Community Banks, Inc. and Subsidiaries
MARKET FOR THE CORPORATION'S COMMON STOCK AND
RELATED SECURITIES HOLDER MATTERS


The shares of Community Banks, Inc. are traded on the American Stock Exchange 
and are transferred through local and regional brokerage houses.  The 
Corporation has approximately 2,640 shareholders as of February 12, 1999. 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. 
                                                                


                    Price Per Share                           Price Per Share   
1998                Low       High         1997               Low       High
                                                                             
First Quarter....  	$24.33    $28.42       First Quarter....  $16.35    $22.86 
Second Quarter..     23.63     27.59       Second Quarter...   19.83     24.00
Third Quarter...     23.25     25.75       Third Quarter....   21.92     25.83
Fourth Quarter..     21.50     25.25       Fourth Quarter...   25.33     30.17 



Holders of the Common Stock of the Corportion 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: 1994-$0.32, 1995-$0.37, 
1996-$0.41, 1997-$0.48, and 1998-$0.62. The market prices listed above are 
based on historical market quotations and have been restated to reflect stock 
dividends and splits        

<TABLE>
<CAPTION>
     
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS                                              
At December 31, 1998 and 1997
(dollars in thousands except per share data)
                                                          1998             1997
                                                                          
                                                                               
ASSETS                                                                         
<S>                                                   <C>               <C>   
Cash and due from banks..........................      $ 25,036          $ 28,015
Interest-bearing time deposits in other banks....         1,258             2,406
Investment securities, available for sale (market                             
  value).........................................       292,542           219,284
Federal funds sold...............................         2,208             2,100
Loans............................................       512,280           455,830
Less:  Unearned income...........................      (10,018)           (11,799)
       Allowance for loan losses.................       (6,954)            (6,270)
       Net loans.................................       495,308           437,761
Premises and equipment, net......................        14,203            13,963
Goodwill.........................................           665               906
Other real estate owned..........................           625               866
Loans held for sale..............................         3,319             2,641
Accrued interest receivable and other assets.....        16,510            11,520
  Total assets...................................     $ 851,674         $ 719,462
                                                      =========         =========
                                                                        
LIABILITIES                                                             
Deposits: 
  Demand.........................................      $ 50,038          $ 44,181
  Savings........................................       254,316           226,376
  Time...........................................       265,884           248,999
  Time in denominations of $100,000 or more......        25,667            30,199
  Total deposits.................................       595,905           549,755
Short-term borrowings............................         7,910            10,540
Long-term debt...................................       161,000            77,280
Accrued interest payable and other liabilities...         7,983             7,874
  Total liabilities..............................       772,798           645,449
                                                                        
STOCKHOLDERS' EQUITY 

Preferred stock, no par value; 
  500,000 shares authorized;                                                 
  no shares issued and outstanding...............           ---               ---
Common stock, $5.00 par value; 20,000,000 shares                              
  authorized; 6,631,000 and 4,406,000 shares                                 
  issued in 1998 and 1997, respectively..........        33,157            22,028
Surplus..........................................        17,989            28,645
Retained earnings................................        27,023            21,219
Accumulated other comprehensive income, net of                               
 tax of $1,437,000 and $1,668,000, respectively..         2,789             3,237
Less:  Treasury stock of 105,000 and 44,000                                  
  shares at cost.................................        (2,082)           (1,116)
  Total stockholders' equity.....................        78,876            74,013
  Total liabilities and stockholders' equity.....     $ 851,674         $ 719,462
                                                      =========         =========
</TABLE>
All periods reflect the combined data of Community Banks, Inc. and Peoples State
Bank.      

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

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                        
CONSOLIDATED STATEMENTS OF INCOME 
For the Years Ended December 31, 1998, 1997, and 1996
(dollars in thousands except per share data)
                                                                             
                                                                   1998              1997              1996 
<S>                                                             <C>               <C>               <C>   
Interest Income:                                                                                   
  Interest and fees on loans.......................              $41,306           $38,095           $34,696
  Interest and dividends on investment securities:                                                 
     Taxable.......................................               11,325            11,382             8,429
     Exempt from federal income tax................                3,795             2,422             1,665
  Other interest income............................                   80                84               278
  Fed funds interest...............................                  494               304               207
     Total interest income.........................               57,000            52,287            45,275


Interest expense:                                                                                  
  Interest on deposits:                                                                            
     Savings.......................................                5,479             5,556             4,974
     Time..........................................               13,459            13,420            13,030
     Time in denominations of $100,000 or more.....                1,580             1,578             1,378
  Interest on short-term borrowings and                                                            
   long-term debt..................................                4,975             2,627             1,034
  Fed funds purchased and repo interest............                1,394             1,242               252
     Total interest expense........................               26,887            24,423            20,668
     Net interest income...........................               30,113            27,864            24,607
Provision for loan losses..........................                1,464             1,317             1,567
     Net interest income after provision for                                                                
       loan losses.................................               28,649            26,547            23,040


Other income:                                                                                      
  Trust department income..........................                  302               317               251
  Service charges on deposit accounts..............                1,584             1,338             1,195
  Other service charges, commissions and fees......                  731               627               368
  Investment security gains........................                  575               770               302         
  Income on insurance premiums.....................                  661               576               653
  Gains on mortgage sales..........................                  634               283               269
  Other income.....................................                  473               318               133
     Total other income............................                4,960             4,229             3,171


Other expenses:                                                                                    
  Salaries and employee benefits..................                10,380             9,679             8,613
  Net occupancy expense...........................                 3,202             2,797             2,531
  Operating expenses of insurance subsidiary......                   472               365               363
  Other operating expense.........................                 5,971             6,519             5,027
     Total other expenses.........................                20,025            19,360            16,534
     Income before income taxes...................                13,584            11,416             9,677
Provision for income taxes........................                 3,534             3,491             2,693
     Net income...................................               $10,050           $ 7,925           $ 6,984         
                                                               =========           =======           =======

Basic earnings per share.......................<F1>              $  1.54           $  1.22           $  1.07
                                                               =========           =======           =======

Diluted earnings per share.....................<F1>              $  1.50           $  1.19           $  1.05
                                                               =========           =======           =======

<FN>
<F1> Per share data for all periods has been restated to reflect stock 
dividends and splits. 
</FN>
</TABLE>

All periods reflect the combined data of Community Banks, Inc. and Peoples 
State Bank.            

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


<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997, and 1996 
(dollars in thousands except per share data)                   

                                                                                     Accumulated                   Total      
                                                                                       Other                                  
                                                        Common           Retained   Comprehensive   Treasury    Stockholders' 
                                                         Stock  Surplus  Earnings      Income         Stock        Equity     
                                                                                                                              
<S>                                                    <C>      <C>      <C>           <C>          <C>          <C>     
Balance, December 31, 1995..........................    $19,424  $14,406  $24,077       $1,742       $  (53)      $59,596     
     Comprehensive income:                                                                                                    
         Net Income.................................                        6,984                                   6,984     
         Change in unrealized gain (loss) on                                                                                  
         securities, net of tax of $(812) and                                                                                 
         reclassification adjustment of $302........                                    (1,576)                    (1,576)    
         Total comprehensive income.................                                                                5,408     
Cash dividends......................................                       (2,725)                                 (2,725)    
10% stock dividend..................................      1,304    5,219   (6,523)                                            
Purchase of treasury stock..........................                                                   (368)         (368)    
Issuance of additional shares.......................        205    2,020     (57)                                   2,168     

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

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

Balance, December 31, 1998..........................    $33,157  $17,989  $27,023       $2,789      $(2,082)      $78,876     
                                                        =======  =======  =======       ======      ========      =======     
</TABLE>
Per share data for all periods has been restated to reflect stock dividends and 
splits.                                       

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

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Years Ended December 31, 1998, 1997, and 1996
(in thousands)                                                            
                                                                        
                                                                   1998              1997               1996                    
<S>                                                            <C>                <C>               <C>    
Operating Activities:                                                                                                
  Net income..............................................       $10,050           $ 7,925           $ 6,984
  Adjustments to reconcile net income to net                                                                         
   cash provided by operating activities:                                                                            
     Provision for loan losses............................         1,464             1,317             1,567
     Provision for depreciation and amortization..........         1,656             1,450             1,268
     Amortization of goodwill.............................           241               241               241
     Investment security gains............................          (575)             (770)             (302)
     Loans originated for sale............................       (38,348)          (14,017)          (11,329)
     Proceeds from sales of loans.........................        38,304            16,281             9,124                        
     Gains on mortgage sales..............................          (634)             (283)             (269)
     Change in other assets, net..........................        (3,769)             (456)           (1,701)
     Increase in accrued interest payable and other                                                                  
      liabilities, net....................................           340               781             1,454
        Net cash provided by operating activities.........         8,729            12,469             7,037                 

Investing Activities:                                                                                                
  Net decrease (increase) in interest-bearing time                                                                   
   deposits in other banks................................         1,148              (900)           (1,072)
  Proceeds from sales of investment securities............        25,310            30,525            13,420
  Proceeds from maturities of investment securities.......        80,425            44,612            38,621
  Purchases of investment securities......................      (179,097)          (94,995)          (92,814)
  Net increase in total loans.............................       (59,991)          (36,380)          (54,594)
  Net increase in premises and equipment..................        (1,896)           (3,445)           (1,368)
        Net cash used in investing activities.............      (134,101)          (60,583)          (97,807)

Financing Activities:                                                                                  
  Net increase in total deposits..........................       46,150             27,153            48,557
  Net increase (decrease) in short-term borrowings........       (2,630)             7,439            26,092
  Proceeds from issuance of long-term debt................       88,720             25,000            18,000
  Repayment of long-term debt.............................       (5,000)            (4,000)              ---
  Cash dividends..........................................       (4,103)            (3,143)           (2,725)
  Purchases of treasury stock.............................         (966)              (695)             (368)
  Proceeds from issuance of common stock..................          330              2,776             2,168
        Net cash provided by financing activities.........      122,501             54,530            91,724
        Increase (decrease) in cash and cash equivalents..       (2,871)             6,416               954

Cash and cash equivalents at beginning of year............       30,115             23,699            22,745
Cash and cash equivalents at end of year..................      $27,244            $30,115           $23,699
                                                                =======            =======           =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial 
statements.
                                
All periods reflect the combined data of Community Banks, Inc. and Peoples 
State Bank.

     Community Banks, Inc. and Subsidiaries
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     
     1.  Organization and Basis of Presentation:
     
        Community Banks, Inc. (Corporation) is a bank holding company whose
     wholly-owned subsidiaries include Community Banks, N.A. (CBNA),Peoples
     State Bank (PSB), Community Banks Investments, Inc. (CBII) and Community
     Banks Life Insurance Company (CBLIC). All significant intercompany
     transactions have been eliminated. 
     The Corporation operates through its main office in Millersburg and through
     28 branch banking offices located in Dauphin, Northumberland, Schuylkill, 
     Luzerne, Snyder, Adams, and York Counties in Pennsylvania. Community Banks,
     Inc.'s primary source of revenue is derived from loans to customers, who
     are predominantly middle-income individuals.
     
     2.  Summary of Significant Accounting Policies:
     
        The more significant accounting policies of the Corporation are: 
     
                                Investment Securities:
        The Corporation classifies debt and equity securities as either
     "held-to-maturity," "available-for-sale," or "trading."  Investments for
     which management has the intent, and the Corporation has the ability, to
     hold to maturity are carried at the lower of cost or market adjusted for
     amortization of premium and accretion of discount.  Amortization and
     accretion are calculated principally on the interest method.  Securities
     bought and held primarily for the purpose of selling them in the near term
     are classified as "trading" and reported at fair value. Changes in
     unrealized gains and losses on "trading" securities are recognized in the
     Consolidated Statements of Income.  At December 31, 1998 and 1997, there
     were no securities identified as "held-to-maturity" or "trading."  All
     other securities are classified as "available-for-sale" and reported at
     fair value. Changes in unrealized gains and losses for "available-for-sale"
     securities, net of applicable taxes, are recorded as a component of
     shareholder's equity.
     
        Securities classified as "available-for-sale" include investments
     management intends to use as part of its asset/liability management
     strategy, and that may be sold in response to changes in interest rates,
     resultant prepayment risk and other factors. Realized gains and losses on
     the sale of securities are recognized using the specific identification
     method and are included in Other Income in the Consolidated Statements of
     Income.
     
                              Allowance for Loan Losses:
        The Corporation maintains an allowance for loan losses at an amount
     which, in management's judgement, should be adequate to absorb losses on
     existing loans that may become uncollectible. Management's judgement in
     determining the adequacy of the allowance is based on evaluations of the
     collectibility of loans. The evaluations take into consideration such
     factors as changes in the nature and volume of the loan portfolio, current
     economic conditions that may affect the borrowers' ability to pay, overall
     portfolio quality and review of specific problem loans.   
     
                               Premises and Equipment:
        Premises and equipment are stated at cost, less accumulated
     depreciation. Depreciation is calculated using accelerated and
     straight-line methods over the estimated useful lives of the assets.
     Maintenance and repairs are expensed as incurred, while major additions and
     improvements are capitalized. Gain or loss on retirement or disposal of
     individual assets is recorded as income or expense in the period of
     retirement or disposal.
     
     
                                      Goodwill:
        Goodwill which represents the excess of purchase price, including
     acquisition costs over the fair market value of net assets acquired under
     the purchase method of accounting is amortized on a straight line basis
     over 15 years.
     
                                    Pension Plan:
        The Corporation has a noncontributory defined benefit pension plan
     covering substantially all CBNA employees and a defined contribution plan
     covering PSB employees. Pension costs are funded currently subject to the
     full funding limitation imposed under federal income tax regulations.
     
                                    Income Taxes:
        Deferred income taxes are accounted for by the liability method, wherein
     deferred tax assets and liabilities are calculated on the differences
     between the basis of assets and liabilities for financial statement
     purposes versus tax purposes (temporary differences) using enacted tax
     rates in effect for the year in which the differences are expected to
     reverse. Tax expense in the statements of income is equal to the sum of
     taxes currently payable, including the effect of the alternative minimum
     tax, if any, plus an amount necessary to adjust deferred tax assets and
     liabilities to an amount equal to period-end temporary differences at
     prevailing tax rates. (See Note 10). 
     
                              Interest Income on Loans:
        Interest income on commercial, consumer, and mortgage loans is recorded
     on the interest method. Nonaccrual loans are those on which the accrual of
     interest has ceased and where all previously accrued and unpaid interest is
     reversed. Loans, other than consumer loans, are placed on nonaccrual status
     when principal or interest is past due 90 days or more and the collateral
     may be inadequate to recover principal and interest, or immediately, if in
     the opinion of management, full collection is doubtful. Generally, the
     uncollateralized portions of consumer loans past due 90 days or more are
     charged-off. Interest accrued but not collected as of the date of placement
     on nonaccrual status is reversed and charged against current income.
     Subsequent cash payments received either are applied to the outstanding
     principal balance or recorded as interest income, depending upon
     management's assessment of the ultimate collectibility of principal and
     interest. (See also Note 5).  Loan origination fees and certain direct
     origination costs are capitalized and recognized as an adjustment of the
     yield on the related loan.
     
                               Other Real Estate Owned:
        Real estate acquired through foreclosure is carried at the lower of the
     recorded amount of the loan for which the foreclosed property previously
     served as collateral or the current appraised value of the property. 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 1998, 1997, and 1996
     non-cash transactions related to real estate acquired through foreclosure
     totalled $980,000, $1,163,000, and $808,000, respectively.
     
        Subsequent to foreclosure, gains or losses on the sale of and losses on
     the periodic reevaluation of real estate acquired through foreclosure are
     credited or charged to noninterest expense. Costs of maintaining and
     operating foreclosed property are expensed as incurred. Expenditures to
     improve foreclosed properties are capitalized only if expected to be
     recovered; otherwise, they are expensed.  
     
                               Statement of Cash Flows:
        Cash and cash equivalents included cash and due from banks and federal
     funds sold. The Corporation made cash payments of $4,436,000, $3,071,000,
     and $2,320,000, and $26,011,000, $24,085,000, and $20,232,000 for income
     taxes and interest, respectively, in 1998, 1997, and 1996. Certain prior
     year amounts have been reclassified to conform with the current year's
     presentation.   
     
                          Recent Accounting Pronouncements:
                                           
     During 1998, the Corporation adopted Statement of Financial Accounting
     Standards No. 130, "Comprehensive Income" (SFAS No. 130), which established
     standards for the reporting and disclosure of comprehensive income and its
     components (revenues, expenses, gains, and losses).  SFAS 130 requires that
     all items required to be recognized under accounting standards as
     components of comprehensive income be reported in a financial statement
     that is displayed with the same prominence as other financial statements. 
     Comprehensive income includes a reclassification adjustment for net
     realized investment gains included in net income of $575,000, $770,000, and
     $302,000 for the years ended December 31, 1998, 1997, and 1996,
     respectively. The new standard requires only additional disclosures in the
     consolidated financial statement:  it does not affect the Corporation's
     financial position or results of operation.
     
     During 1998, the Corporation also adopted Statement of Financial Accounting
     Standards No. 132, "Employers' Disclosures about Pensions and Other
     Postretirement Benefits" (SFAS No. 132), which revises employers'
     disclosures about pensions and other postretirement benefit plans.  It
     standardizes the disclosure requirements for pensions and other
     postretirement benefits to the extent practicable, requires additional
     information on changes in the benefit obligations and fair values of plan
     assets that will facilitate financial analysis and eliminates certain
     disclosures that are no longer as useful as they were under previous
     pronouncements.
     
     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standard No. 133, "Accounting for Derivative Instruments and
     Hedging Activities" in June of 1998.  SFAS 133 establishes standards for
     recording derivative financial instruments on the balance sheet at their
     fair value.  This Statement requires changes in the fair value of
     derivatives to be recorded each period in current earnings or other
     comprehensive income, depending on whether a derivative is designated as
     part of a hedge transaction and, if it is, the type of hedge transaction. 
     This Statement is effective for all fiscal quarters of fiscal years
     beginning after June 15, 1999.  Management anticipates that the adoption of
     SFAS 133 will not have a material effect on the Corporation's financial
     condition or results of operations.
     
     The Financial Accounting Standards Board issued Statement of Financial
     Standards No. 131, "Disclosure About Segments of an Enterprise and Related
     Information" (SFAS 131) in 1997.  SFAS 131 establishes standards for
     disclosure about products, services, geographic areas, and major customers.
     SFAS 131 is effective for fiscal years beginning after December 15, 1997. 
     Management has reviewed SFAS 131 and determined that the Corporation only
     has one qualifying segment and no additional disclosure is required.
      
     SFAS 134 " Accounting for Mortgage-Backed Securities Retained after the
     Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
     Enterprise" requires that after a securitization of mortgage loans held for
     sale, an entity engaged in mortgage banking activities classify the
     resulting mortgage-backed securities or other retained interest based on
     its ability and intent to sell or hold those investments. The Statement is
     effective for the first fiscal quarter beginning after December 15, 1998. 
     Management anticipates that this Statement will not have a material effect
     on the Corporation's financial condition or results of operations.
     
                                           
             Use of Estimates in the Preparation of Financial Statements:
     
     The preparation of financial statements in accordance with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and reported amounts of revenues and expenses during
     the reporting period.  Actual results could differ from those estimates. 

3. Investment Securities:

<TABLE>
<CAPTION>
The amortized cost and market value of all investment securities at 
December 31, 1998 and 1997 are as follows:
                                                
                    
                                                                            
                                                                            1998                                           1997
                                                           Gross      Gross                        Gross      Gross
                                                Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
                                                Cost      Gains       Losses    Value     Cost     Gains      Losses   Value
                                                                                 (in thousands)
<S>                                              <C>       <C>     <C>      <C>       <C>       <C>     <C>      <C>      
U.S. government corporations and agencies........ $ 78,800  $  845  $ (196)  $ 79,449  $ 66,940  $  474  $  (25)  $ 67,389
Mortgage-backed U.S. government agencies.........   82,887     568    (195)    83,260    84,568     834    (265)    85,137
Obligations of states and political subdivisions.   85,771   2,211    (306)    87,676    55,248   1,406     (21)    56,633
Corporate securities.............................   27,574     225    (340)    27,459     1,244      34     ---      1,278
Equity securities..............................     13,284   1,565    (151)    14,698     6,379   2,468     ---      8,847
                                                            
         Total................................... $288,316  $5,414  $(1,188) $292,542  $214,379  $5,216  $ (311)  $219,284
                                                  ========  ======  ======== ========  ========  ======  =======  ========
</TABLE>
     The amortized cost and market value of all investment securities at 
December 31, 1998, by contractual maturity, are shown below.  Expected 
maturities will differ from contractual maturities because borrowers may have 
the right to call or prepay obligations with or without call or prepayment 
penalties.

                                                                               
                                                        Amortized      Market
                                                          Cost         Value
                                                             (in thousands)

Due in one year or less............................      $  6,457      $  6,519
Due after one year through five years..............        27,391        27,877
Due after five years through ten years.. ..........        36,546        36,938
Due after ten years................................       121,751       123,250
                                                          192,145       194,584
Mortgage-backed securities.........................        82,887        83,260
Equity securities..................................        13,284        14,698
                                                         $288,316      $292,542
                                                         ========      ========

     Proceeds from sales of investments in debt securities were $24,279,000, 
$29,319,000  and $12,767,000 in 1998, 1997, and 1996, respectively. Gross gains
and losses of $147,000 and $17,000, respectively, were recognized in 1998.  
Gross gains and losses of $138,000 and $117,000, respectively, were recognized 
in 1997.  Gross gains and losses of $113,000 and $88,000, respectively, were 
recognized in 1996.       

     At December 31, 1998 and 1997, investment securities with carrying amounts
of approximately $104,186,000 and $89,373,000 respectively, were pledged to 
collateralize public deposits and for other purposes as provided by law.

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


4. Loans:

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

                                                            December 31
                                                          1998       1997  
                                                           (in thousands)

Commercial, financial and agricultural................$ 65,698    $ 53,520 
Real-estate-construction..............................  17,381       5,553  
Real-estate-mortgage.................................. 324,709     299,529  
Personal installment..................................  97,561      88,046
Other.................................................   6,931       9,182     
                                                      $512,280    $455,830
                                                      ========    ========  

     Loans held for resale amounted to $3,319,000 and $2,641,000 at 
December 31, 1998 and 1997, respectively. These loans are primarily 
fixed-rate mortgages.


5. Allowance for Loan Losses:

     Changes in the allowance for loan losses are as follows:

                                                     December 31
                                         1998            1997           1996
                                                    (in thousands)

Balance, January 1...................   $6,270          $5,561         $4,955 
Provision for loan losses............    1,464           1,317          1,567 
Loan charge-offs.....................   (1,258)         (1,466)        (1,967)
Recoveries...........................      478             858          1,006
Balance, December 31.................   $6,954          $6,270         $5,561 
                                        ======          ======         ======




                                                         NONPERFORMING LOANS (a)
                                                         AND OTHER REAL ESTATE  

                                                        December 31           
                                                    1998            1997
                                                       (in thousands)

              
Loans past due 90 days or more
 and still accruing interest:
   Commercial, financial and agricultural...      $   47        $   53      
   Mortgages................................         353           405      
   Personal installment.....................          34            72     
   Other....................................           7            21      
                                                     441           551     

Restructured Loans                          			      248      	    626			

Loans on which accrual of interest has been
 discontinued:
   Commercial, financial and agricultural...         866           926      
   Mortgages................................       2,282         3,388     
   Other....................................         282           300    
                                                   3,430         4,614    
Other real estate...........................         625           866       
   Total....................................      $4,744        $6,657     
                                                  ======        ======        




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

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

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

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

     At December 31, 1998, the Corporation recorded no investment in impaired 
loans with no related valuation allowance. For the years ended December 31, 
1998, 1997, and 1996, the average balance of impaired loans was negligible.  
The company recognized no interest on impaired loans on the cash basis. 


6. Premises and Equipment:

     Premises and equipment are comprised of the following:

                                                               December 31    
                                                             1998        1997 
                                                             (in thousands)  

Banking premises.....................................   $15,504     $14,808  
Furniture and fixture................................    11,110       9,963   
Leasehold improvements...............................       369         345
                                                         26,983      25,116 
Less accumulated depreciation and amortization.......   (12,780)    (11,153) 
                                                        $14,203     $13,963    
                                                        =======     =======   

     Depreciation expense charged to operations amounted to approximately 
$1,656,000, $1,450,000, and $1,268,000 in 1998, 1997, and 1996, respectively. 


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

     Short-term borrowings consist of the following:
                                                                December 31    
                                                               1998      1997  
                                                               (in thousands)
Securities sold under agreements to repurchase,
   3.40% and 4.97% in 1998 and 1997, respectively......    $ 1,188      $   753
Federal Home Loan Bank, 5.77% in 1997..................        ---        8,085
Federal funds purchased, 4.96% in 1998.................      6,400          ---
Treasury tax and loan note option account,
   4.34% and 4.91% in 1998 and 1997, respectively......        322        1,702
                                                           $ 7,910      $10,540
                                                           =======      =======

     Interest incurred on Federal Funds purchased and other short-term 
borrowings amounted to $298,000, $331,000, and $353,000 for the years ended 
December 31, 1998, 1997, and 1996, respectively.

     At December 31, 1998, long-term debt consists of long-term advances from 
the FHLB of Pittsburgh of $141,000,000 and repurchase agreements totalling 
$20,000,000.  The long-term advances are due to mature from 1999 through 2008.  
Monthly payments of interest are required to be paid to the Federal Home Loan 
Bank at variable and fixed rates presently 5.26%, with principal due at 
maturity.  Quarterly payments of interest are required to be paid on the 
repurchase agreements at a fixed rate, presently 5.76%, with principal due at 
maturity. Interest on long-term debt amounted to $6,071,000, $3,538,000, and 
$933,000 for the years ended December 31, 1998, 1997, and 1996, respectively.

     Maturities on long term debt at December 31, 1998 are as follows:

     1999............................  	  $ 4,000,000
     2000............................     $ 4,000,000
     2001............................     $20,000,000
     2002............................     $45,000,000
     2003............................     $10,000,000 
     Subsequent to 2003..............     $78,000,000


8. Pension Plan:

<TABLE>
<CAPTION>
     The following table sets forth the pension plan's funded status and pension
cost at and for the years ended December 31, 1998 and 1997.
                                                                            
                                                                                           1998           1997
                                                                                             (in thousands)
<S>                                                                                     <C>            <C>   
Changes in benefit obligation:                    
Projected benefit obligation at beginning of year.................................	      $4,461         $3,933
Service cost......................................................................    	     244	           222
Interest cost.....................................................................          310	           293
Distributions.....................................................................         (128)           (49)
Change due to change in assumptions...............................................          299            (66)
Change due to plan amendment......................................................          215            ---
Experience (gain) or loss.........................................................          533            128
Projected benefit obligation at end of year.......................................       $5,934         $4,461
                                                                                         ======         ======
Change in plan assets:                                                                      
Fair value of plan assets at beginning of year.................................... 	     $4,546	        $3,626
Employer contributions............................................................          355	           360
Actual return on assets...........................................................          297	           609
Distributions.....................................................................         (128)           (49)
Fair value of plan assets at end of year, primarily listed stocks,
	corporate, and US bonds..........................................................       $5,070         $4,546
                                                                                         ======         ======
   
Funded status at end of year......................................................       $ (864)	       $   85
Unrecognized net transition (asset) or obligation.................................          (29)	          (38)
Unrecognized prior service cost...................................................          128            (97)
Unrecognized net (gain) or loss...................................................        1,679  	         775
End of year (accrued) or prepaid pension cost.....................................       $  914	        $  725
                                                                                         ======   	     ======

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

Components of net periodic benefit cost:
Service cost......................................................................       $  244	        $  221
Interest cost.....................................................................          311            293
Actual return on plan assets......................................................         (297)          (609)
Amortization of unrecognized net transition (asset) or obligation.................           (8)            (8)
Amortization of unrecognized prior service cost...................................           (8)            (8)
Amortization of unrecognized net (gain) or loss...................................           47             42
Asset gain or (loss) deferred.....................................................         (119)           272
Net periodic pension cost for the year............................................       $  170         $  203
                                                                                         ======         ======
</TABLE>
                                                                           

9.  Earnings Per Share:

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


                                          For the Year Ended 1998    For the Year Ended 1997    For the Year Ended 1996
                                                          Per-Share                  Per-Share                  Per-Share
                                         Income   Shares   Amount   Income   Shares   Amount   Income   Shares   Amount
                                                            (in thousands except for per share data)                         
<S>                                     <C>       <C>      <C>     <C>       <C>      <C>     <C>       <C>      <C>   
Basic EPS:                                  

Income available to common 
   stockholders........................  $10,050   6,542    $1.54   $7,925    6,516    $1.22   $6,984    6,504    $1.07
                                                            =====                      =====                      =====
Effect of Dilutive Securities:

Incentive stock options 
   outstanding.........................              150                        164                        136          

Diluted EPS:

Income available to common
   stockholders and assumed 
    conversion......................... $10,050    6,692    $1.50   $7,925    6,680    $1.19   $6,984    6,640    $1.05
                                        =======    =====    =====   ======    =====    =====   ======    =====    =====
</TABLE>


10. Income Taxes:

     The provision for income taxes consists of the following:                

                                                1998        1997        1996 
                                                        (in thousands)
       
         Current...........................    $4,004      $3,775      $2,440 
         Deferred..........................      (470)       (284)        253 
                                               $3,534      $3,491      $2,693 
                                               ======      ======      ====== 

     The components of the net deferred tax asset (liability) as of December 
31, 1998, 1997, and 1996 were as follows:
                                                                                
                                                    1998     1997       1996
                                                         (in thousands)

Deferred tax assets: 
     Loan loss provision.........................  $1,531   $1,183     $1,010
     Non-accrual loan interest income............     363      264        183 
     Miscellaneous...............................     121      291        296 
     Deferred compensation.......................     296      176         73 
         Total deferred tax assets...............  $2,311   $1,914     $1,562 
                                                           
Deferred tax liabilities:
     Depreciation................................  $  560   $  583     $  628 
     Accretion of discount.......................     176      239        156 
     Pension expense.............................     285      246        216 
     Unrealized gain on marketable 
         equity securities.......................   1,437    1,671         97
     Miscellaneous...............................     ---       23         14
         Total deferred tax liability............   2,458    2,762      1,111 
         Net deferred asset (liability)..........  $ (147)  $ (848)    $  451 
                                                   ======   ======     ====== 

                                                                              
                                                     1998       1997       1996 
                                                           (in thousands)

Computed "expected" tax provision..................  $4,615     $3,882   $3,291
Effect of tax-exempt municipal bond and loan  
  interest, net of interest expense disallowance...  (1,230)      (784)    (605)
Goodwill amortization..............................      92         82       82
Nondeductible expense related to acquisition.......      49        252      ---
Other, net.........................................      61         59      (75)
Officer life insurance, net........................     (53)       ---      ---
Total provision for income taxes...................  $3,534     $3,491   $2,693
                                                     ======     ======   ======


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

    The Corporation has a Long Term Incentive Plan whereby awards in the form of
Incentive Stock Options, Nonqualified Stock Options or Stock Appreciation 
Rights may be granted to certain Executive Officers and other key employees 
selected by a committee of the Board of Directors.  The price at which common 
stock can be purchased pursuant to the exercise of options cannot be less than
100% in the case of Incentive Stock Options and 80% in the case of Nonqualified 
Stock Options, of the fair market value of the common stock on the date of the
grant of the option.  Options are exercisable starting one year from the date 
of grant to the extent of 20.0% to 33.3% a year on a cumulative basis and expire
no later than ten years after the date of grant.  Incentive stock options issued
under the plan totalled 119,926, 86,070, and 85,501, in 1998, 1997, and 
1996, respectively.

<TABLE>
<CAPTION>
     A summary of the status of the Bank's Plan as of December 31, 1998, 1997, 
and 1996 and changes during the years ending on those dates is presented below:
                                                                                                               Weighted
                                                                                                             Average Fair
                                                       Shares      Shares        Weighted        Options    Value of Options
                                                        Under     Available      Average       Exercisable   Granted During
                                                       Option    For Option   Exercise Price   at Year-end      The Year
<S>                                                  <C>         <C>             <C>            <C>             <C>
Balance, December 31, 1995........................    338,141     1,197,376       $11.73         142,325

Options granted...................................     85,501       (85,501)      $13.24                         $ 6.53
Options exercised.................................    (30,865)          ---       $ 7.94                                  
Options cancelled or expired......................    (11,049)       11,049       $14.64   

Balance, December 31, 1996........................    381,728     1,122,924       $12.32         162,218
                                                                                 
Options granted...................................     86,070       (86,070)      $19.91                         $ 8.43
Options exercised.................................    (92,059)          ---       $10.59
Options cancelled or expired......................     (1,923)        1,923       $14.92                
             
                                                                                                          
Balance, December 31, 1997........................    373,816     1,038,777       $13.99         151,129

Options granted...................................    119,926      (119,926)      $24.02                         $ 5.05
Options exercised.................................    (28,374)          ---       $10.82 
Options cancelled or expired......................     (1,914)        1,914       $20.00                  

Balance, December 31, 1998........................    463,454       920,765       $17.07         279,320     
                                                      =======     =========       ======         =======          
</TABLE>
     On January 1, 1996, the Corporation adopted Statement of Financial 
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 
123).  As permitted by SFAS 123, the Corporation has chosen to apply APB Opinion
No. 25, "Accounting for Stock issued to Employees" (APB 25) and related 
interpretations in accounting for its Plans.  Accordingly, no compensation cost 
has been recognized for options granted under the Plan.  Had compensation cost 
for the Corporation's Plan been determined based on the fair value at the 
grant dates for awards under the Plan consistent with the method of SFAS
123, the impact on the Corporation's net income and net income per share would 
have approximated $(267,000) and $(.04), respectively in 1998.  The impact on 
net income and net income per share in 1997 would have been $(96,000) and 
$(.01), respectively. The impact on net income and net income per share in 
1996 would have been $(73,000) and $(.01), respectively.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average 
assumptions used for grants in 1998 and 1997, respectively; dividend yield of 
2.5% and 1.0%, expected volatility of 23% and 20%, risk-free interest rates of 
4.80% and 6.14%, and expected life of 6 years.  


12. Related Parties:

     Certain directors and their business affiliates (defined as the beneficial 
ownership of at least a 10 percent interest), executive officers and their 
families are indebted to Community Banks, N.A. and Peoples State Bank.  At 
December 31, 1998, 1997, and 1996, loans to these persons and their business 
affiliates amounted to $6,548,000, $6,367,000 and $4,012,000, respectively.  

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

                                                1998         1997       1996 
                                                        (in thousands)

Balance beginning of period.................  $ 6,367      $ 4,012    $ 4,492 
Additions...................................    2,003        4,884        708
Amounts collected...........................   (1,822)      (2,529)    (1,188) 
Amounts written off.........................      ---          ---        --- 
Balance end of period.......................  $ 6,548      $ 6,367    $ 4,012  
                                              =======      =======    ======= 


13. Condensed Financial Information of Community Banks, Inc. (Parent Only):
                                                                                
                                                             1998        1997 
                                                              (in thousands)
Condensed Balance Sheets:                                     
         Cash and investments............................   $   150   $   137
         Investment in Community Banks, N.A. ............    49,537    48,085
       	 Investment in Peoples State Bank................    24,228    20,653
         Investment in nonbank subsidiaries..............     4,329     4,652
         Other assets....................................     1,023     1,292
         Total assets....................................   $79,267   $74,819 
                                                            ========   =======
         Other liabilities...............................   $   391   $   806
         Stockholders' equity............................    78,876    74,013 
         Total liabilities and stockholders' equity......   $79,267   $74,819 
                                                            ========   =======

                                                                               
                                                    1998       1997       1996 
Condensed Statements of Income:                           (in thousands)
    Dividends from:
         Community Banks, N.A. ...................   $5,279   $3,010   $2,260
         Peoples State Bank.......................      285      ---      --- 
         Other income (expense)...................     (546)    (335)      86 
Income before equity in undistributed earnings of 
    subsidiaries..................................    5,018    2,675    2,346
Equity in undistributed earnings of:
    Community Banks, N.A. ........................    1,483    3,240    3,364 
    Peoples State Bank............................    3,118    1,342      887 
    Nonbank subsidiaries..........................      431      668      387 
                                                      5,032    5,250    4,638
Net income........................................  $10,050   $7,925   $6,984
                                                    =======   ======   ======
                                                                          
Condensed Statements of Cash Flows:                                       
    Operating activities:
    Net income....................................  $10,050   $7,925   $6,984
        Adjustments to reconcile net cash provided
          by operating activities:
      Undistributed earnings of:
        Community Banks, N.A. ....................   (1,483)  (3,240)  (3,364)
        Peoples State Bank........................   (3,118)  (1,342)    (887)
        Nonbank subsidiaries......................     (431)    (668)    (387)
      Other, net..................................      266   (1,615)  (1,684)
        Net cash provided by operating activities.    4,752    1,060      662
    Investing activities:
      Additional investment in nonbank subsidiaries     ---      ---      ---
      Net cash used in investment activities.......     ---      ---      ---

Financing Activities:
    Proceeds from issuance of common stock........      330    2,776    2,168
       Purchase of Treasury Stock.................     (966)    (695)    (368)
       Dividends paid.............................   (4,103)  (3,143)  (2,725)
        Net cash used by financing activities.....   (4,739)  (1,062)    (925)
        Net change in  cash and cash equivalents..       13       (2)    (263)
          Cash and cash equivalents at 
               beginning of year..................      137      139      402
          Cash and cash equivalents at end of year  $   150  $   137   $  139
                                                    =======  =======   ======

14. Regulatory Restrictions of Banking Subsidiaries:


     CBNA and PSB are subject to legal limitations as to the amount of dividends
that can be paid to its shareholder (the Corporation).  The approval of certain 
banking regulatory authorities is required if the total of all dividends 
declared by the bank exceeds limits as defined by the regulatory authorities.  
CBNA and PSB could declare dividends in 1998 without regulatory approval of 
$9,183,000 plus an additional amount equal to the bank's retained net profits in
1999 up to the date of any dividend declaration.  

     Included in cash and due from banks are balances required to be maintained 
by subsidiary banking companies on deposit with the Federal Reserve.  The 
amounts of such reserves are based on percentages of certain deposit types and 
totalled $265,000 at December 31, 1998 and 1997. 



15. Financial Instruments with Off-Balance Sheet Risk:


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


     Financial instruments with off-balance sheet risk at December 31, 1998, 
     are as follows:

                                                     Contract or Notional Amount
                                                                 (in thousands)

Financial instruments whose contract amounts represent credit risk:
 Commitments to originate loans............................          $50,925
 Unused lines of credit....................................          $21,136    
 Standby letters of credit.................................          $ 3,640  
 Unadvanced portions of construction loans.................              ---

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

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


16. Quarterly Results of Operations (Unaudited):  

<TABLE>
<CAPTION>
     The following is a summary of the quarterly results of operations for the 
     years ended December 31, 1998 and 1997:

                                                              Three Months Ended                                     
                                                       1998                               1997                     
                               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.............. $13,456    $13 702    $14,542   $15,300      $12,406    $12,788     $13,467    $13,626      
Interest expense.............   6,235      6,330      6,917     7,405        5,801      5,941       6,268      6,413   
Net interest income..........   7,221      7,372      7,625     7,895        6,605      6,847       7,199      7,213             
Provision for loan losses....     193        231        487       553          390        290         340        297 
Net interest income after
 provision for loan losses:..   7,028      7,141      7,138     7,342        6,215      6,557       6,859      6,916        
Other income.................     845        913        971     1,022          779        748         876        773  
Investment security   
  gains......................     270         73        224         8          373        104          86        207     
Gains on mortgage sales......     142        142        131       219           40         62          31        150         
Other expenses...............   4,932      4,885      5,020     5,188        4,395      4,588       4,678      5,699     
Income before income taxes...   3,353      3,384      3,444     3,403        3,012      2,883       3,174      2,347      
Income taxes.................     976        920        868       770          909        831         931        820     
Net income................... $ 2,377    $ 2,464    $ 2,576   $ 2,633      $ 2,103    $ 2,052     $ 2,243    $ 1,527
                               ======     ======     ======    ======       ======     ======      ======     ======            

Basic earnings per share.....   $ .37     $ .38       $ .39     $ .40        $ .32      $ .32       $ .35      $ .23
Diluted earnings
  per share..................   $ .35     $ .37       $ .39     $ .39        $ .31      $ .31       $ .34      $ .23           
Dividends per share..........   $ .14     $ .16       $ .16     $ .16        $ .11      $ .12       $ .12      $ .13          

</TABLE>
Per share data has been restated to reflect stock dividends and splits.


17. Fair Values of Financial Instruments:

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

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

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

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

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

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

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

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

<TABLE>
<CAPTION>
    The following table summarizes the carrying values and fair values of 
    financial instruments at December 31, 1998 and 1997:


                                                              December 31,                   
                                                      1998                       1997         
                                             Carrying       Fair        Carrying        Fair
                                               Value        Value         Value         Value
                                                               (in thousands)
<S>                                         <C>         <C>            <C>         <C> 
Financial assets:
Cash, interest-bearing time deposits, 
  and federal funds sold...................  $ 28,502    $ 28,502       $ 32,521    $ 32,521
Investment securities......................   292,542     292,542        219,284     219,284
Loans, net of unearned income..............   502,262     498,552        444,031     437,121
Less: Allowance for loan losses............    (6,954)        ---         (6,270)        ---
      Net Loans............................   495,308     498,552        437,761     437,121
Loans held for sale........................     3,319       3,319          2,641       2,641
      Total................................  $819,671    $822,915       $692,207    $691,567
                                             ========    ========       ========    ========
Financial liabilities:
Deposits...................................  $595,905    $598,654       $549,755    $550,847
Short-term borrowings......................     7,910       7,910         10,540      10,540
Long-term debt.............................   161,000     160,822         77,280      75,038
      Total                                  $764,815    $767,386       $637,575    $636,425
                                             ========    ========       ========    ========

</TABLE>


18.  Completed Acquisition:

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

<TABLE>
<CAPTION>
     A summary of unaudited pro forma combined financial information for Community and Peoples follows:


                                                                                                                     
     Year Ended December 31                                            1997                       1996               
                                                                (dollars in thousands except per share data)

                                                                            Community/                   Community/
                                                              Community       Peoples      Community       Peoples
                                                             As Reported     Combined     As Reported     Combined 
<S>                                                           <C>            <C>           <C>            <C>     
     Net interest income................................       $19,381        $27,864       $17,906        $24,607
     Provision for loan losses and lease losses.........           717          1,317         1,042          1,567
     Other Income.......................................         3,375          4,229         2,754          3,171
     Other Expenses.....................................        13,443         19,360        12,017         16,534
     Income before taxes................................         8,596         11,416         7,601          9,677
     Taxes..............................................         2,626          3,491         1,969          2,693
     Net income.........................................       $ 5,970        $ 7,925       $ 5,632        $ 6,984
                                                               =======        =======       =======        =======
     Basic Earnings Per Share...........................       $  1.32        $  1.22       $  1.25        $  1.07
     Diluted Earnings Per Share.........................       $  1.29        $  1.19       $  1.23        $  1.05
                                                               =======        =======       =======        =======

</TABLE>
     Per share data for all periods has been restated to reflect stock dividends
     and split     
	
     
     
                          REPORT OF INDEPENDENT ACCOUNTANTS
     
     
     
     Board of Directors and Shareholders
     Community Banks, Inc.
     Millersburg, Pennsylvania
     
     
     
     
     
             In our opinion, the accompanying consolidated balance sheets and
     the related consolidated statements of income, changes of 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, 1998 and 1997, and the results of their
     operations and their cash flows for each of the three years in the period
     ended December 31, 1998, in conformity with generally accepted accounting
     principles.  These financial statements are the responsibility of the
     Corporation's management; our responsibility is to express an opinion on
     these  financial statements based on our audits.  We conducted our audits
     of these statements in accordance with generally accepted auditing
     standards 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 audits provide a reasonable basis
     for the opinion expressed above.
     
     
     
                                              PRICEWATERHOUSECOOPERS, L.L.P
     
     
     
     One South Market Square
     Harrisburg, PA 17101
     January 14, 1999

<TABLE>
<CAPTION>
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                             1998              1997              1996              1995              1994 
                                                               (dollars in thousands except per share data)                   
<S>                                        <C>                <C>               <C>              <C>               <C>      
Balance Sheet Data                                                                                                            
Investment securities...............         $292,542           $219,284          $194,003         $155,676          $161,053
Loans (net of unearned income and                                                                                             
  allowance for loan losses)........          495,308            437,761           402,681          349,544           306,814 
Total assets........................          851,674            719,462           651,573          553,325           526,866 
Total deposits......................          595,905            549,755           522,602          474,045           443,516 
Stockholders' equity................           78,876             74,013            64,079           59,596            51,131 
Total average assets................          765,980            681,491           591,724          538,682           515,088 
Total average stockholders' equity..           77,057             68,971            61,320           55,209            50,156 
                                                                                                                              
Earnings Data                                                                                                                 
Net interest income.................           30,113             27,864            24,607           22,381            20,629 
Provision for loan losses...........            1,464              1,317             1,567            1,078             1,912 
Net interest income after                                                                                                     
    provision for loan losses.......           28,649             26,547            23,040           21,303            18,717 
Other income........................            4,960              4,229             3,171            2,790             3,387 
Other expense.......................           20,025             19,360            16,534           16,303            15,107 
Provision for income taxes..........            3,534              3,491             2,693            2,071             1,602 
Net income..........................           10,050              7,925             6,984            5,719             5,395 
                                                                                                                              
Per Share Data                                                                                                                
Basic earnings per share............             1.54               1.22              1.07              .88               .83 
Diluted earnings per share..........             1.50               1.19              1.05              .86               .82 
Cash dividends......................              .62                .48               .41              .37               .32 
Book value..........................            12.09              11.31              9.85             9.16              7.81 
Average diluted shares                                                                                                        
    outstanding.....................        6,692,172          6,679,675         6,639,526        6,620,931         6,618,598 

Profitability Ratios                                                                                                          
Return on average assets............             1.31%             1.16%             1.18%             1.06%             1.05%
Return in average stockholders'                                                                                               
    equity..........................            13.04%            11.49%            11.39%            10.36%            10.76%
Net interest margin (FTE)...........             4.47%             4.58%             4.60%             4.39%             4.30%
Efficiency ratio....................            53.80%            55.29%            60.40%            62.80%            61.80%
                                                                                                                              
Capital & Liquidity Ratios                                                                                                    
Stockholders' equity to total assets             9.26%            10.29%             9.83%            10.77%             9.70%
Net loans to assets.................            58.16%            60.85%            61.80%            63.17%            58.23%
                                                                                                                              
Asset Quality Ratios                                                                                                          
Reserve for loan losses to total                                                                                              
    loans outstanding...............             1.38%             1.41%             1.36%             1.40%             1.41%
Reserve for loan losses to                                                                                                    
    non-performing assets...........              147%               94%               83%               90%               74%
Non-performing assets to total                                                                                                
    loans outstanding...............              .94%             1.50%             1.65%             1.55%             1.91%
Non-performing assets to                                                                                                      
    total assets....................              .56%              .93%             1.03%              .99%             1.13%

</TABLE>

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                       
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
Income and Rates on a Tax Equivalent Basis <F2> for the
Years Ended December 31, 1998, 1997, and 1996 (dollars in thousands)          
                                                                           
                                                                             
                                              1998                         1997                         1996                   
                                                      Average                      Average                        Average  
                                            Interest   Rates              Interest   Rates              Interest   Rates   
                                 Average    Income/    Earned/ Average    Income/    Earned/ Average    Income/    Earned/  
                                 Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>  
<S>                              <C>        <C>       <C>   <C>       <C>      <C>   <C>       <C>      <C>       
Assets:                                                                                                    
 Cash and due from banks.........  $ 20,438                   $18,809                 $ 17,845   
 Earnings Assets:                                                                                              
   Interest-bearing deposits in                                                                               
     other banks.................     1,626  $    80   4.92%    1,587  $    84  5.29%    5,211  $   278   5.33%
   Investment securities:                                                                                     
     Taxable.....................   176,687   11,325   6.41   167,732   11,382  6.79   130,978    8,429   6.44
     Tax-exempt<F2>..............    68,489    5,750   8.40    43,017    3,670  8.53    29,696    2,523   8.50
   Total investment                                                                                        
     securities..................   245,176                   210,749                  160,674           
   Federal funds sold............     8,251      494   5.99     5,528      304  5.50     3,808      207   5.44
   Loans, net of unearned                                                                                   
     income<F2>..................   467,094   41,539   8.89   421,283   38,236  9.08   385,956   34,806   9.02
    Total Earning Assets.........   722,147  $59,188   8.19   639,147  $53,676  8.40   555,649  $46,243   8.32
 Allowance for loans                                                                                    
   losses........................    (6,528)                   (6,035)                  (5,225)    
 Premises, equipment and                                                                                    
    other assets.................    29,923                    29,570                   23,455          
    Total assets.................  $765,980                  $681,491                 $591,724 
                                   ========                  ========                 ========  
Liabilities:                                                                                       
 Demand deposits.................    43,911                    37,806                   35,762 
 Interest bearing liabilites:                                                                             
   Savings deposits..............   243,290    5,479   2.25%  224,786    5,556  2.47   202,019    4,974   2.46
   Time deposits:                                                                                           
     $100,000 or greater.........    28,687                    28,987                   25,270            
     Other.......................   251,223                   248,467                  240,812        
   Total time deposits...........   279,910   15,039   5.37   277,454   14,998  5.41   266,082   14,408   5.41
   Total time and savings                                                                                 
     deposits....................   523,200                   502,240                  468,101             
   Short-term borrowings.........     4,527      298   6.58     6,313      331  5.24     7,496      354   4.72
   Long-term debt................   109,414    6,071   5.55    60,636    3,538  5.83    14,758      932   6.32
    Total interest-bearing                                                                                  
     liabilities.................   637,141  $26,887   4.22   569,189  $24,423  4.29   490,355  $20,668   4.21
Accrued interest, taxes and                                                                              
   other liabilities.............     7,871                     5,525                    4,287     
    Total liabilities.............  688,923                   612,520                  530,404
Stockholders' Equity..............   77,057                    68,971                   61,320   
    Total liabilities and                                                                         
     stockholders' equity......... $765,980                  $681,491                 $591,724 
                                   ========                  ========                 ========
  Interest income to earning                                                                              
    assets........................                     8.19%                    8.40%                     8.32%
  Interest expense to earning                                                                               
    assets........................                     3.72                     3.82                      3.72
      Effective interest                                                                                    
        differential..............           $32,301   4.47%           $29,253  4.58%           $25,575   4.60%
                                             =======   =====           =======  =====           =======   ====


<FN>
<F1> Amortization of net deferred fees included in interest income and rate 
calculation.                                                                
<F2> Interest income on all tax-exempt securities and loans have been adjusted 
to tax equivalent basis utilizing a Federal income tax rate of 34%. 
<F3> Averages are a combination of monthly and daily averages.                
</FN>
</TABLE>

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
Management's Discussion of Financial Condition and Results of Operations  
Rate/Volume Analysis <F1>
For the Years Ended December 31, 1998 and 1997                           
(in thousands)                                                       


                                                  1998 vs 1997                        1997 vs 1996                            
                                             Volume   Rate     Total             Volume   Rate       Total                    
<S>                                         <C>        <C>      <C>             <C>      <C>      <C>    
Increase (decrease) in interest income:                                                                  
  Loans.............................         $4,112      ($809)  $3,303          $3,197   $  233   $3,430
  Investment securities:                                                                               
    Taxable.........................            594       (651)     (57)          2,474      479    2,953
    Tax-exempt......................          2,137        (57)   2,080           1,138        9    1,147
       Total........................          2,731       (708)   2,023           3,612      488    4,100
  Federal funds sold................            161         29      190              95        2       97
  Interest-bearing deposits in other                                                                     
   banks............................              2         (6)      (4)           (192)      (2)    (194)
     Total..........................          7,006     (1,494)   5,512           6,712      721    7,433

Increase (decrease) in interest expense:                                   
  Savings deposits..................            438       (515)     (77)            562       20      582
  Time deposits.....................            143       (102)      41             590      ---      590
  Short-term borrowings.............           (107)        74      (33)            (60)      37      (23)
  Long-term debt and capital notes..          2,711       (178)   2,533           2,683      (77)   2,606
     Total..........................          3,185       (721)   2,464           3,775      (20)   3,755
  Increase (decrease) in effective                                                                     
   interest differential............         $3,821      $(733)  $3,048          $2,937   $  741   $3,678
                                             ======      ======  ======          ======   ======   ======

<FN>
<F1> Table shows approximate effect on the effective interest differential of 
volume and rate changes for the years 1998 and 1997. 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.
Nonaccrual 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 34%.                                                     


          Community Banks, Inc. and Subsidiaries
          MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
          OPERATIONS
          
          
          On March 31, 1998 Community Banks, Inc. (Community) completed its
          merger of The Peoples State Bank (Peoples).  Peoples has six
          banking offices which are located in York and Adams Counties,
          Pennsylvania.  Community issued 1,325,330 shares of common stock
          for all of the outstanding common stock of Peoples.  This
          transaction was accounted for as a pooling of interests and
          combined unaudited financial information is included in this
          report.   
          
          The earnings of Community Banks, Inc. (Corporation) are derived
          exclusively from the operations of its wholly owned subsidiaries;
          Community Banks, N.A.; Peoples State Bank; Community Banks
          Investments, Inc.; and Community Banks Life Insurance Co.
          
          Diluted net income was $1.50 per share in 1998 compared to $1.19
          per share in 1997, and $1.05 in 1996.  Net income per share in
          1998 was 26.1% more than net income per share in 1997. Net income
          per share in 1997 increased 13.3% compared to the previous year.
          
          Net Interest Income:
          
          The primary determinant of the Corporation's net income is net
          interest income.  This is the income which remains after
          deducting from the total income generated by earning assets the
          interest expense applicable to funds required to support the
          earning assets.
          
          Total interest income increased $4,713,000 or 9.0% in 1998,
          compared to an increase of $7,012,000 or 15.5% in 1997, and an
          increase of $4,131,000 or 10.0% in 1996.  Interest and fees on
          loans increased $3,211,000 or 8.4% in 1998.  Most of this
          increase was volume related and caused by an increase in average
          balances of $45,811,000 or 10.9%.  The increase of $1,316,000 or
          9.5% in interest and dividends on investment securities was also
          volume related.  The average balances of tax-exempt securities
          increased $25,472,000 or 59.2% in 1998. Interest and fees on
          loans increased $3,399,000 or 9.8% in 1997.  This was primarily a
          volume related change driven by an increase in average balances
          of $35,327,000 or 9.2%.  The increase of $3,710,000 or 36.8% in
          interest and dividends on investment securities was also volume
          related.  The average balances of investment securities increased
          $50,075,000 or 31.2% in 1997.  Factors contributing to the 1996
          change included a volume related increase in interest and fees on
          loans of $4,350,000 and a volume related decrease of $317,000 in
          interest and dividends on investment securities.  
          
          Total interest expense increased $2,464,000 or 10.1% in 1998 and
          $3,755,000 or 18.2% in 1997, and $1,905,000 or 10.2% in 1996.  A
          rate related decrease of $77,000 or 1.4% occurred in savings
          interest expense in 1998. Also affecting the 1998 increase was an
          increase of $41,000 or 0.3% in time deposit interest expense. 
          All of the increase in time deposit interest expense was caused
          by increased volume.  An increase of $2,500,000 or 64.6% in
          borrowed funds interest significantly affected total interest
          expense in 1998.  Material factors affecting the 1997 increase
          were increases of $590,000 or 4.1% in total time deposit interest
          expense and an increase of $582,000 or 11.7% in savings interest
          expense. The average balances of savings accounts increased
          $22,767,000 or 11.3%.  Material factors affecting the 1996 change
          were increases of $625,000 or 4.5% in total time deposit interest
          expense and $367,000 or 40.0% in interest expense of
          borrowings.  

          Average interest-bearing deposits represented 92.3% of average
          total deposits in 1998 compared to 93.0% in 1997 and 93.2% in
          1996.
          
          Net interest income increased $2,249,000 or 8.1% in 1998,
          compared to $3,257,000 or 13.2% in 1997 and $2,226,000 or 9.9% in
          1996.  Average earning assets increased $83,000,000 or 13.0% in
          1998 compared to $83,498,000 or 15.0% in 1997 and $49,843,000 or
          9.9% in 1996.  Average interest-bearing liabilities increased
          $67,952,000 or 11.9% in 1998 compared to $78,834,000 or 16.1% in
          1997 and $45,264,000 or 10.2% in 1996.
          
          Net Interest Income Margin:
          
          Net interest income margin for 1998 was 4.47% compared to 4.58%
          in 1997 and 4.60% in 1996.  Interest income to earning assets
          decreased from 8.40% in 1997 to 8.19% in 1998.  Interest expense
          to earning assets decreased from 3.82% to 3.72%.  
          
          Provision for Loan Losses:
          
          Net loan charge-offs for 1998 were $780,000 compared to $608,000
          in 1997 and $961,000 in 1996.  The provision for loan losses
          charged to income was $1,464,000 in 1998 compared to $1,317,000
          in 1997 and $1,567,000 in 1996.  Total non-performing loans
          approximated $4,119,000, $5,791,000, and $5,839,000, as of
          December 31, 1998, 1997, and 1996, respectively.  Non-performing
          residential real estate and commercial loans totalled
          approximately $2,635,000 and $913,000, respectively, at year-end
          1998.  Total delinquencies as a percentage of total loans
          approximated 2.2%, 3.4%, and 4.2% at December 31, 1998, 1997, and
          1996, respectively.
          
          Other Income and Other Expenses:
          
          Other income net of security gains increased $926,000 or 26.8% in
          1998 compared to an increase of $590,000 or 20.6% in 1997 and a
          decrease of $1,000 in 1996. The increase in 1998 of $350,000 or
          17.8% in service charges on deposit accounts and other service
          charges commissions and fees resulted from increased deposit
          account balances and management's renewed emphasis on these
          functions.  The increases in trust department income and service
          charges on deposit accounts which occurred in 1997 and 1996 also
          resulted from management's emphasis on these functions. 
          Investment security gains in 1998 and 1997 were associated
          primarily with equity securities held by Community Banks
          Investments, Inc.  Investment security losses approximated
          $17,000 in 1998.  Changes in income on insurance premiums are a
          reflection of consumer loan demand and activity at Community
          Banks Life Insurance Co.  Gains on mortgage sales increased
          significantly in 1998 as a result of increased demand for
          fixed-rate real estate loans.  The market values of loans held
          for sale approximated their carrying values at year ends 1998,
          1997, and 1996.  
           
          Other expenses increased $665,000 or 3.4% in 1998 compared to
          increases of $2,826,000 or 17.1% in 1997, and $231,000 or 1.4% in
          1996. The 1998 increases in salaries and employee benefits of
          $701,000 or 7.2% and occupancy expense of $405,000 or 14.5% were
          affected by the opening of new banking offices. The 1997
          increases in salaries and benefits of $1,066,000 or 12.4% and net
          occupancy expense of $266,000 or 10.5% were also affected by the
          opening of new banking offices. In addition, affecting salaries
          and benefits was the recognition of certain retirement plan
          obligations.  The decrease of $548,000 or 8.4% in other operating
          expense in 1998 was affected by the recognition in 1997 of
          expense associated with the pending acquisition of the Peoples
          State Bank. Increases in salaries and employee benefits and net
          occupancy expense also affected an increase in 1996 in total
          other expenses. Three new banking offices established in 1995
          contributed to these changes.     
          
          Provision for Income Taxes:
          
          The relationship of the provision for income taxes to income
          approximated 26.0%, 30.6%, and 27.8% in 1998, 1997, and 1996,
          respectively.  Significantly impacting these changes were
          increases in tax-exempt investment security income recognized in
          1998.    
          
          These factors contributed to increases in net income of
          $2,125,000 or 26.8%, $941,000 or 13.5%, and $1,265,000 or 22.1%
          for 1998, 1997, and 1996, respectively.
            
          Balance Sheet Data:
          
          Earning assets represented 94.1% of total assets at year-end 1998
          compared to 93.2% at year-end 1997.  Increases in deposits and
          long-term debt in 1998 were reflected in increases in earning
          assets, most notably investment securities and loans.  Changes in
          the composition of earning assets reflect management's attempt to
          respond to fluctuating loan demand and corresponding policies
          relating to liquidity and asset/liability management. 
          
          Under the Corporation's current policy, if management has the
          intent and the Corporation has the ability at the time of
          purchase to hold securities until maturity or on a long-term
          basis, securities are classified as held-to-maturity investments
          and carried at amortized historical cost.  Securities to be held
          for indefinite periods of time and not intended to be held to
          maturity or on a long-term basis are classified as available for
          sale and carried at market value.  Securities held for indefinite
          periods of time include securities that 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 related to interest rate and
          resultant prepayment risk changes.
          
          At December 31, 1998 and 1997, management classified investment
          securities with book and market values of $288,316,000 and
          $292,542,000 and $214,379,000 and $219,284,000, respectively, as
          available for sale.  Gross unrealized gains and losses relating
          to investment securities were $5,414,000 and $1,188,000 and
          $5,216,000 and $311,000, respectively, at year-end 1998 and 1997.
          The Corporation generally avoids investments in securities of a
          speculative nature.  No securities were considered held for sale
          or for trading purposes at December 31, 1998 and December 31,
          1997.
          
          At December 31, 1998 and 1997, the unrealized gains on
          investments available for sale, net of tax were $2,789,000 and
          $3,237,000, respectively, and were accordingly reflected in
          shareholders equity.      
          
          Net loans increased 13.1% from December 31, 1997 to December 31,
          1998. Real estate loans increased 12.1%, while commercial and
          personal loans increased 22.8% and 10.8%, respectively, during
          the period.  New banking offices and increased demand for loans
          affected these changes.

          The following table sets forth information regarding nonaccrual
          loans, other real estate owned, restructured loans, and loans
          which are 90 days or more delinquent but accruing interest at the
          dates indicated.
          
          
                                                  December 31              
                                       1998    1997   1996     1995   1994 
                                             (dollars in thousands)
          
          Nonaccrual loans..........  $3,430 $4,614  $4,754  $3,177  $2,902
          Other real estate owned...     625    866     883     901   1,846
          Restructured loans........     248    626     277     494     366
          Accruing loans contractually    
           past due 90 days or more..    441    551     808     917     819
              Total.................. $4,744 $6,657  $6,722  $5,489  $5,933
                                      ====== ======  ======  ======  ======
          
                   
           Ratio of nonaccrual loans,
           other real estate owned,
           restructured loans,
           and accruing loans contractu-
           ally past due 90 days or
           more to total assets......    .56%   .93%   1.03%   .99%   1.13%
          
          
          
          As discussed in Note 5 to the financial statements, management
          performs periodic reviews of its loans to identify risks in the
          loan portfolio.  As a result of these periodic reviews, problem
          loans and potential problem loans are identified and the
          likelihood of collectibility is assessed. Based upon the results
          of these reviews, which also consider other pertinent data,
          management determines an appropriate allowance for loan losses. 
          Other relevant factors include past loss experience, current
          economic conditions, and the growth and composition of the loan
          portfolio.  The allowance for loan losses is maintained at a
          level believed by management to be adequate to absorb potential
          losses in the respective portfolios. The allowance for loan
          losses to loans net of unearned income approximated 1.38%, 1.41%,
          1.36%, 1.40%, and 1.46% at year-end, 1998, 1997, 1996, 1995, and
          1994, respectively. 
          
          At December 31, 1998, management is not aware of any loans or
          lending relationships that are expected to deteriorate in the
          next year.  In addition, the Corporation is not aware of any
          significant environmental liability related to real estate owned
          or in-foreclosure procedures.
          
          The increase of $240,000 or 1.7% in premises and equipment was
          affected by new banking locations.  Goodwill is being amortized
          over fifteen years.  The balance of loans held for sale at
          December 31, 1998 included student loans totalling $2,257,000.
          The increase of $4,990,000 or 43.3% in accrued interest
          receivable and other assets was impacted by increases in accrued
          interest receivable, prepaid expenses, and deferred taxes.  
                
          Total deposits increased $46,150,000 or 8.4% in 1998 with most of
          the increase occurring in savings and time deposits.  As
          previously noted, management chose to reduce short-term
          borrowings and increase long-term debt by borrowing at the
          Federal Home Loan Bank of Pittsburgh.
          
          
          Liquidity:
          
          The primary functions of asset/liability management are the
          assurance of adequate liquidity and maintenance of an appropriate
          balance between interest-sensitive earning assets and
          interest-bearing liabilities.  Liquidity management refers to the
          ability to meet the cash flow requirements of depositors and
          borrowers.
          
          A continuous review of net liquid assets is conducted to assure
          appropriate cash flow to meet needs and obligations in a timely
          manner. 
          
          The Corporation's primary funding requirement is loan demand. 
          The loan demand is primarily funded through deposit growth.
          Generally, any deposit growth not used in funding loan demand is
          invested in short-term, interest-bearing deposits or longer term
          investments.  These short-term investments and shorter term
          investment portfolio securities are a source of liquidity to fund
          loan demand.
          
          For the years ended December 31, 1998, 1997 and 1996, financing
          activities provided cash of $122,501,000, $54,530,000, and
          $91,724,000, respectively. Deposit growth and long-term debt
          accounted for the largest portion of this funding source in 1998
          and 1997.  Deposits and short-term and long-term borrowings
          represented the largest funding source in 1996.
          
          Net cash used in investing activities totalled $134,101,000, 
          $60,583,000, and $97,807,000 for the years ended December 31,
          1998, 1997 and 1996, respectively.  The primary uses of funds in
          1998 were purchases of investment securities of $179,097,000 and
          net increases in total loans of $59,991,000. The primary uses of
          funds in 1997 were purchases of investment securities of
          $94,995,000 and increases in net loans of $36,380,000.  In 1996,
          investment securities purchased and net increases in loans also
          represented most of the investing activities.

           
          Forward Outlook:  
          
          Management is unaware of any regulatory recommendations which, if
          implemented, would have a material effect on the liquidity,
          capital resources, or operations of the Corporation.  Adequate
          loan demand is anticipated for the remainder of 1999 and
          management will continue to carefully evaluate this demand based
          on the creditworthiness of borrowers and the relative strength of
          the economy in the Corporation's market.  
          
          Effects on Inflation:
          
          All business enterprises are affected by the constantly changing
          economic environment.  Changes in the economy, however, affect
          the banking industry differently than other industries.  A bank's
          assets and liabilities are primarily monetary in nature and
          values are established without regard to future price changes. 
          
          Also, banks, unlike industrial corporations are not required to
          provide for large capital expenditures in the form of premises,
          equipment and inventory.  Interest rate changes and the actions
          of the Federal Reserve Board have a greater impact on a bank's 
          operations than do the effects of inflation.  Although occasional
          deviations may occur, it is management's policy to generally
          attempt to  maintain rate-sensitive assets at a level
          approximating rate-sensitive liabilities.  Based on a one-year
          parameter, this relationship approximated 105% at December 31,
          1998.
          
          Accordingly, management anticipates that any decline in interest
          rates will negatively impact earnings of the Corporation. 
          Conversely, management may be able to increase rates on certain
          earning assets more rapidly than those of interest-bearing
          liabilities if a significant increse in interest rates would
          occur.  This may result in an increase in the net interest margin
          of the Corporation.  
          
          Capital Strength:
          
          The current economic and regulatory environment has placed an
          increased emphasis on capital strength.  Risk-based capital
          guidelines recognize the relative degree of credit risk
          associated with various assets by setting lower capital
          requirements for some assets which clearly have less credit risk
          than others.  Capital guidelines require banks to hold 4% Tier 1
          and 8% Total Risk-based capital.  Following is a summary of
          significant capital ratios at the dates indicated.


                                        Regulatory      December 31,
                                          Minimum     1998    1997         
                                          (dollars in thousands)


            Core (Tier 1) Capital          ---      $74,813  $69,214    

            Leverage ratio (A)             4.0%        8.8%     9.6%    
     
            Risk-based Capital Ratios:

            Tier 1 capital ratio (B)       4.0%       12.8%    15.0%    
     
            Total risk-based capital 
             ratio (C)                     8.0%       14.0%    15.8%   

           (A)  Core capital divided by total assets less    
                intangible assets.

           (B)  Core capital divided by year-end risk-adjusted 
                assets, as defined by risk-based capital 
                guidelines.

           (C)  Total capital divided by risk-adjusted assets,
                as defined by risk-based guidelines.
          
          As shown by the table, the Bank's capital ratios exceeded
          regulatory minimums in 1998 and 1997.  The core capital ratio
          decreased from 15.0% to 12.8%, and the total capital ratio
          decreased from 15.8% to 14.0%, still well above the regulatory
          minimums of 4.0% for core and 8.0% for total capital.  These
          changes were impacted by the Corporation's asset growth and
          retention of earnings during the year. 
                 


          Impact of the Year 2000 Issue:
          
          The "Year 2000 Issue" is the result of the possibility that
          computer programs may be unable to properly recognize the year
          2000. This could result in a system failure or miscalculations
          causing disruptions of operations, including among other things,
          a temporary inability to process transactions, send invoices, or
          engage in similar business activities.
          
          Based on an ongoing assessment, the Corporation has determined
          that it will need to modify or replace portions of its software
          and hardware so that its computer systems will properly utilize
          dates beyond December 31, 1999. If such modifications and
          conversions are not made, or are not completed on a timely basis,
          the Year 2000 Issue could have an adverse impact on operations of
          the Corporation. However, management presently believes that as a
          result of modifications to existing software and hardware and
          conversions to new software and hardware, the Year 2000 Issue
          will be mitigated.
          
          The Corporation's Year 2000 Action Plan has been categorized into
          five phases: Awareness, Assessment, Testing, Validation, and
          Implementation. The initial focus within those phases has been on
          vendors and systems that are related to mission critical business
          processes. Mission critical processes are defined as those areas
          of the business whose continued operations are required in order
          to provide basic banking services. Management is currently
          testing these mission critical processes and plans to complete
          implementation by May 31, 1999. In addition, all other business
          processes subject to Y2K remediation are expected to be completed
          prior to December 31, 1999.
          
          Community Banks, Inc. has initiated formal communications with
          all of its significant vendors and large commercial customers to
          determine the extent to which it is vulnerable to those third
          parties' failure to remediate their own Year 2000 Issue. To date,
          no material impact is anticipated based upon responses to these
          communications. The Corporation's estimated Year 2000 project
          costs include the costs and time associated with the impact of a
          third party's Year 2000 Issue, and are based on presently
          available information. For significant vendors, management will
          validate that they are Year 2000 compliant by December 31, 1999,
          or make plans to switch to a new vendor or system that is
          compliant. For large commercial loan customers, management will
          take appropriate action based upon the customer's response.
          
          The Corporation will utilize both internal and external resources
          to reprogram or replace, and test software for Year 2000
          modifications. Costs incurred to date as well as for the 1998
          fiscal year for the Year 2000 project total less than $100,000
          and are generally considered normal operating costs by the
          Corporation. All Year 2000 conversion software and modifications
          are being delivered and executed by the Corporation's various
          software vendors with which the Corporation deals for its many
          different computer processing and transaction functions. The
          Corporation does not anticipate significant expense incurred or
          charged to the Year 2000 Issue due to its many software,
          maintenance, and licensing agreements with its software vendors.
          The cost to complete the internal process is currently estimated
          to be less than $100,000.
          
          Management believes that the Corporation's existing alternative
          processing procedures will be available as a contingency
          alternative in the unanticipated event that the Year 2000 Issue
          results in significant disruption of normal business
          activities.  
          
          Recent Accounting Pronouncements:
          
          During 1998, the Corporation adopted Statement of Financial
          Accounting Standards No. 130, "Comprehensive Income" (SFAS No.
          130), which established standards for the reporting and
          disclosure of comprehensive income and its components (revenues,
          expenses, gains, and losses). SFAS 130 requires all items
          required to be recognized under accounting standards as
          components of comprehensive income be reported in a financial
          statement that is displayed with the same prominence as other
          financial statements. Comprehensive income includes a
          reclassification adjustment for net realized investment gains
          included in net income of $575,000, $770,000, and $302,000 for
          the years ended December 31, 1998, 1997, and 1996 respectively.
          The new standard requires only additional disclosures in the
          consolidated financial statements: it does not affect the
          Corporation's financial position or results of operations.
          
          During 1998, the Corporation also adopted Statement of Financial
          Accounting Standards No. 132, "Employers' Disclosures about
          Pensions and Other Postretirement Benefits" (SFAS No. 132), which
          revises employers' disclosures about pensions and other
          postretirement benefit plans. It standardizes the disclosure
          requirements for pensions and other postretirement benefits to
          the extent practicable, requires additional information on
          changes in the benefit obligations and fair values of plan assets
          that will facilitate financial analysis and eliminates certain
          disclosures that are no longer as useful as they were under
          previous pronouncements.
          
          The Financial Accounting Standards Board issued Statement of
          Financial Accounting Standards No. 133, "Accounting for
          Derivative Instruments and Hedging Activities" in June of 1998.
          SFAS 133 establishes standards for recording derivative financial
          instruments on the balance sheet at their fair value. The
          statement requires changes in the fair value of derivatives to be
          recorded each period in current earnings or other comprehensive
          income, depending on whether a derivative is designated as part
          of a hedge transaction, and, if it is, the type of hedge
          transaction. This statement is effective for all fiscal quarters
          of fiscal years beginning after June 15, 1999. Management
          anticipates that the adoption of SFAS 133 will not have a
          material effect on the Corporation's financial condition or
          results of operations.
          
          The Financial Accounting Standards Board issued Statement of
          Financial Standards No., "Disclosure About Segments of an
          Enterprise and Related Information" (SFAS 131) in 1997. SFAS 131
          establishes standards for disclosure about products, services,
          geographic areas, and major customers.  SFAS 131 is effective for
          fiscal years beginning after December 15, 1997.  Management has
          reviewed SFAS 131 and determined that the Corporation only has
          one qualifying segment and no additional disclosure is required.
          
          SFAS 134, "Accounting for Mortgage-Backed Securities Retained
          after the Securitization of Mortgage Loans Held for Sale by a
          Mortgage Banking Enterprise" requires that after a securitization
          of mortgage loans held for sale, an entity engaged in mortgage
          banking activities classify the resulting mortgage-backed
          securities or other retained interest based on its ability and
          intent to sell or hold those investments. The statement is
          effective for the first fiscal quarter beginning after December
          15, 1998. Management anticipates that this Statement will not
          have a material effect on the Corporation's financial condition
          or results of operations.         


</TABLE>