     $  2,369
     Investment securities, available for sale.............................      8,494          ---
     Investment in banking subsidiary......................................    130,412      106,813
     Investment in nonbank subsidiaries....................................      4,355        3,128
     Other assets..........................................................        713          475
                                                                              --------     --------
       Total assets........................................................   $144,632     $112,785
                                                                              ========     ========

     Long term debt........................................................   $ 15,464     $    ---
     Other liabilities.....................................................          6        1,536
     Stockholders' equity..................................................    129,162      111,249
                                                                              --------     --------
       Total liabilities and stockholders' equity..........................   $144,632     $112,785
                                                                              ========     ========
</TABLE>
<TABLE>
<CAPTION>


                                                                                2002         2001         2000
                                                                             ------------------------------------
                                                                                          (in thousands)
Condensed Statements of Income:
<S>                                                                           <C>          <C>          <C>
     Dividends from:
           Banking subsidiary .............................................   $  5,000     $  4,396     $  7,300
     Other income (expense)................................................       (354)        (686)        (595)
                                                                              --------     --------     --------
Income before equity in undistributed earnings of subsidiaries.............      4,646        3,710        6,705
                                                                              --------     --------     --------
Equity in undistributed earnings of:
     Banking subsidiary....................................................     13,416        9,205        6,818
     Nonbank subsidiaries..................................................        384          681          392
                                                                              --------     --------     --------
                                                                                13,800        9,886        7,210
                                                                              --------     --------     --------
Net income ................................................................   $ 18,446     $ 13,596     $ 13,915
                                                                              ========     ========     ========

Condensed Statements of Cash Flows:
   Operating activities:
     Net income............................................................   $ 18,446     $ 13,596     $ 13,915
         Adjustments to reconcile net cash provided by
            operating activities:
         Undistributed earnings of:
              Banking subsidiary...........................................    (13,416)      (9,205)      (6,818)
              Nonbank subsidiaries.........................................       (384)        (681)        (392)
         Other, net........................................................     (2,232)       1,548           61
                                                                              --------     --------     --------
              Net cash provided by operating activities....................      2,414        5,258        6,766
                                                                              --------     --------     --------
Investing activities:
         Purchase of available for sale securities.........................     (8,494)         ---          ---
                                                                              --------     --------     --------
              Net cash used in investment activities.......................     (8,494)         ---          ---
                                                                              --------     --------     --------

Financing Activities:
     Proceeds from issuance of long term debt..............................     15,464          ---          ---
     Proceeds from issuance of common stock................................      1,387        3,574          564
     Purchases of treasury stock...........................................     (5,828)        (689)      (2,674)
     Dividends paid........................................................     (6,654)      (5,880)      (4,600)
                                                                              --------     --------     --------
              Net cash used by financing activities........................      4,369       (2,995)      (6,710)
                                                                              --------     --------     --------
              Net change in cash and cash equivalents......................     (1,711)       2,263           56
     Cash and cash equivalents at beginning of year........................      2,369          106           50
                                                                              --------     --------     --------
     Cash and cash equivalents at end of year..............................   $    658     $  2,369     $    106
                                                                              ========     ========     ========

</TABLE>



<PAGE>



16.  REGULATORY MATTERS:

     Community  Banks  is  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.

     Included in cash and due from banks are balances  required to be maintained
by  Community  Banks on deposit  with the Federal  Reserve.  The amounts of such
reserves are based on percentages of certain  deposit types and totaled  $90,000
at December 31, 2002 and $440,000 at December 31, 2001.

     The following table illustrates the capital ratios for the Corporation on a
consolidated basis:
<TABLE>
<CAPTION>

                                                                                          Corporation
                                      Regulatory                Well-                      December 31,
                                       Minimum               Capitalized                2002          2001
                                        ------------------------------------------------------------------

<S>                                      <C>                     <C>                    <C>           <C>
Leverage ratio                           4.0%                    5.0%                   8.2%          7.5%
Tier 1 capital ratio                     4.0%                    6.0%                  11.2%         10.5%
Total risk-based capital ratio           8.0%                   10.0%                  12.3%         11.8%
</TABLE>

     At December 31, 2002 and 2001  Community  Banks  exceeded  well-capitalized
leverage  ratio,  tier 1 capital  ratio,  and  total  risk-based  capital  ratio
standards.

     Failure to meet any one of the minimum  capital  ratios  would result in an
institution   being   classified   as   "undercapitalized"   or   "significantly
undercapitalized."  Such  classifications  could  disrupt  dividends  or capital
distributions.  In  addition,  other  restrictions,  prohibitions,  and  related
supervisory actions would be likely depending upon the overall level of capital.
Community   anticipates  no  problems  in  meeting  current  or  future  capital
standards.


17.  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, 2002, are
as follows:

<TABLE>
<CAPTION>
                                                                               Contract or Notional Amount
                                                                               ---------------------------
                                                                                      (in thousands)

     Financial instruments whose contract amounts represent credit risk:
<S>                                                                                      <C>
         Commitments to originate loans....................................              $ 63,199
         Unused lines of credit............................................              $194,877
         Standby letters of credit.........................................              $ 23,060
         Unadvanced portions of construction loans.........................              $ 22,177
</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.

<PAGE>

     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.


18.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

     The following is a summary of the quarterly  results of operations  for the
years ended December 31, 2002 and 2001:

<TABLE>
<CAPTION>

                                                                           Three Months Ended
                                           ----------------------------------------------------------------------------------------
                                                                2002                                        2001
                                           ----------------------------------------------------------------------------------------
                                              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............................   $24,107    $24,215     $24,413   $23,965    $24,376    $24,523     $24,567    $24,609
Interest expense...........................    11,638     11,876      11,465    11,233     13,401     13,280      13,148     12,311
                                              -------    -------     -------   -------    -------    -------     -------    -------
Net interest income........................    12,469     12,339      12,948    12,732     10,975     11,243      11,419     12,298
Provision for loan losses..................     1,600        650         500       600      1,573        871       1,306      1,330
                                              -------    -------     -------   -------    -------    -------     -------    -------
Net interest income after provision for
     loan losses...........................    10,869     11,689      12,448    12,132      9,402     10,372      10,113     10,968
Other income...............................     2,779      3,544       2,602     2,795      1,948      2,164       2,325      2,633
Investment security gains  (losses)........       518         18          64       434       (128)       366       1,018        448
Gains on loan sales........................       385        101         310       425        163        378         326        500
Other expenses.............................     9,423     10,027       9,563    10,287     10,612      8,172       8,287      9,450
                                              -------    -------     -------   -------    -------    -------     -------    -------
Income before income taxes.................     5,128      5,325       5,861     5,499        773      5,108       5,495      5,099
Income taxes...............................       677        706       1,121       863        (35)     1,077       1,176        661
                                              -------    -------     -------   -------    -------    -------     -------    -------
Net income.................................   $ 4,451    $ 4,619     $ 4,740   $ 4,636    $   808    $ 4,031     $ 4,319    $ 4,438
                                              =======    =======     =======   =======    =======    =======     =======    =======

Basic earnings per share...................   $   .48    $   .50     $   .51   $   .51    $   .09    $   .44     $   .47    $   .48
Diluted earnings per share.................   $   .47    $   .49     $   .50   $   .49    $   .09    $   .43     $   .46    $   .47
Dividends declared.........................   $   .16    $   .18     $   .18   $   .20    $   .15    $   .16     $   .16    $   .16
</TABLE>

Per share data has been restated to reflect stock dividends.




<PAGE>


19.  FAIR VALUES OF FINANCIAL INSTRUMENTS:

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

CASH AND DUE FROM BANKS, INTEREST-BEARING TIME DEPOSITS, AND FEDERAL FUNDS SOLD:
     The  carrying  values for cash and due from  banks,  interest-bearing  time
deposits,  and federal funds sold is deemed to be the same as 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 core
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:
     Substantially  all of the  Corporation's  unused  commitments  to originate
loans and unused  lines of credit are at  variable  rates or will be provided at
the  prevailing  fixed rate when the loans are originated or the lines are used.
The fair value of off-balance-sheet items approximate their carrying value.

     The  following  table  summarizes  the  carrying  values and fair values of
financial instruments at December 31, 2002 and 2001:
<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                  ---------------------------------------------------------
                                                                             2002                           2001
                                                                  ---------------------------------------------------------
                                                                                  Estimated                       Estimated
                                                                    Carrying        Fair           Carrying          Fair
                                                                      Value         Value            Value          Value
                                                                  ---------------------------------------------------------
                                                                                      (in thousands)
              Financial assets:
<S>                                                               <C>            <C>             <C>             <C>
                Cash and due from banks, interest-bearing time
                  deposits, and federal funds sold..............  $    37,088    $    37,088     $    46,136    $    46,136
                Investment securities...........................      667,801        667,801         543,901        543,901
                Loans...........................................      904,568        911,547         857,278        871,674
                Less: Allowance for loan losses.................      (12,343)           ---         (12,132)           ---
                                                                  -----------    -----------     -----------    -----------
                    Net loans...................................      892,225        911,547         845,146        871,674
                Loans held for sale.............................       11,483         11,483          10,479         10,479
                                                                  -----------    -----------     -----------    -----------
                   Total........................................  $ 1,608,597    $ 1,627,919     $ 1,445,662    $ 1,472,190
                                                                  ===========    ===========     ===========    ===========

              Financial liabilities:
                Deposits........................................  $ 1,132,913    $ 1,144,891     $ 1,003,225    $ 1,009,947
                Short-term borrowings...........................       69,125         69,125          60,002         60,002
                Long-term debt..................................      335,533        359,236         322,155        324,492
                                                                  -----------    -----------     -----------     ----------
                   Total........................................  $ 1,537,571    $ 1,573,252     $ 1,385,382    $ 1,394,441
                                                                  ===========    ===========     ===========    ===========
</TABLE>
<PAGE>


20. COMPLETED-ACQUISITION:

     On March 30,  2001  Community  completed  its merger of The Glen Rock State
Bank (Glen Rock).  The merger was accounted  for under the  pooling-of-interests
method of  accounting  and,  as such,  all  prior  period  information  has been
restated.

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

-------------------------------------------------------------------------------
Year Ended December 31,                                2000
-------------------------------------------------------------------------------
                                         (in thousands, except per share data)

                                                             Community /
                                              Community      Glen Rock
                                             As Reported      Combined
                                             -----------      --------
Net interest income.......................     $37,858        $43,795
Provision for loan losses ................       2,308          2,863
Other income..............................       7,363          8,148
Other expenses............................      25,774         30,463
                                               -------        -------
Income before income taxes................      17,139         18,617
Income taxes..............................       4,288          4,702
                                               -------        -------
Net income................................     $12,851        $13,915
                                               =======        =======

Basic earnings per share..................     $  1.73        $  1.52
Diluted earnings per share................     $  1.70        $  1.50
                                               =======        =======


Per share data has been restated to reflect stock dividends.




21.  PENDING ACQUISITIONS

     In  December  of 2002  and  January  of  2003,  Community  announced  three
acquisitions  that are expected to be  consummated in the first half of 2003. On
December 18,  2002,  Community  announced  an  agreement to acquire  Abstracting
Company of York  County  (ABCO),  a title  insurance  and  abstracting  company.
Shareholders  of ABCO  would  receive a total of 25,760  shares  for the  96,920
shares of  outstanding  ABCO  common  shares  in a  tax-free  exchange.  In late
December,  Community agreed to acquire The Shultz Agency (Schultz), an insurance
agency  providing both  commercial and personal lines.  Finally,  on January 14,
2003,  Community  agreed to acquire Erie Financial Group, Inc (Erie), a mortgage
banking  company.   Both  the  Schultz  and  Erie   acquisitions  will  be  cash
acquisitions.  All of these transactions are expected to expand existing product
lines of Community and will be integrated with existing subsidiaries.












<PAGE>


                        REPORT OF Independent Accountants
                        ---------------------------------

Board of Directors and Shareholders
Community Banks, Inc.

     In our opinion,  based on our audits and the report of other auditors,  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,  2002 and 2001,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2002 in  conformity  with  accounting  principles
generally accepted in the United States of America.  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.  The
consolidated  financial statements give retroactive effect to the merger of Glen
Rock State Bank on March 30, 2001 in a transaction accounted for as a pooling of
interests, as described in Note 20 to the consolidated financial statements.  We
did not audit the financial statements of Glen Rock State Bank, which statements
reflect net interest income of $5,937,000 for the year December 31, 2000.  Those
statements  were  audited  by  other  auditors  whose  report  thereon  has been
furnished to us, and our opinion expressed herein,  insofar as it relates to the
amounts included for the Corporation, is based solely on the report of the other
auditors.  We  conducted  our  audits of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  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 and the report of
other auditors provide a reasonable basis for our opinion.



Signature available on separate letter


Harrisburg, Pennsylvania
January 24, 2003



<PAGE>





                              REPORT OF Management
                              --------------------


     The management of Community  Banks,  Inc., is responsible for  establishing
and  maintaining  a  system  of  internal  controls  that  is  designed  to give
reasonable assurance as to the reliability of financial reporting.  Furthermore,
management is responsible for the fair  presentation of information  included in
this Annual  Report and to ensure  that the  consolidated  financial  statements
included  herein are prepared in accordance with generally  accepted  accounting
principles.

     Management has performed an assessment of the effectiveness of its internal
control structure and the procedures  applied to ensure the fair presentation of
information  that is included  in these  financial  statements.  Based upon this
assessment, management believes that:


     o        all material information has been identified and disclosed and,
     o        the system of internal controls related to financial disclosures
              has been evaluated as effective.

     The  assessment  of the  effectiveness  of  internal  controls  related  to
financial  disclosures  is  reported  to the  Audit  Committee  of the  Board of
Directors of Community  Banks,  Inc., which consists solely of directors who are
not members of management.  The Audit Committee meets with the internal auditors
and the independent  auditors to discuss and review audit scope, audit findings,
and other important accounting and auditing issues. The internal and independent
auditors  have free  access to the Audit  Committee.  The Audit  Committee  also
recommends  to the  Board  of  Directors  the  appointment  of  the  independent
auditors.

     Management  believes  that  there are no  significant  deficiencies  in the
design or operation of internal controls that could adversely affect its ability
to record,  process,  summarize and report  financial  information in accordance
with generally accepted accounting principles.  Management further believes that
the financial  information that is contained in this report fairly presents,  in
all material respects,  the financial condition and results of operation for all
periods presented.



/s/ Eddie L. Dunklebarger                           /s/ Donald F. Holt
-------------------------                           ----------------------------
Eddie L. Dunklebarger                               Donald F. Holt
Chairman, President and                             Executive Vice President and
Chief Executive Officer                             Chief Financial Officer

<PAGE>




Community Banks, Inc. and Subsidiaries
Management's Discussion of Financial Condition and Results of Operations

     Management's discussion of financial condition and results of operations is
based  on the  selected  financial  data  listed  below  and  should  be read in
conjunction with the Consolidated Financial Statements and Notes thereto.

FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>

                                                           2002          2001          2000          1999          1998
                                                        ------------------------------------------------------------------
                                                                  (dollars in thousands except per share data)
BALANCE SHEET DATA:
<S>                                                     <C>           <C>           <C>           <C>           <C>
Investment securities.............................      $  667,801    $  543,901    $  389,819    $  360,540    $  333,209
Total loans.......................................         904,568       857,278       814,874       708,016       619,750
Total assets......................................       1,679,898     1,509,734     1,308,713     1,151,344     1,023,407
Total deposits....................................       1,132,913     1,003,225       919,241       826,167       727,953
Long-term debt....................................         335,533       322,155       239,613       213,865       178,872
Stockholders' equity..............................         129,162       111,249       103,978        86,309        94,293
Total average assets..............................       1,580,046     1,398,521     1,238,870     1,093,262       930,191
Total average stockholders' equity................         119,352       111,381        92,255        92,274        91,905

EARNINGS DATA:
Net interest income...............................          50,488        45,935        43,795        40,248        36,039
Provision for loan losses.........................           3,350         5,080         2,863         1,588         2,054
Net interest income after provision
     for loan losses..............................          47,138        40,855        40,932        38,660        33,985
Other income......................................          13,975        12,141         8,148         6,388         5,574
Other expense.....................................          39,300        36,521        30,463        27,501        24,446
Provision for income taxes........................           3,367         2,879         4,702         4,257         3,882
Net income........................................          18,446        13,596        13,915        13,290        11,231

PER SHARE DATA:
Basic earnings per share..........................            2.00          1.48          1.52          1.44          1.21
Diluted earnings per share........................            1.95          1.45          1.50          1.42          1.19
Cash dividends....................................             .72           .64           .57           .52           .49
Book value........................................           14.11         11.97         11.44          9.38         10.18
Average diluted shares outstanding................       9,441,663     9,419,498     9,245,584     9,382,409     9,451,314

PROFITABILITY RATIOS:
Return on average assets..........................           1.17%          .97%         1.12%         1.22%         1.21%
Return on average stockholders' equity............          15.46%        12.21%        15.08%        14.40%        12.22%
Net interest margin (FTE).........................           3.78%         3.83%         4.01%         4.20%         4.38%
Efficiency ratio..................................          56.81%        59.77%        55.42%        55.54%        55.88%

CAPITAL AND LIQUIDITY RATIOS:
Stockholders' equity to total assets..............           7.69%         7.37%         7.95%         7.50%         9.21%
Net loans to assets...............................          53.11%        55.98%        61.48%        60.72%        59.72%

ASSET QUALITY RATIOS:
Allowance for loan losses to total loans
     outstanding..................................           1.36%         1.42%         1.27%         1.27%         1.39%
Allowance for loan losses to non-accrual
     loans........................................            131%          109%          171%          152%          144%
Non-accrual loans to total loans
     outstanding..................................           1.04%         1.29%          .74%          .83%          .97%
Non-performing assets to total assets.............            .63%          .78%          .49%          .57%          .67%

</TABLE>
<PAGE>




MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This review of Community Banks, Inc.  ("Community" or the "Corporation") is
presented in order to provide an analysis of its financial condition and results
of its  operations  for the  year  ended  December  31,  2002.  Throughout  this
presentation,  net income and yield on earning  assets have been  presented on a
tax equivalent  basis,  and balances  represent  average daily  balances  unless
otherwise indicated.

2002 SUMMARY

     Against a backdrop of an uncertain economy,  increasing global tensions,  a
series  of  unfortunate  corporate  scandals,   and  the  lowest  interest  rate
environment in the last four decades,  Community Banks, Inc.,  recorded the most
profitable  results in its history in 2002. Net income reached $18.5 million and
earnings  per  share  grew to  $1.95,  reflecting  an  increase  of 36% and 34%,
respectively,  over the results  achieved in 2001.  Performance in 2001 had been
reduced by charges  incurred  in  connection  with the merger of Glen Rock State
Bank, which was combined into Community Banks at the end of the first quarter of
2001. Results for 2002 translated into a return on average assets (ROA) of 1.17%
and a return  on  average  equity  of  15.46%,  and  represented  a  substantial
improvement  over  the  ROA of  0.97%  and  ROE of  12.21 %  reported  in  2001.
Performance in 2002 represented a realization of Community's  strategic  efforts
to provide its customers with expanded  financial  services within the framework
of a convenient and efficient "community banking" model.


Corporate Strategy

     Community  believes that the key to its financial  success centers on three
factors: growth, diversification, and profitability.  Community seeks to achieve
financial success and differentiate itself in its marketplace by emphasizing the
benefits of local  market  knowledge  and local  decision-making.  During  2002,
average  assets  grew to $1.58  billion,  an  increase  of 13% from 2001,  while
deposits  grew to nearly $1.09  billion,  a 12%  increase  over the same period.
Loans,  which are the largest  earning asset  category and the most  significant
source of interest  income,  grew a more modest  6.2% and reached  $887  million
during  the year.  These  growth  trends  helped to fuel a 12%  increase  in net
interest  income,  which remains the single most important  source of revenue in
the financial services industry.

     Achievement of financial  success requires  growth,  which is influenced by
the  economic  vibrancy  of the markets in which a  financial  services  company
operates.  Community's principal  marketplace is in central  Pennsylvania.  On a
statewide  basis,  Pennsylvania's  economy  generally  lags the regional  trends
experienced  in areas of the country  with more robust  growth  characteristics.
Community,  however,  seeks to identify and locate in targeted markets that tend
to  outperform  the  overall  Pennsylvania  economy  and where its  strategy  of
"community   banking"  provides  a  competitive   advantage  over  larger,  less
personalized financial services companies.  Growth within these core markets can
be  augmented  by selective  expansion  into new market  areas that  represent a
predictable  flow of  commerce  from  its  existing  franchise.  Such  expansion
requires  disciplined  planning in order to  maintain  the  appropriate  balance
between cost  control  vigilance  and prudent  investment  in  strategic  growth
opportunities. Growth during 2002 was mainly driven via increased penetration in
core markets and through expansion of existing customer relationships. Community
opened two new York County,  Pennsylvania  offices in 2002, in order to solidify
its presence in a thriving component of its core franchise. In the third quarter
of 2002, the Corporation  announced plans to open two new offices in the growing
community of Carroll County,  Maryland, which is just south of the Corporation's
Hanover,  Pennsylvania presence.  This selective expansion into vibrant adjacent
markets is expected to provide  continuing  opportunities  for future growth and
expansion and represents Community's first foray across the Maryland border.

     Diversification  of financial  services is the second critical component of
Community's drive toward expanded product  offerings,  enhanced customer service
and improved profitability.  An expanded menu of complementary product offerings
is critical to the fortification of the revenue stream from traditional loan and
deposit  services.  Over the last  several  years,  Community  has  expanded its
product mix into  annuity and mutual fund  offerings,  personal  and  commercial
insurance lines, title insurance services,  and other product offerings designed
to bring a more complete menu of financial services to its customers.  Community
has consistently sought to expand customer service while leveraging its existing
distribution  platforms through acquisitions and through selective  partnerships
that deliver both convenience and specialized expertise.

<PAGE>

     Late in 2002, Community announced the acquisition of Abstracting Company of
York County (ABCO), a title insurance and abstracting company and, in a separate
transaction,  the Shultz Agency, an insurance agency that provides both personal
and commercial  insurance  services.  Each of these partners  currently  conduct
their  business  within  Community's  existing  footprint,   and  each  will  be
integrated with the operations of existing  subsidiaries of the Corporation.  In
early 2003, Community announced its acquisition of Erie Financial Group, Ltd., a
mortgage origination company headquartered in York, Pennsylvania, with an office
in Gaithersburg, Maryland.

     While  expansion  into  new  product  offerings  and new  service  delivery
channels   remain  key   components  of  the   Corporation's   strategic   plan,
diversification  also includes  continuing efforts to enhance financial services
that are tied to traditional banking relationships.  As an example,  Community's
expansive ATM network now includes almost 50 ATM's that are accessible through a
partnership  with  one  of the  largest  convenience  store  chains  within  the
Corporation's  marketplace.  The  combination  of this  partnered  network  with
Community's  core  propriety  network  provides a total of nearly 100 convenient
distribution   points  for  this   increasingly   important   consumer  service.
Furthermore,  utilization of this network by noncustomers  provides an important
and  growing  source of fee  income.  These  services,  and other new  fee-based
services,  will continue to be examined,  expanded and implemented into 2003 and
beyond.

     Growth  and  diversification  are two of the  factors  that  contribute  to
Community's primary objective,  which is to increase profitability and, in turn,
shareholder value. While both growth and financial services diversification play
pivotal roles in profitability  performance,  there are other essential  factors
that are endemic to the achievement of improved profit performance. Two of these
cornerstones are loan quality and cost control.  Within financial  institutions,
management  of  loan  quality  is  one  of  the  most  important  distinguishing
performance   attributes.   Successful   management  of  loan  quality  requires
experience,  good judgment, and constant awareness of factors likely to impede a
customer's  ability  to meet the terms  and  obligations  of credit  agreements.
During times of economic turmoil or uncertainty, adherence to a disciplined loan
quality  process is  intensified.  Likewise,  controlling  operating costs while
maintaining  the  highest  standards  of  service  quality   represents  another
considerable  challenge,  particularly if service quality must meet the elevated
standards associated with a "community banking" model.  Balancing operating cost
control efforts with strategic investment in technology and service improvements
requires  constant  analysis and assessment.  Loan quality and expense  control,
along  with  growth  and  financial  services  diversification,  have all played
critical roles in the achievement of Community's 2002 profit performance.


Economic Factors

     There are certain extrinsic  factors,  largely beyond the direct control of
management,  that also play an essential role in the  profitability of financial
services companies. In 2002, Community began the year confident of its strategic
direction, buoyed by the Federal Reserve Bank's aggressive pattern of reductions
in benchmark  interest  rates during 2001 and the potential for reduced  funding
costs.  Additionally,  the seemingly  unlimited level of consumer confidence had
fueled a modest  recovery  after the tragic  events of September  11,  2001.  On
January 1, 2002, the Corporation  combined its banking  operation under a single
charter,  and began the process of merging its separate  banks to take advantage
of inherent operating  efficiencies and heightened brand awareness.  For much of
2002, Community's local economies were less influenced by national trends, which
had included a sluggish pace of economic growth combined with an increase in the
level of corporate layoffs and unemployment.

     The  Federal  Reserve  Board (the "Fed")  made every  attempt to  forestall
pushing  the  economy  into an even  weaker  trajectory.  Fed  monetary  policy,
combined with almost no inflationary pressure,  brought interest rates to levels
unseen  in over 40  years,  resulting  in a  steeper  yield  curve,  lower  real
borrowing costs and another wave of mortgage refinancing. Consumers continued to
enjoy the  benefits  of these lower rates and  maintained  personal  spending at
levels that  prevented the economy from slowing even  further.  The reduction in
borrowing  costs did  little  to  alleviate  apprehension  within  the  business
community,  however,  as concerns  over the  possibility  of increased  domestic
terrorism,  the escalation of global military conflicts, and the likelihood of a
deeper,  more serious economic downturn were elevated by year end. By the fourth
quarter,  even the consumer  spirit  began to dampen as the rising  unemployment
rate and the discouraging job outlook began to take its toll.

<PAGE>

     As the economy  labored to recover from the dearth of optimistic  news, the
capital markets  remained in a state of turmoil as the year ended. The Dow Jones
Industrial  Average, a major bellwether of equity market  performance,  fell for
the third  calendar  year in a row and was  nearly 30% below its  all-time  high
recorded in January of 2000.  While  stock  market  performance  during 2002 was
partially  attributed  to the spate of lackluster  economic  news, it was also a
direct  result of the wave of corporate  misdeeds  uncovered  at companies  like
Enron,  WorldCom,  Global  Crossing,  Tyco and  others  that  spurred  a wave of
skepticism regarding corporate ethics.  Deflated stock prices were somewhat of a
mixed blessing for financial  institutions as consumers began to seek the safety
and security of bank deposit  products in order to ride out the economic  storm.
Unfortunately for banks, this phenomenon occurred during a period when corporate
lending demand was muted by concern over recessionary  trends and provided fewer
opportunities to expand net interest income. More importantly,  this sequence of
corporate scandals and abuses gave rise to a populist groundswell of distrust in
the capital markets.  Congress passed urgent legislation at mid-year in the form
of the Sarbanes-Oxley Act of 2002. This act dealt with initiatives  designed to,
among  other  things,   promote   corporate   responsibility,   enhance   public
disclosures, improve the quality of financial reporting, create a Public Company
Accounting Oversight Board, promote the objectivity of analysts,  and strengthen
penalties for securities law violations.

     Despite the many regrettable events of 2002,  Community Banks, Inc. and the
vast  majority  of the banking  sector  enjoyed a  reasonable  amount of success
during the year.  Capital  positions  remained  strong and asset quality metrics
were surprisingly  resilient in the face of a slowing economy. While some of the
country's largest banks experienced problems linked to corporate scandals, there
is little  evidence to suggest that the  excesses of the last several  years had
any  meaningful  impact  on more  traditional  "community  banking"  operations.
Additionally, the news about the economy was not entirely negative as the nation
moved into 2003.  Economic  reports  continue  to make  periodic  references  to
reductions in jobless  claims,  to increases in orders for capital goods, to the
favorable  prospect  from  an  expansionary  monetary  policy,  and to the  Bush
administration's plan for a fiscal stimulus package.  Financial success, even in
a more  favorable  economic  climate,  will  continue to be a challenge  for the
financial  services industry in 2003. The continuing  fallout from interest rate
trends,  competitive pressures,  net interest margin compression,  asset quality
concerns, cost containment issues, and overall risk management will require that
bank  management  remain  attentive  to ensure the  fiscal  health and long term
viability of this vital sector of the economy.


NET INTEREST INCOME


     Community's  major  source  of  revenue  is  derived  from   intermediation
activities  and is  reflected  as net interest  income.  Net interest  income is
defined as the difference between interest income on earning assets and interest
expense on  deposits  and  borrowed  funds.  Net  interest  margin is a relative
measure of a financial institution's ability to efficiently deliver net interest
income from a given level of earning  assets.  Both net interest  income and net
interest  margin are  influenced  by the frequency and velocity of interest rate
changes  and by the  composition  and  absolute  volumes of  earning  assets and
funding sources.

     The following  table compares net interest  income and net interest  margin
components between 2002 and 2001 (in thousands):

<TABLE>
<CAPTION>


                                        2002                         2001                      Change
                             --------------------------------------------------------------------------------
                                              Yield/                      Yield/                     Yield/
                                Amount        Rate            Amount       Rate         Amount        Rate
                             --------------------------------------------------------------------------------


<S>                            <C>              <C>          <C>           <C>           <C>          <C>
Interest Income                $102,488         6.89%        $102,351      7.81%         $  137       (0.92)%
Interest Expense                 46,212         3.60%          52,140      4.63%         (5,928)      (1.03)%
                             ----------     ---------      ----------   --------      ---------
Net interest income            $ 56,276                      $ 50,211                    $6,065
                             ----------                    ----------                 ---------

Interest spread                                 3.29%                      3.18%                        0.11%
Impact of
     non-interest funds                         0.49%                      0.65%                      (0.16)%
                                            ---------                   --------                    ---------

Net interest margin                             3.78%                      3.83%                      (0.05)%
                                            ---------                   --------                    ---------
</TABLE>

<PAGE>



Interest Rates

     Interest rates had a profound  influence on net interest  income and profit
performance  during 2002.  Throughout the year, the Federal Reserve maintained a
mostly accommodative interest rate policy. The fed funds rate, which is the rate
banks charge each other for overnight  borrowings,  was influenced by Fed policy
and  remained at 1.75% for most of 2002,  but was reduced to 1.25% by the end of
the year. By contrast, the fed funds rate at the beginning of 2001 was at 6.00%,
illustrating  the dramatic decline in short term rates over the two-year period.
At the same time, other critical  benchmark interest rates followed a trend that
produced a much steeper  yield curve for most of 2002 as shown in the  following
comparison of the average U.S. Treasury yield curve for 2002 and 2001:


AVERAGE U.S. TREASURY CURVE

        Three   Six     One     Two     Five    Ten     Thirty
        Months  Months  Year    Years   Years   Years   Years
        -----------------------------------------------------

2002    1.62%   1.66%   1.92%   2.63%   4.02%   4.90%   5.40%

2001    3.47%   3.47%   3.53%   3.93%   4.64%   5.35%   5.61%


     While  the  rates  on  the  longest-term   Treasury  borrowings   exhibited
comparatively  modest  reductions  from 2001  levels,  significant  declines  in
Treasury  rates  between one and five years were the primary  stimulant  for the
steeper average yield curve during 2002.

     During  much of 2002,  Community's  interest  expense  declined  due to the
pricing of maturing  certificates  of  deposits  at rates lower than  previously
assigned  rates,  resulting  in a steady  reduction  in funding  costs.  General
interest  rate trends  were also  crucial to interest  income  performance.  The
incremental pricing of maturing  investments,  variable rate loans, and new loan
relationships was correlated to the lower prevailing interest rates,  increasing
pressure on asset yields.  While earning asset yields declined,  interest income
remained  stable  during  most of the year  because of the volume  growth in the
earning asset base. The declines in funding  costs,  however,  lowered  interest
costs and provided year-over-year improvement in net interest income.

     In the fourth quarter,  the repricing  velocity of earning asset categories
to lower,  prevailing  interest  rates  began to outpace the  repricing  of term
deposits,  resulting in additional margin compression.  In order to preserve the
spread  between   earning  asset  yields  and  funding  costs,   most  financial
institutions  were  required to reduce rates on core  deposits to historic  lows
during that quarter.  While the absolute amount of net interest income increased
between 2001 and 2002,  the  magnitude of the  increase was  constrained  by the
compression of interest rates and the inability to improve earning asset yields,
particularly in the fourth quarter.


<PAGE>


Interest Income /Earning Assets

     Interest  income was $102.5 million in 2002,  virtually equal to the $102.4
million  recorded in 2001,  despite the fact that earning asset yields  declined
from 7.81% to 6.89% over the two-year period.  At the same time,  earning assets
grew 13.6%,  from nearly $1.310 billion to $1.487 billion,  and helped to offset
the compression that would normally  accompany lower earning asset yields.  From
2001 to 2002,  earning assets grew $177 million,  including $52 million in loans
and $131 million in portfolio investment securities. This reflected growth rates
of 6.2 % in loans and 29.0% in investments.  During 2002, Community  experienced
11.8% growth in total  deposits,  which  increased by nearly $115  million,  and
clearly  outpaced  the level of demand for  increased  credit  facilities.  This
excess  funding was then  utilized to fund  increases  in the level of portfolio
investments  throughout  the year.  Community  seeks to maintain  an  investment
portfolio  that both  maximizes  return and  provides  an  additional  source of
liquidity as demand for more profitable loan relationships increases.


Interest Expense / Funding Sources

     Interest   expense  on  deposits  and  other   funding   sources   declined
dramatically  during 2002 and was the primary  driver of the 12%  improvement in
net interest  income.  While interest  income was stable during 2002,  Community
achieved  an  11.4%  reduction  in  interest  expense,  even as  total  deposits
increased  11.8 % and total  interest  bearing  liabilities  grew  14.2%.  Total
interest  expense  dropped  to  $46.2  million,   a  decline  of  $5.9  million,
representing  substantial improvement from the interest expense of $52.1 million
recorded in 2001.  Deposits grew by $115 million,  which included growth of $ 44
million  in  core  transaction  and  saving  accounts  and $71  million  in time
deposits.  Growth in deposit  funding was  attributable  to a number of factors,
including the safety,  soundness  and  convenience  of bank deposit  products as
contrasted  with the  volatility and risk of loss that has  characterized  other
investment and savings alternatives over the last several years.

     Community  also  grew its  funding  from  long-term  debt,  which  consists
primarily  of  collateralized  borrowings  from the Federal  Home Loan Bank,  by
almost  $30  million,  or 11%  to  selectively  augment  growth  in the  deposit
categories.  Throughout  2002, the steady  decline in prevailing  interest rates
allowed  Community to reduce pricing on time deposits.  In the fourth quarter of
the year,  most banks were forced to reexamine  the pricing on more core sources
of funds as rates declined to the lowest levels in decades.  As a consequence of
these trends, the overall cost of funds declined 103 basis points, from 4.63% in
2001 to 3.60% in 2002.


Interest Spread and Net Interest Margin

     A  financial  institution's  ability  to  effectively  blend the  impact of
changing  rates,  shifting  rate  indices,  customer  preferences,  and  product
development  initiatives can be measured by the performance of interest  spread,
which is defined as the difference  between  earning asset yield and the cost of
funding sources. Net interest margin combines the impact of interest spread with
both  investment  of  non-interest  bearing  funding  sources and  management of
non-earning  assets.  As a result of rate trends and the other dynamics specific
to Community's  balance sheet, the Corporation  reported a modest improvement in
net  interest  spread from 3.18% in 2001 to 3.29% in 2002,  and a decline in net
interest margin from 3.83% to 3.78% over the same period.  The decline in margin
was attributable to the impact of reduced contribution from non-interest funding
sources,  which  declined  from  0.65% to 0.49%.  During  periods  of  declining
interest rates, the contribution from non-interest  funds to net interest margin
is reduced since funds are invested at progressively lower rates. During periods
of rising rates,  these funds can be expected to contribute to  improvements  in
net interest margin.


<PAGE>



Quarterly Performance

     The following table provides a comparison of earning asset yields,  funding
costs,  and other  information  for each of the four  quarters of 2002 and 2001.
(dollars in thousands)

<TABLE>
<CAPTION>




                                                                    2002
                                           Fourth           Third           Second           First
                                          Quarter          Quarter          Quarter         Quarter

<S>                                              <C>              <C>              <C>            <C>
Asset yield                                      6.54%            6.80%            7.01%          7.26%
Funding cost                                     3.35%            3.51%            3.74%          3.82%
                                      ------------------------------------------------------------------
        Interest Spread                          3.19%            3.29%            3.27%          3.44%
                                      ------------------------------------------------------------------
        Net Interest Margin                      3.65%            3.78%            3.76%          3.96%
                                      ------------------------------------------------------------------
Net Interest Income                            $14,180          $14,394          $13,757        $13,946
                                      ------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>


                                                                    2001
                                           Fourth           Third           Second           First
                                          Quarter          Quarter          Quarter         Quarter

<S>                                              <C>              <C>              <C>            <C>
Asset yield                                      7.37%            7.68%            7.96%          8.31%
Funding cost                                     4.07%            4.56%            4.84%          5.14%
                                      ------------------------------------------------------------------
        Interest Spread                          3.30%            3.12%            3.12%          3.17%
                                      ------------------------------------------------------------------
        Net Interest Margin                      3.87%            3.75%            3.82%          3.90%
                                      ------------------------------------------------------------------
Net Interest Income                            $13,569          $12,522          $12,244        $11,876
                                      ------------------------------------------------------------------
</TABLE>


     The first quarter 2002 results generated improvement in net interest income
and net  interest  margin over both the first  quarter of 2001 and over the more
immediate fourth quarter, 2001 performance. During the second and third quarters
of 2002,  Community  continued to record  higher  levels of net interest  income
while net interest  margin  seemed to settle into a  sustainable  range.  In the
fourth quarter, however,  Community experienced modest additional compression of
both net interest income and net interest margin.  This reduced  performance was
linked to the fourth  quarter  declines in Fed rates,  continued  prepayment  of
mortgage-related  product,  and the  offsetting  changes to core deposits  rates
that, when combined, served to stabilize the level of net interest income.




PROVISION FOR CREDIT LOSSES

     The provision for credit losses  declined from $5.1 million in 2001 to $3.4
million in 2002,  while the ratio of the allowance for loan losses to loans also
reflected a modest  decline from 1.42% at the end of 2001 to 1.36% at the end of
2002.  When  comparing  asset  quality  trends from 2001 to those  during  2002,
Community  reported  significant  improvements  in the metrics  commonly used to
assess the overall credit quality of the loan portfolio. By the end of 2002, for
example,  non-accrual  loans had dropped by 15% while loans 90 days past due but
still accruing interest declined even more dramatically,  by almost 42%. See the
reserve for loan losses and asset quality sections of this review for additional
information.

<PAGE>


NON-INTEREST INCOME

     Non-interest  income  continued to improve on a year-over-  year basis at a
pace reflective of Community's  continuing emphasis on the expansion of products
and services.  Excluding the impact of security gains,  income from non-interest
sources  grew to $12.9  million  from $10.4 in 2001,  an increase of nearly 24%.
Results  in 2002  included  over  $500  thousand  in gains  from the sale of two
branches, but improvement in year over year performance still would have reached
20%,  exclusive of these gains.  The growth in this important  source of revenue
for financial institutions follows the year-over-year growth of 36% from 2000 to
2001.  The  following  is a summary of the various  components  of  non-interest
income between 2001 and 2002 (in thousands):
<TABLE>
<CAPTION>


                                                                                           Change
                                                       2002            2001          Amount       %
                                                       ----            ----          ------       -
<S>                                                     <C>            <C>             <C>       <C>
Investment management and trust services                $993           $740            $253      34%
Service charges on deposit accounts                    3,440          3,023             417      14%
Other service charges, commissions and fees            2,471          1,783             688      39%
Insurance premium income and commissions               2,016          1,483             533      36%
Gains on loan sales                                    1,221          1,367           (146)    (11%)
Other income                                           2,800          2,041             759      37%
                                                  ---------------------------------------------------
                                                     $12,941        $10,437          $2,504      24%
Investment security gains                              1,034          1,704           (670)    (39%)
      Total                                       ---------------------------------------------------
                                                     $13,975        $12,141          $1,834      15%
                                                  ===================================================
</TABLE>



     Community  experienced  growth in almost  all  categories  of  non-interest
income.  Investment  management  and trust  services  includes  income  from the
commissions  earned on sales of mutual  funds and  annuity  products  as well as
income from more traditional trust services.  Investment management services are
provided  through  another  of the  Corporation's  strategic  partnerships,  and
product offerings are made available to existing  customers through  Community's
office network and dedicated sales staff. The year 2002 was the first full year,
bank-wide rollout of these product offerings.

     Services  charges on deposit accounts include the impact of fees associated
with  overdrawn  checking  accounts,  deposit  service  fees,  and other similar
sources of fee-based income. The increase was driven by both the increase in the
volume of personal and business  accounts,  and by the continuous  evaluation of
the fee structure to ensure that Community is fairly compensated for the cost of
providing these deposit services.

     Other service charges,  commissions and fees reflect revenues received from
customers  who utilize the various cash  exchange  and payment  systems that are
accessible through  Community's bank network.  The convenience and accessibility
of ATM's,  traditional  credit  cards,  retail  debit cards and other  financial
service  delivery  channels  provide  Community  with an  important  and growing
revenue  source.  Consumer  reliance on the  convenience  associated  with these
service  delivery  channels  has  generated  a  growing  acceptance  of the fees
associated  therewith.  A large  percentage  of these fees are derived  from ATM
surcharges  that are  received  from  customers  who use  another  bank as their
primary depository.  The size of Community's ATM network,  which includes nearly
100  convenient  locations,   has  made  this  an  important  component  of  the
non-interest revenue stream.  Convenience has also fostered a growing acceptance
of  "cashless"  point  of sale  transactions,  best  illustrated  by the  steady
migration  toward  expanded use of debit card  transactions  that provide vendor
interchange  fees to Community based upon the volume of debit card usage.  Other
important  components  include  commercial  letter of credit  fees,  credit card
interchange fees, and safety deposit fees.

     Insurance fees are composed primarily of commissions earned on the issuance
of  title   insurance   policies  and  fees  earned  in   providing   access  to
credit-related insurance products on consumer loans. In 2001, Community acquired
The Sentinel Agency and a smaller title agency in one of its primary markets and
reported  partial year  results for that year.  The first full year of operating
results  from this  important  complementary  business  occurred in 2002.  These
revenues provided substantial fee increases as a consequence of the expansion of
mortgage  lending  activity.  On the credit insurance side,  Community  actually
experienced  a  reduction  in the fees  earned  through  its  captive  insurance
business,  which partially  offset the increase in title insurance fees.  During
2002,  changes in federal  regulations  required  that all banks  convert from a
single  premium to a monthly  premium on credit  insurance,  which will  require
income  recognition  over the life of the related  loan.  Previously,  such fees
could be recognized  upon  remittance  of the single  premium.  Over time,  this
change in income  recognition is not expected to adversely affect fees from this
service.

<PAGE>

     Other income included approximately $500 thousand in gains from the sale of
underperfoming offices, which accounted for the majority of the increase in this
category.  Mortgage banking results, as in 2001, were favorable and were largely
influenced  by the  steady  reduction  in  interest  rates and  another  wave of
refinancing  that occurred  during the year.  Security  gains in 2002 were lower
than  gains  recorded  in  2001,  even as the  value of  Community's  investment
portfolio increased.

NON-INTEREST EXPENSES

     Non-interest expenses grew 8% to $39.3 million in 2002 versus $36.5 million
in 2001,  resulting in an increase of $2.7 million in  year-over-year  expenses.
Expenses in 2001 had  included  nearly  $2.0  million in  nonrecurring  expenses
incurred in connection with the merger of Glen Rock State Bank at the end of the
first  quarter of 2001.  Excluding  these  charges,  non-interest  expenses grew
nearly $4.8 million and reflected an increase in core operating expenses of 14%.
The following is a summary of the various  components of operating  expenses and
the change from 2001 to 2002 (in thousands):
<TABLE>
<CAPTION>

                                                                                     Change
                                                      2002        2001           Amount      %
                                                  ---------------------------------------------

<S>                                                 <C>         <C>              <C>        <C>
Salary and employee benefits                        $21,636     $18,528          $3,108     17%
Net occupancy expense                                 6,051       5,267             784     15%
Merger and restructuring related charges                  0       1,968         (1,968)     N/A
Other operating expenses                             11,613      10,758             855      8%
                                                  ----------------------------------------------
            Total                                   $39,300     $36,521          $2,779      8%
                                                  ==============================================
</TABLE>

     As  expected,  the vast  majority  of the  increase in  recurring  expenses
occurred in salary and benefits  expense,  which grew from $18.5 million in 2001
to $21.6 million in 2002, an increase of 17%. Of the total increase from 2001 to
2002,  nearly 4% was  attributed  to the average 2002 salary  increase of 4%. An
additional  4% was  ascribed to  increases  in the  Corporation's  discretionary
variable  compensation  plans,   employee  benefit  plan  contributions,   sales
incentives and other performance-driven compensation plans. The impact of annual
merit  increase  combined  with  performance-driven  compensation  accounted for
almost one half of the 17%  increase  in salary  and  benefit  costs.  Community
continues to migrate toward more variable  compensation  programs that rely less
on base salary increases and more on performance-driven incentives, particularly
at the management level. Increased expenses from 2001 to 2002 were reflective of
the improved profit performance on a year-over-year basis and the achievement of
predefined profit  objectives.  Variable  compensation  programs are designed to
adjust downward in years when performance fails to meet predefined objectives.

     The  remaining 8% of the total 17% increase in salary and benefit  expenses
was driven by several factors,  including the following: the full year impact of
staffing of offices  added in 2001 along with the  partial  year impact of those
added in 2002;  the  increase  in  personnel  added  in  nontraditional  banking
services,  most notably those added from the merger of The Sentinel Agency;  and
the increased  cost of providing  group  insurance  benefits to  employees.  The
aggregate  expense  increases  associated with these three items increased total
costs by over $1  million.  Other  increases  occurred  as a result  of  service
delivery  improvements  designed to elevate service  convenience and operational
efficiency, including a centralized call center.

<PAGE>

     Occupancy  expenses  increased  $784  thousand and, like salary and benefit
expenses,  were  influenced  by offices  added in both 2001 and 2002.  Community
continues to make  appropriate  investment  to build its  regional  franchise by
expansion into markets that have the requisite growth  characteristics  and that
are expected to be receptive to the Corporation's  operating philosophy.  During
the  past two  years,  Community  has  added a total of  seven  new  offices  in
strategic  locations  and  continues to make  investments  in  technology-driven
initiatives  designed to improve customer service.  During 2002, the Corporation
completed  its new  regional  operations  center that will  streamline  internal
operations and will increase occupancy costs in 2003.

     Other expense  exhibited a more modest  increase from 2001 to 2002.  During
2001,  Community  had  incurred  incremental  costs  associated  with new branch
openings,  the  acquisition of Glen Rock State Bank and the  convergence of bank
charters.  During 2002,  the increases in such expenses  moderated and were more
closely linked to the growth in related  fee-based  businesses and to the growth
in core components of the franchise.

INCOME TAXES

     Income tax expense grew to $3.3 million in 2002,  reflecting an increase of
nearly 17% over the income tax of $2.9 million  recorded in 2001.  The effective
tax rate for 2002 was nearly 16% and was comparable to the 17% rate  experienced
in 2001. The relative level of tax-exempt income influences effective income tax
rates and was largely  responsible for the difference  between the effective tax
rate and the statutory federal tax rate for corporations.



BALANCE SHEET OVERVIEW

     The period end balance of total  assets at the end of 2002  reached  $1.679
billion,  and  represented  an 11% increase  over the balance of $1.510  billion
recorded at December 31, 2001. Average balances of earning assets,  total assets
and  deposits  increased  13.6%,  13.0%,  11.8%,  respectively.   Average  loans
increased  a more modest 6.2% and were  influenced  by waning  demand for credit
products that was due, in some measure,  to sluggish  economic activity later in
2002.  Community's  growth  rates  over the last five years have been in the low
double-digits,  and have  reflected  both organic growth within its core markets
and opportunities presented by favorable competitive conditions.  Community will
continue   to  pursue  a  strategy   emphasizing   its  local  roots  and  local
decision-making  in order to  exploit  situations  favorable  to the  erosion of
competitor market share.



INVESTMENTS


     Community  has  established  corporate  investment  policies  that  address
various aspects of portfolio management,  including quality standards, liquidity
and maturity limits,  investment  concentrations and regulatory guidelines.  The
Corporation's   objective  with  respect  to  investment   management   includes
maintenance of appropriate  asset  liquidity,  facilitation  of  asset/liability
strategy  and  maximization  of return.  Compliance  with  investment  policy is
regularly reported to the Board of Directors.

     Community  actively  manages its  investment  portfolio  and,  accordingly,
classifies  all  investment  securities as "available  for sale".  Under current
policy, if management has the intent and the Corporation has the ability to hold
securities  until  maturity,  securities  are  classified as  "held-to-maturity"
investments  at the time of purchase and carried at amortized  historical  cost.
Securities  to be held for  indefinite  periods of time,  but not intended to be
held until  maturity,  are  classified as available for sale and carried at fair
value.  Securities held for indefinite  periods of time include  securities that
management intends to use as part of its asset/liability management strategy and
may be sold in response to changes in interest rates,  prepayment risk and other
factors affecting overall investment strategy.

<PAGE>

     During 2002, the average balance in the investment portfolio grew from $453
million to $584 million,  a growth rate of 29%, which far exceeded the growth in
the loan  portfolio.  The inflow of deposits,  particularly in the first half of
2002,  resulted in funding  growth that outpaced the demand for  commercial  and
consumer  borrowing.  Such  funding,  and the  liquidity  related  thereto,  was
utilized to grow the portfolio  within the  constraints of the ALCO policy.  The
dynamic interest rate environment in 2002 profoundly  influenced the composition
of the  investment  portfolio.  At the  beginning  of the year,  the  investment
portfolio had reached an average  duration of more than 7 years.  Given both the
constraints of prudent investment management and the potential for an inevitable
rise in interest rates, management undertook a program that reduced the duration
of the  portfolio  to just  over 4 years at  December  31,  2002.  This  reduced
duration was also  influenced by factors  beyond  management's  direct  control,
including  an  increase in the volume of  prepayments  from  callable  bonds and
pass-through instruments within Community's portfolio. While reducing the bank's
exposure to the effects of a severe upturn in interest  rates, it also served to
compress  yields as proceeds  from these  prepayments  were  reinvested at lower
prevailing  yields.  In  management's  view, this effort reduced the exposure to
longer-term  margin  compression  and  brought  Community's  interest  rate risk
profile within more desirable  tolerance levels. At the same time, these factors
contributed to the overall  reduction in investment yields from 6.87% in 2001 to
5.91% in 2002.

     At December 31, 2002, and 2001, management classifies investment securities
with amortized  cost and fair values of $655 million and $668 million,  and $549
million and $544 million,  respectively,  as available for sale. While Community
had net  unrealized  losses of nearly $5 million at the beginning of 2002,  such
losses  had  been  converted  to over $12  million  of net  unrealized  gains at
December 31, 2002.



LOANS

     Average loans reached $890 million at the end of 2002, a 6.2% increase over
the $838 million of average loans  recorded in 2001.  The  composition  of loans
between 2001 and 2002 remained  relatively  constant and was influenced by broad
trends affecting  community-based  banks. The following presentation of loans at
December 31 for each of the past two years is an  indication of the relative mix
of loans included in the portfolio (in thousands):

<TABLE>
<CAPTION>

                                                                                Change
                                        2002             2001            Amount         %
                                        ----             ----            ------         -

<S>                                   <C>              <C>               <C>           <C>
Commercial                            $295,506         $291,474         $ 4,032         1.4%
Commercial real estate                 246,533          199,142          47,391        23.8
Residential real estate                109,497          136,990         (27,493)      (20.1)
Consumer                               253,032          229,672          23,360        10.2
                                   ---------------------------------------------------------
   Total                              $904,568         $857,278         $47,290        5.5%
                                   =========================================================
</TABLE>


     Loan growth trends at Community  have been  influenced  by dynamics  within
both the commercial and consumer  sectors.  Commercial loan growth has been more
concentrated in the commercial real estate market, which includes owner-occupied
lending across a wide spectrum of businesses as well as collateral-based  loans.
Current expectations for 2003 suggest that a slower pace of economic growth over
a prolonged  period of time has the  potential to  constrain  demand for credit,
particularly in the commercial sector.


     Consumer  lending has also been influenced by trends that have emerged over
the last  several  years.  Residential  real estate  lending,  which is composed
primarily of loans to single-family  creditors, has experienced a steady decline
as a result  of the  increasing  accessibility  of  secondary  market  liquidity
through mortgage banking activities.  Community-based  banks continue to provide
an avenue for consumers to access funding for residential  lending, but most new
credits are sold in the secondary market. This strategy has reduced the interest
rate risk  associated  with  consumer  preferences  for long  term,  fixed  rate
lending,  and  continues  to  provide  valuable  liquidity  for  other  forms of
relationship  lending.  Other forms of consumer  lending  provide  extensions of
credit to facilitate  consumer-borrowing  needs and include  installment  loans,
home equity loans and lines of credit,  automobile loans, credit card loans, and
other similar forms of credit.  Consumer demand for credit facilities has been a
significant  contributing  factor to sustaining  community lending during a year
when commercial  borrowing was less robust.  While overall demand for credit was
rather  constant  throughout  most of 2002, the rate of growth was somewhat less
than that experienced in 2001.

<PAGE>

ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY


     The following  sets forth  activity  within the allowance for credit losses
beginning January 1, 2000 (in thousands).


                                                 2002        2001        2000
                                                 ----        ----        ----

Balance at January 1,                           $12,132     $10,328     $ 8,976

       Loans charged off                         (4,180)     (3,776)     (1,925)
       Recoveries                                 1,041         500         414
       Provision charged to operations            3,350       5,080       2,863
                                              ---------------------------------
Balance at December 31                          $12,343     $12,132     $10,328
                                              =================================
Allowance to Loans                                1.36%       1.42%       1.27%




     During 2001,  Community  identified  isolated loan situations that elevated
the potential  for  subsequent  charge-off  activity.  Recognition  of the risks
identified  with these specific  credits was reflected in the provision for loan
losses  recorded  throughout  2001 and in the first quarter of 2002. In the last
nine  months  of 2002,  the risk  profile  of  Community's  loan  portfolio  was
characterized by declines in both non-accrual  loans and substantial  reductions
in the  level  of  loans  past  due  more  than  90  days  from  year-end  2001.
Accordingly,  the  provision for loan losses was reduced  during these  discrete
periods. In the fourth quarter, management identified a single additional credit
and reflected a specific  charge off of nearly $1 million related  thereto.  The
relationship  of the  allowance  for loan losses to loans  outstanding  stood at
1.36% at the end of 2002 versus 1.42% at the end of 2001.  The reduction in this
relationship  is directly  related to the improved  credit quality picture since
the end of 2001, despite an increase in overall loan balances.


Risk Elements

     The following sets forth information regarding various segments of the loan
portfolio,  collectively  referred to as risk elements.  These segments  include
both  non-performing  assets  and  those  loans  past  due for 90 days or  more.
Nonperfoming  assets include non-accrual loans,  restructurings,  and other real
estate. Non-accrual loans are loans for which interest income is not accrued due
to concerns  about the  collection of interest  and/or  principal.  Restructured
loans may  involve  renegotiated  interest  rates,  repayments  terms,  or both,
because of  deterioration in the financial  condition of the borrower.  The only
credits that would have qualified as restructured loans at the end of both years
were already classified in the more severe non-accrual  category.  The following
table  provides a comparative  summary of  non-performing  assets and total risk
elements at the end of each of the last two years (in thousands).


<PAGE>


                                        2002        2001
                                        ----        ----

Non-accrual loans                     $ 9,393     $11,090
Other real estate                       1,183         631
                                      -------     -------
       Non-perfoming assets            10,576      11,721
Loans past due 90 days or more            961       1,659

                                      -------     -------
       Total risk elements            $11,537     $13,380
                                      =======     =======

                                      -------     -------
Ending allowance                      $12,343     $12,132
                                      =======     =======


Ending allowance to
       non-accrual loans                 131%        109%


     Comparisons of risk characteristics  between 2001 and 2002 reflect a marked
improvement in the loan portfolio's risk profile,  particularly as it relates to
the significant  reductions in both  non-accrual  loans and in loans past due 90
days or more.


Determination of the Allowance for Loan Losses

     Management  believes that the  application of its  accounting  policies and
procedures  in the  determination  of the  adequacy  of the  allowance  for loan
losses, and the related provision for loan losses,  should be considered to be a
critical  accounting policy to ensure the fair presentation of the Corporation's
financial  statements.  Community  applies a  systemic  methodology  in order to
estimate  the  allowance  for  loan  losses.   This   methodology   incorporates
management's  judgments about the credit quality of the loan portfolio through a
disciplined process that is consistently  applied.  This process requires that a
detailed  analysis of the loan portfolio be performed on a quarterly basis. This
analysis  includes a specific  individual loan review for any and all loans that
meet specific  materiality  criteria.  Such loans are  evaluated for  impairment
under the provisions of Statement of Financial  Accounting  Standards (SFAS) No.
114,  "Accounting  by Creditors  for  Impairment  of a Loan".  The  portfolio is
further  stratified  to analyze  groups of  homogenous  loans with  similar risk
characteristics.  Such loans are  evaluated  under the  provisions of SFAS No. 5
"Accounting for Contingencies". Management considers all known relevant internal
and external factors that may affect loan collectability,  as well as particular
risks  indigenous to specific types of lending.  Community has formal  quarterly
meetings,  under the  auspices  of  executive  management,  to review  the risks
inherent in its loan  portfolio  on a detailed  basis.  This process is formally
documented  and is the primary basis for the  Corporation's  loan loss allowance
methodology.  The process is further  designed to consolidate the aggregate loss
estimates  and to ensure  that the  allowance  for loan  losses is  recorded  in
accordance with generally accepted accounting principles.  This process requires
the use of a loan  grading  system that is  prepared  and  monitored  by a staff
experienced  in the credit  review  process.  The final results are reviewed and
approved by executive  management.  Results are constantly validated by a review
of trends associated with loan volume,  delinquencies,  potential concentrations
or other  factors  that may  influence  the  methodology  used to  estimate  the
allowance for loan losses.



Overall Assessment

     Community has assessed all of the above factors in the establishment of the
allowance for loan losses. The determination as to the adequacy of the allowance
reflects  management's  judgment,  and was based upon  collateral,  local market
conditions,  various estimates,  and other information that requires  subjective
analysis.  These factors, which are prone to change, are monitored by management
to evaluate their potential impact on management's assessment of the adequacy of
the allowance. Based on its evaluation of loan quality, management believes that
the  allowance  for loan  losses at  December  31,  2002 was  adequate to absorb
probable losses within the loan portfolio.

<PAGE>

DEPOSITS

     Deposit  balances  remain  the  primary  source of  funding  for  financial
institutions  and  Community  recognized  notable  growth of nearly  12% in this
important core-funding source, summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                   Change
                                         2002            2001               Amount           %
                                         ----            ----               ------           -

<S>                                    <C>             <C>                 <C>              <C>
Demand                               $  163,434        $150,218           $ 13,216          8.8%
Savings                                 322,632         292,187             30,445         10.4%
Time                                    498,159         457,196             40,963          9.0%
Time  $100,000 or more                  107,523          77,321             30,202         39.1%
                                   --------------------------------------------------------------
                                     $1,091,748        $976,922           $114,826         11.8%
                                   ==============================================================
</TABLE>


     Excluding  large  certificates  of deposit,  deposit growth occurred evenly
between core accounts and time deposits.  Throughout 2002, Community experienced
healthy  increases in its deposit base as consumers began to seek the safety and
liquidity  of bank  products  versus  other,  more  risky  forms  of  saving  or
investment.  The poor  performance  of the equity  market over the last  several
years and the  potential  risk  inherent in seeking  higher  rates of return has
reversed the trends of the past several years. During these years, the potential
for higher returns in the equity and other markets had resulted in a net outflow
of deposits from financial  institutions.  This trend had been influenced by the
lure of the  equity  markets  and an  increasing  preference  to  pursue  wealth
accumulation through tax-advantaged  retirement plans such as 401(k) plans. This
situation  began to reverse  during 2001 and extended into 2002.  Consumers have
shown a preference for flexibility,  liquidity and guaranteed return during this
period of economic  turmoil.  Additionally,  Community  believes  that its local
presence and "community-based  approach" has fostered favorable comparisons with
other local banks that have affiliated with out-of-market institutions.


BORROWED FUNDS

     Community  makes tactical use of Federal Home Loan Bank (FHLB) advances and
other borrowed funds to augment its funding needs.  Strategic  capital  leverage
efforts,  including share repurchase and various  investment  initiatives,  have
affected  the  volume  and  composition  of  non-deposit  funding.  The  largest
component of borrowed funds comes from FHLB advances. FHLB borrowings, which are
collateralized by residential mortgages or other qualified securities, include a
variety of credit products  available to Community through its membership in the
Federal Home Loan Bank.

SHAREHOLDERS' EQUITY

     Capital  strength  is a critical  metric  with  which to judge the  overall
stability  of  a  financial  institution.  A  strong  capital  base  is  also  a
prerequisite for sustaining franchise growth through both internal expansion and
strategic acquisition  opportunities.  Regulatory authorities impose constraints
and  restrictions  on bank  capital  levels that are designed to help ensure the
vitality of the nation's banking system.

     Community  believes  that capital is a valuable,  albeit  limited  resource
whose availability moderates with changes in the business cycle. The Corporation
has developed an extensive  capital  management  policy designed to consider all
aspects of capital management. This policy is mindful of the responsibilities to
Community's  shareholders,  employees,  regulators,  and other constituencies to
ensure that capital is well managed. The policy considers the impact of numerous
capital management issues,  including:  the maintenance of key financial ratios;
the need for an adequate return to shareholders in terms of both dividend payout
and  capital  appreciation;  the  flexibility  to  apply  techniques  that  will

<PAGE>

accommodate  either equity expansion or contraction;  and the restraint required
to avoid generation of unsustainable levels of intangible assets. Community also
continuously  examines  its  options  with regard to capital  management  in the
context of intrinsic factors,  including its prospects for growth, the potential
for earnings disruption,  and others.  Maintenance of appropriate capital levels
may require the  application  of techniques  designed to help  Community meet or
exceed regulatory  guidelines and to correlate capital levels with a given asset
growth rate.  The  Corporation's  capital  management  and  planning  process is
reviewed and approved by its Board of Directors.

     The most fundamental source of capital is earnings and earnings  retention.
This  cornerstone  of capital  adequacy  can be augmented by a number of capital
management strategies,  many of which were utilized during 2002. As it has for a
number of years,  the Board  approved the issuance of a 5% stock dividend in the
first quarter.  Throughout the year, the Corporation's strong earnings supported
a return of capital to existing  shareholders  in the form of an increase in the
traditional  cash  dividend.  Community  also continues to make strategic use of
share   repurchase  as  another   efficient   means  of  returning   capital  to
shareholders.  In the fourth  quarter,  the Board of Directors  authorized a new
share  repurchase  program of 3% of  outstanding  shares.  In  December of 2002,
management executed a pooled trust preferred issuance of $15 million in order to
increase  the amount of  regulatory  capital  through a  relatively  inexpensive
funding  source.  Such amounts are  classified  as long-term  debt for financial
statement  purposes.  These  strategies  and  techniques  allowed  management to
maintain  capital at levels that  represented  an efficient use of this valuable
resource.



     Regulators have established standards for the monitoring and maintenance of
appropriate levels of capital for financial institutions. All regulatory capital
guidelines  are now based upon a risk-based  supervisory  approach that has been
designed  to ensure  effective  management  of  capital  levels  and  associated
business  risk.  The following  table provides  Community's  risk-based  capital
position at the end of 2002 along with a  comparison  to the various  regulatory
capital requirements.
<TABLE>
<CAPTION>


                                      December 31,         "Well          Regulatory
                                          2002          Capitalized"       Minimums
                                          ----          ------------       --------

<S>                                       <C>                <C>              <C>
Leverage ratio                            8.2%               5%               4%
Tier 1 capital ratio                     11.2%               6%               4%
Total risk-based capital ratio           12.3%              10%               8%
</TABLE>


ASSET/LIABILITY MANAGEMENT AND LIQUIDITY

     The  process by which  financial  institutions  manage  earning  assets and
funding   sources  under   different   interest  rate   environments  is  called
asset/liability management. The primary goal of asset/liability management is to
increase  net  interest  income  through  the  prudent  control of market  risk,
liquidity,   interest  rate  risk  and  capital.  Two  important  barometers  of
performance  are net  interest  margin and  liquidity.  Net  interest  margin is
increased  by  widening   interest  spread  while   controlling   interest  rate
sensitivity.  The adequacy of liquidity is determined by the ability to meet the
cash flow requirements of both depositors and customers  requesting bank credit.
The  Board of  Directors  (the  "Board")  and the Audit  Committee  of the Board
governs and monitors asset/liability management processes as part of the overall
risk management process and delegates the responsibility for management of these
processes to the corporate Asset/Liability Management Committee (ALCO).

     Liquidity  is  defined  as the  ability to meet  maturing  obligations  and
customers'  demand for funds on a  continuous  basis.  Liquidity is sustained by
stable core deposits, a diversified mix of liabilities, strong credit perception
and the presence of sufficient assets  convertible to cash without material loss
or disruption of normal operations.  Community actively manages liquidity within
a defined  range  and has  developed  reasonable  liquidity  contingency  plans,
ensuring   availability  of  alternate  funding  sources  to  maintain  adequate
liquidity under a variety of business  conditions.  The Corporation's  investing
and financing  activities  are conducted  within the overall  constraints of its
liquidity management policy and practices.

<PAGE>

     Community  utilizes a variety of  techniques to assist  management  and the
Board of  Directors  to manage  and  moniter  interest  rate  risk.  In order to
quantify  the impact of changes in interest  rates on net interest  income,  the
Corporation  conducts a quarterly  interest rate shock  simulation that projects
the impact of interest  rate changes on net interest  income over the next year.
These  simulations  are utilized to assess whether  management  should  consider
corrective actions in order to minimize Community's exposure or vulnerability to
a particular  trend in interest  rates.  Management has  established  acceptable
tolerance  limits for the impact of changes in interest  rates on the volatility
of net interest  income,  and is authorized to pursue  mitigating  strategies in
order to minimize unfavorable impact under a variety of scenarios.

     Management  augments its simulation process with two other techniques,  GAP
analysis and economic  value of equity (EVE)  computations.  The most  practical
tool for  day-to-day  management of interest  rate risk is GAP  analysis,  which
provides an array of various  timeframes during which earning assets and funding
sources can be expected to mature or reprice.  This  information  is  ordinarily
examined in the context of the results  derived  from the  quarterly  rate shock
simulations.  Management uses such  information to identify  specific "cause and
effect"  relationships that can be reviewed,  analyzed,  managed,  or changed to
ensure  maximization  of  net  revenue  from  intermediation   activities.   The
combination  of GAP  analysis  and  rate  shock  simulations  provides  the most
practical measurement tools for monitoring and managing of the largest source of
revenue for community banks.

     EVE  computations  provide a longer-term  assessment of interest rate risk,
but  are  more   practical  for   evaluating   long-term,   strategic   planning
alternatives.  EVE has several  limitations,  including:  the intrinsic value of
assets  and  liabilities  does  not  necessarily  represent  the  fair  value of
financial  instruments  since it does not  include  credit  risk and  liquidity;
estimated cash flows are required for nonmaturity financial instruments and are,
by their nature,  inexact and; the future structure of Community's balance sheet
does not  consider  increased  loan and deposit  activities  from core  business
within its present value assessment.  The results derived from EVE computations,
however,  provide a valuable  framework for managing  longer-term  balance sheet
exposures and interest rate volatility trends.



REGULATORY MATTERS

     Community and its  affiliates are subject to periodic  examinations  by the
various regulatory agencies. These examinations include, but are not limited to,
procedures  designed  to  review  lending  practices,  risk  management,  credit
quality,   liquidity,   compliance  and  capital  adequacy.   During  2002,  the
Pennsylvania  State  Department  of  Banking,   the  Federal  Deposit  Insurance
Corporation,  and the Federal  Reserve Bank performed  various  examinations  of
Community  and its  banking  subsidiaries  pursuant to their  regular,  periodic
regulatory  reviews.  No comments were  received from these various  bodies that
would  have  a  material  adverse  effect  on  Community's  liquidity,   capital
resources, or operations.

INFLATION

     Community's  ability to cope with the impact of inflation is best  measured
by its ability to respond to  changing  interest  rates and manage  non-interest
income and expense.  Within its ALCO processes,  the Corporation manages the mix
of interest  rate-sensitive  assets and liabilities in order to limit the impact
of changing  interest rates on net interest income.  Inflation also has a direct
impact on non-interest income and expense such as service fee income, salary and
benefits expenses, and other overhead expenses.  Inflationary pressures over the
last  several  years  have been  modest  but this  trend is  subject  to change.
Management  will  continue to monitor the potential for inflation and its impact
on the pricing of products and services.

FORWARD-LOOKING STATEMENTS

     Periodically,  Community has made and will continue to make statements that
may  include   forward-looking   information.   The  Corporation  cautions  that
forward-looking  information disseminated through financial presentations should
not be  construed  as  guarantees  of future  performance.  Furthermore,  actual
results  may  differ  from  expectations   contained  in  such   forward-looking
information  as  a  result  of  factors  that  are  not  predictable.  Financial
performance can be affected by any number of factors that are not predictable or
are  out of  management's  direct  control.  Examples  include:  the  effect  of
prevailing  economic  conditions;  unforeseen or dramatic changes in the general
interest rate environment; actions or changes in policies of the Federal Reserve
Board  and  other  government  agencies;   business  risk  associated  with  the
management of the credit extension  function and fiduciary  activities.  Each of
these factors could affect estimates,  assumptions,  uncertainties and risk used
to develop forward-looking information, and could cause actual results to differ
materially from management's expectations regarding future performance.

<PAGE>

2001 VERSUS 2000

     The year 2001 was a critical transitional period for Community as it sought
to expand its role as a more complete provider of financial services.  Community
had solidified its presence in vital south central  Pennsylvania  market through
the  merger  of  Glen  Rock  State  Bank  and  by  strategic   acquisitions   of
complementary  businesses  that helped to augment its growing  menu of financial
services  products.  These and other  initiatives  were  planned and executed to
enhance  Community's ability to serve the expanding needs of its marketplace and
growing customer base. The Glen Rock  transaction  resulted in nearly $2 million
in nonrecurring merger-related expenses.

     Earnings  per share for 2001 reached  $1.45,  which was nearly equal to the
performance  of $1.50  achieved in 2000. Net income reached $13.6 million versus
$13.9  million in the prior year.  Results for 2001  included  the  nonrecurring
special charges  associated  with merger activity and by a higher  provision for
loan losses.  Performance reflected a ROA of .97% and a ROE of 12.21%, a decline
from the ROA and ROE achieved in 2000 of 1.12% and 15.08%, respectively.

Interest Income

     Interest  income  from  earning  assets  grew $6.5  million or 6.7% to $102
million in 2001.  The yield on earning  assets  actually  declined from 8.24% in
2000 to 7.81% in 2001.  The  decline in earning  asset  yield  stemmed  from the
decline in overall  interest  rate  trends and asset  pricing.  The  precipitous
decline  in  overall  rates  reflected,  in part,  the  effect  of a  series  of
reductions in the benchmark Fed discount  rate, the fed funds rate and a general
decline in other lending rates.  During this same period,  Community was able to
achieve  only modest  reductions  in the cost of  funding.  The lower rates did,
however, fuel borrower demand for affordably priced loan products, boosting loan
balances by 9.1% or $70  million.  This  increase,  combined  with a $62 million
increase in tax-exempt security holdings,  overcame the negative effect of lower
interest rates and produced a $6.5 million increase in interest income

Interest Expense

     Declines in interest  rates in 2001 produced only modest  reductions in the
cost of funds,  which was 4.63% and nearly equal to the 4.66%  recorded in 2000.
Deposit  pricing was less  responsive to rate  declines,  thus  compressing  net
interest income.  Furthermore,  additional  dynamics  occurred which changed the
composition of deposits and included: a shift in deposits from  interest-bearing
accounts  to   non-interest-bearing   accounts,   which   increased  the  margin
contribution from non-interest-bearing  funds but elevated the cost on remaining
low cost deposit sources;  rates paid on certain deposit  categories had reached
levels where further declines were  competitively  impractical and; less dynamic
repricing  of term  deposits  due to  normal  delays  in  scheduled  maturities.
Community  achieved a 10% increase in its  deposit-based  funding sources during
the year while actual interest expense grew 6% to $52.1 million,  an increase of
$2.9 million.  Additionally, the Corporation made strategic use of other sources
of funding  liquidity,  including  FHLB  advances to supplement  deposit  growth
trends.


Net Interest Income

     Community  blended the impact of changing  rates,  shifting  rate  indices,
customer  preferences and product  development to increase net interest  income,
which grew 7.6% from $46.6 million in 2000 to $50.2 million in 2001. At the same
time, net interest margin  reflected  compression from 4.01% in 2000 to 3.83% in
2001, which resulted from a decline in the net interest spread between yields on
earning assets and costs of funds for a given level of earning  assets.  Despite
the margin compression,  net interest income grew by $3.5 million due largely to
the absolute growth in earning assets of nearly 13%.


Non-interest Income

     Management  focus  on the  expansion  of  complementary  services  began in
earnest in 2001, resulting in dramatic improvement in the diversification of the
revenue stream. Non-interest income, excluding the impact of gains from security
transactions,  grew 36%,  from $7.7  million  in 2000 to $10.4  million in 2001.
Results from 2001 non-interest sources aggregated 17% of the total net revenues,
which includes both non-interest  revenues and net revenues from  intermediation

<PAGE>

activities.  Areas  recording  substantial  growth  included  service charges on
deposits,  which grew 25%, other service  charges,  including debit card income,
which grew 19%, and strong  growth in ATM service  charges.  Expansion  into new
business lines, including the title insurance business and investment management
sales of mutual fund and annuity products,  also contributed to the growth. Fees
from  mortgage  originations  and sales  added  $1.4  million of  revenues.  Net
security  gains added over $1.7 million that,  when added to the $10.4  million,
reflected a grand total of $12.1 million in income from non-interest sources.



Non-interest Expenses

     Excluding the impact of merger-related expenses incurred in connection with
the merger of Glen Rock total  non-interest  expenses grew over 13%, or slightly
in excess of $4 million  over  expenses in 2000.  Nonrecurring  merger  expenses
aggregated  nearly $2 million of the total of $36.5 million of expenses recorded
in 2001. Of the $4 million increase in core expenses, almost half was attributed
to increases in salary and benefits expense,  most notably from the expansion of
Community's  distribution  network in both 2000 and 2001,  and by expenses added
from employees  involved in fee-based  services such as the title  insurance and
investment management activities. Office expansion also contributed to increases
in occupancy  expenses,  which grew by 17%. Other expenses exhibited an increase
of 12%, and were also influenced by the new offices and by expenses  incurred as
a result of the  convergence  of the bank  charters.  Increases also occurred in
telecommunications,  travel,  office  supplies and automated  teller  processing
fees.


Income taxes

     Community reported a lower effective tax rate for 2001 than in 2000, as the
effective  tax rate  dropped to 17% from 25% in the prior year.  The decline was
due to two factors:  the lower level of earnings  and the  relative  increase in
income from tax-advantaged investments.  The Corporation has increased the level
of  tax-exempt  investment  during 2001 and these  investments  will continue to
favorably influence the effective tax rate through their maturity dates.




Market for the Corporation's Common Stock and Related Securities Holder Matters


     The  shares of  Community  Banks,  Inc.  (CMTY)  are  traded on the  Nasdaq
National Market and are transferred through local and regional brokerage houses.
The Corporation has  approximately  3,270  shareholders as of December 31, 2002.
The  following  table sets forth the high and low prices within the knowledge of
management  of  Community  Banks,  Inc.  at  which  the  common  stock  has been
transferred  during  the  periods  indicated.  The  table is based  solely  upon
transactions  known to management of the Corporation and represents a portion of
the actual transfers of common stock during the periods in question.

<TABLE>
<CAPTION>



                                   Price Per Share                                               Price Per Share
2002                               Low        High           2001                                Low         High
--------------------------------------------------------------------------------------------------------------------

<S>                               <C>       <C>              
                                <C>        <C>
First Quarter..................   $24.35    $27.75           First Quarter..................    $19.40     $20.84
Second Quarter.................    25.55     29.70           Second Quarter.................     20.10      28.43
Third Quarter..................    23.90     27.69           Third Quarter..................     20.57      28.38
Fourth Quarter.................    25.98     29.00           Fourth Quarter.................     23.14      25.95
</TABLE>

     Holders  of the  common  stock  of the  Corporation  are  entitled  to such
dividends as may be declared  from time to time by the Board of Directors out of
funds legally available therefore. Community Banks, Inc. has paid cash dividends
per share of common stock  during the last five years as follows:  1998 - $0.49,
1999 - $0.52,  2000 - $0.57,  2001 - $0.64,  and 2002 - $.72.  The market prices
listed above are based on historical market quotations and have been restated to
reflect stock dividends and splits.
<PAGE>
<TABLE>
<CAPTION>


                     Community Banks, Inc. and Subsidiaries
                       Supplemental Financial Information

      Average Balances, Effective Interest Differential and Interest Yields

Income and Rates on a Tax Equivalent Basis (b) for the Years Ended December 31,
                              2002, 2001, and 2000
                             (dollars in thousands)



                                              2002                               2001                             2000
                              ------------------------------------------------------------------------------------------------------
                                                        Average                           Average                            Average
                                            Interest     Rates                 Interest    Rates                Interest      Rates
                                Average      Income     Earned/    Average      Income/   Earned/   Average      Income/     Earned/
                               Balance(c)   Expense(a)  Paid (a)   Balance(c)  Expense(a) Paid (a)  Balance(c)  Expense(a)   Paid(a)
 Assets:

<S>                            <C>          <C>          <C>       <C>          <C>         <C>     <C>       <C>             <C>
   Cash and due from banks.... $   36,982                          $   36,129                       $   31,909
                               ----------                          ----------                       ----------
   Earning assets:
      Interest-bearing deposits
       in other banks.........      1,742   $     26      1.49%        2,126    $    103    4.84%        1,204   $    71      5.90%
                               ----------                          ----------                       ----------
      Investment securities:
         Taxable..............    384,097     19,602      5.10        300,040     20,075    6.69       293,899    20,570      7.00
         Tax-exempt (b).......    200,419     14,955      7.46        152,960     11,034    7.21        91,447     7,403      8.10
                               ----------                          ----------                       ----------
      Total investment
       securities.............    584,516                             453,000                          385,346
                               ----------                          ----------                       ----------
      Federal funds sold......     11,126        193      1.73         16,221        800    4.93         7,807       750      9.61
                               ----------                          ----------                       ----------
    Loans (b).................    889,912     67,712      7.61        838,178     70,339    8.39       768,204    67,072      8.73
                               ----------   --------      ----     ----------   --------    ----    ----------   -------     -----
       Total earning assets...  1,487,296   $102,488      6.89      1,309,525   $102,351    7.81     1,162,561   $95,866      8.24
                               ----------   --------      ----     ----------   --------            ----------   -------     -----
      Allowance for loan losses   (12,689)                            (11,745)                          (9,496)
      Premises, equipment, and
         other assets.........     68,457                              64,612                           53,896
                               ----------                          ----------                       ----------
         Total assets......... $1,580,046                          $1,398,521                       $1,238,870
                               ==========                          ==========                       ==========

Liabilities:
   Demand deposits.........    $  163,434                          $  150,218                       $   83,064
                               ----------                          ----------                       ----------
   Interest-bearing liabilities:
      Savings deposits........    322,632      4,151      1.29        292,187      6,820    2.33       319,045     6,954      2.18
                               ----------                          ----------                       ----------
      Time deposits:
         $100,000 or greater..    107,523                              77,321                           69,687
         Other................    498,159                             457,196                          416,903
                               ----------                          ----------                       ----------
      Total time deposits.....    605,682     24,498      4.04        534,517     28,731    5.38       486,590    27,725      5.70
                               ----------                          ----------                       ----------
      Total time and savings
         deposits.............    928,314                             826,704                          805,635
      Short-term borrowings...     54,178        977      1.80         12,344        240    1.94        15,698       564      3.59
      Long-term debt..........    302,406     16,586      5.48        286,569     16,349    5.71       233,354    13,956      5.98
                               ----------   --------      ----     ----------   --------    ----    ----------   -------      ----
         Total interest-bearing
            liabilities.......  1,284,898   $ 46,212      3.60      1,125,617   $ 52,140    4.63     1,054,687   $49,199      4.66
                               ----------   --------      ----     ----------   --------    ----    ----------   -------      ----
   Accrued interest, taxes and
      other liabilities.......     12,362                              11,305                            8,864
                               ----------                          ----------                       ----------
         Total liabilities....  1,460,694                           1,287,140                        1,146,615
   Stockholders' equity.......    119,352                             111,381                           92,255
                               ----------                          ----------                       ----------
         Total liabilities and
          stockholders' equity $1,580,046                          $1,398,521                       $1,238,870
                               ==========                          ==========                       ==========

Interest income to earning
   assets.....................                            6.89%                             7.81%                             8.24%
Interest expense to earning
   assets.....................                            3.11                              3.98                              4.23
                                                          ----                              ----                              ----

      Effective interest
         differential.........              $ 56,276      3.78%                 $ 50,211    3.83%                $46,667      4.01%
                                            ========      ====                  ========    ====                 =======      ====


</TABLE>

(a) Amortization of net deferred fees included in interest income and rate
    calculations.
(b) Interest income on all tax-exempt securities and loans have been adjusted
    to tax equivalent basis utilizing a Federal tax rate of 35% in 2002, 2001,
    and 2000.
(c) Averages are a combination of monthly and daily averages.

<PAGE>


Community Banks, Inc. and Subsidiaries
Supplemental Financial Information
Rate/Volume Analysis-Tax Equivalent Basis (a) For the Years Ended December 31,
2002 and 2001 (in thousands)
<TABLE>
<CAPTION>


                                                          2002 vs 2001                           2001 vs 2000
                                                 --------------------------------------------------------------------
                                                   Volume      Rate        Total        Volume      Rate       Total
                                                 --------------------------------------------------------------------
<S>                                              <C>         <C>          <C>          <C>        <C>        <C>
Increase (decrease) in interest income:
    Loans.................................       $   4,169   $ (6,796)    $ (2,627)    $  5,948   $ (2,681)  $  3,267
    Investment securities:................
       Taxable............................           4,906     (5,379)        (473)         425       (920)      (495)
       Tax-exempt.........................           3,527        394        3,921        4,521       (890)     3,631
                                                 ---------   --------     --------     --------   --------   --------
          Total...........................           8,433     (4,985)       3,448        4,946     (1,810)     3,136
    Federal funds sold....................            (198)      (409)        (607)         538       (488)        50
    Interest-bearing deposits in other
      banks...............................             (16)       (61)         (77)          47        (15)        32
                                                 ---------   --------     --------     --------   --------   --------

       Total..............................          12,388    (12,251)         137       11,479     (4,994)     6,485
                                                 ---------   --------     --------     --------   --------   --------

Increase (decrease) in interest expense:
    Savings deposits......................             645     (3,314)      (2,669)        (601)       467       (134)
    Time deposits.........................           3,516     (7,749)      (4,233)       2,624     (1,618)     1,006
    Short-term borrowings.................             755        (18)         737         (103)      (221)      (324)
    Long-term debt .......................             899       (662)         237        3,049       (656)     2,393
                                                 ---------   --------     --------     --------   --------   --------
       Total..............................           5,815    (11,743)      (5,928)       4,969     (2,028)     2,941
                                                 ---------   --------     --------     --------   --------   --------
    Increase (decrease) in effective
      interest differential...............       $   6,573   $   (508)    $  6,065     $  6,510   $ (2,966)  $  3,544
                                                 =========   ========     ========     ========   ========   ========
</TABLE>





(a) Table shows  approximate  effect on the effective  interest  differential of
volume and rate  changes for the years 2002 and 2001.  The effect of a change in
average volume has been  determined by applying the average yield or rate in the
earlier period to the change in average volume during the period.  The effect of
a change in rate has been  determined  by applying the change in rate during the
period to the average  volume of the prior  period.  Any  resulting  unallocated
amount was allocated ratably between the volume and rate components. Non-accrual
loans have been included in the average volume of each period. Tax-exempt income
is shown on a tax equivalent  basis assuming a federal income tax rate of 35% in
2002, 2001, and 2000.



<PAGE>


FINANCIAL CONDITION
For the Years Ended December 31, 2002 and 2001


     The  Corporation's   financial  condition  can  be  examined  in  terms  of
developing trends in its sources and uses of funds.  These trends are the result
of both external  environmental  factors,  such as changing economic conditions,
regulatory changes and competition,  and internal  environmental factors such as
management's  evaluation  as  to  the  best  use  of  funds  in  these  changing
conditions.
<TABLE>
<CAPTION>


                                          Average        Increase (Decrease)             Average          Increase (Decrease)
                                          Balance               Since                    Balance                Since
                                            2002                2001                      2001                  2000
                                        ------------------------------------------------------------------------------------
                                                                      (dollars in thousands)

                                                            Amount         %                              Amount         %
                                                            ------         -                              ------         -
Funding sources:

   Deposits and borrowed funds:

<S>                                     <C>             <C>               <C>          <C>             <C>              <C>
     Non-interest bearing...........    $   163,434     $  13,216         8.8          $   150,218     $  67,154        80.8
     Interest-bearing...............        928,314       101,610        12.3              826,704        21,069         2.6
                                        -----------     ---------       -----          -----------     ---------       -----
          Total deposits............      1,091,748       114,826        11.8              976,922        88,223         9.9

   Borrowed funds...................        356,584        57,671        19.3              298,913        49,861        20.0
   Other liabilities................         12,362         1,057         9.3               11,305         2,441        27.5
   Shareholders' equity.............        119,352         7,971         7.2              111,381        19,126        20.7
                                        -----------     ---------       -----          -----------     ---------       -----

          Total sources.............    $ 1,580,046     $ 181,525        13.0          $ 1,398,521     $ 159,651        12.9
                                        ===========     =========       =====          ===========     =========       =====


Funding uses:

   Interest-earning assets:

     Short-term investments..........   $    12,868     $  (5,479)      (30.0)         $    18,347     $   9,336       103.6
     Investment securities..........        584,516       131,516        29.0              453,000        67,654        17.6
     Loans..........................        889,912        51,734         6.2              838,178        69,974         9.1
                                        -----------     ---------       -----          -----------     ---------       -----

          Total interest earning assets   1,487,296       177,771        13.6            1,309,525       146,964        12.6

   Cash and due from banks..........         36,982           853         2.4               36,129         4,220        13.2
   Other assets.....................         55,768         2,901         5.5               52,867         8,467        19.1
                                        -----------     ---------       -----          -----------     ---------       -----

          Total uses................    $ 1,580,046     $ 181,525        13.0          $ 1,398,521     $ 159,651        12.9
                                        ===========     =========       =====          ===========     =========       =====
</TABLE>