For the fiscal year ended December 31, 2001
Commission file number 0-15786

COMMUNITY BANKS, INC.
(Exact names of registrant as specified in its charter)Pennsylvania
(State or other jurisdiction of incorporation or organization)23-2251762
(I.R.S. Employer Identification No.)150 Market Street, Millersburg, PA
(Address of principal executive offices)17061
(Zip Code)(717) 692-4781
Registrant's telephone number, including area code

Securities registered pursuant to Section 12 (b) of the Act:

|Title of each class                                          | Name of each exchange on which registered
|------------------------------------------------------------ | -----------------------------------------
|Common Stock, par value $5 per share                         | American Stock Exchange                  
|Securities registered pursuant to Section 12 (g) of the Act: | NONE                                     

Indicate by check markwhether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesXNo

As of March 1, 2002, the aggregated market value (based on recent selling prices)
of the voting stock of the registrant held by its nonaffiliates ( 7,362,461 shares)
was $185,165,894.

Indicate the number of shares outstanding of each registrants classes of common
stock, as of the latest practical date.

8,804,526 shares of common stock outstanding on March 1, 2002

DOCUMENTS INCORPORATED BY REFERENCE

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

Exhibit index is located on page 28. This document contains 31 pages.

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy
or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Item 1.  Business:

Community Banks,  Inc.  (Corporation) is a financial
holding company whose banking  subsidiary is Community Banks and whose  non-banking  subsidiaries  are
Community  Banks  Investments,  Inc.  (CBII),  Community  Banks  Life  Insurance Company, Inc. (CBLIC), and The Sentinel Agency, Inc.

On  October  18,  2001,   the   Corporation   announced  that  its  banking
subsidiaries  would be combined  into a single  Pennsylvania  chartered  banking
institution  under the name Community  Banks. On January 3, 2002 the Corporation
completed the consolidation of charters pursuant to regulatory approvals.  Prior
to that time,  the  Corporation's  separate  banking  organizations  operated as
Peoples State Bank (PSB), a state  chartered bank with offices  throughout  York
and Adams Counties; and Community Banks, N.A. (CBNA), a federally chartered bank
headquartered  in  Dauphin  County  with  offices in  central  and  northeastern
Pennsylvania.   The   consolidation   was  designed  to  facilitate  a  regional
operational  focus that would ease  regulatory  burdens while, at the same time,
continuing  a  philosophy  of local  decision-making.  For the  purposes of this
presentation,  all  references  to  Community  Banks  relates  to  the  combined
activities of PSB and CBNA.

The Corporation  conducts a full service  commercial  banking  business and
provides  trust services in Adams County,  Cumberland  County,  Dauphin  County,
southern  Luzerne County,  Northumberland  County,  western  Schuylkill  County,
Snyder County, and York County. The Corporation currently has 42 offices.  There
are offices of  commercial  banks and savings and loan  associations  within its
market area with which the  Corporation  competes.  Deposits of the  Corporation
represent  approximately  18% of the total  deposits  in the  market  area.  The
Corporation  has 3 offices in Adams County,  2 offices in Cumberland  County,  9
offices  in  Dauphin  County,   3  offices  in  Luzerne  County,  2  offices  in
Northumberland  County,  10 offices  in  Schuylkill  County,  1 office in Snyder
County, and 12 offices in York County.

Like other depository  institutions,  the Corporation has been subjected to
competition  from  brokerage  firms,  money market funds,  consumer  finance and
credit card  companies  and other  companies  providing  financial  services and
credit to consumers.

During 1986 the Corporation formed CBLIC to provide credit life insurance
to its consumer credit borrowers. Total premiums earned were $993,000 for the year ended December 31, 2001.
During 1985 the Corporation formed CBII to make investments primarily in equity securities of other banks. Total assets of
CBII at December 31, 2001 were $3,462,000.

The  Corporation  has  approximately  504 full and part-time  employees and
considers its employee relations to be satisfactory.

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

In  1989,  the  Federal  Reserve  Board  issued  final  risk-based  capital
guidelines for bank holding  companies which were phased in through December 31,
1992. The intent of regulatory capital guidelines is to measure capital

adequacy based upon the
credit risk of various assets and off-balance sheet items. Risk categories,
weighted at 0%, 20%, 50% and 100%, are specifically identified. The sum of the
results of each such category is then related to the adjusted capital account of
the Corporation. The minimum required capital ratio at December 31, 2001, was 8
percent. The Corporations December 31, 2001 ratio approximated 11.8%.
Subsequently, in August 1990 the board announced approval of capital to total
assets (leverage) guidelines. This minimum leverage ratio was set at 4% and
would apply only to those banking organizations receiving a regulatory composite
1 rating. Most banking organizations will be required to maintain a leverage
ratio ranging from 1 to 2 percentage points above minimum standard. The
Corporations leverage ratio at December 31, 2001, approximated 7.5%.
Risk-based capital requirements replace previous capital guidelines which
established minimum primary and total capital requirements.

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

Quantitative  measures established by regulation to ensure capital adequacy
requires  Community  Banks to maintain  minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the  regulations) to
risk-weighted  assets (as defined) and of Tier 1 capital (as defined) to average
assets  (as  defined).  Management  believes,  as of  December  31,  2001,  that
Community  Banks has met all  capital  adequacy  requirements  to which they are
subject.

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

`At December 31, 2001
----------------------------------------------------------------------------------------------------------------
                            Tier 1 Capital                      Total Risk-Based Capital      Capital Leverage
                                Ratio (A)                                Ratio (B)                 Ratio (C)
----------------------------------------------------------------------------------------------------------------

Required Minimum                  4.0%                                     8.0%                      4.0%
Well Capitalized                  6.0                                     10.0                       5.0
Community Banks, Inc.            10.5                                     11.8                       7.5


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

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

(C)  Tier 1 capital divided by average total assets less  disallowed  intangible
     assets.`

Statistical Data:

The following is hereby incorporated by reference:

Pages 23, 34, and 35 of the Community Banks, Inc. Annual report to stockholders dated
December 31, 2001 contain the following information concerning:

Financial Highlights, Average Balances, Effective Interest Differential, and Interest
Yields for the three years ended December 31, 2001.

Rate/Volume Analysis for the two years ended December 31, 2001.

Appendix A attached to Part I contains information concerning:

Return on Equity and Assets for the five years ended December 31, 2001.

Amortized cost and Estimated Market Values of Investment Securities as of December 31,
2001, 2000, and 1999.

Maturity  Distribution  of  Securities as of December 31, 2001 (Market Value).

Loan Account Composition as of December 31, 2001, 2000, 1999, 1998, and 1997.

Maturities and Sensitivity to Changes in Interest Rates for Commercial, Financial, and
Agricultural Loans as of December 31, 2001.

Non-performing Loans as of December 31, 2001, 2000, 1999, 1998, and 1997.

Loan Loss Experience for the five years ended December 31, 2001.

Loans Charged Off and Recovered for the five years ended December 31, 2001.

Allowance for Loan Losses as of December 31, 2001, 2000, 1999, 1998, and 1997.

Maturity  Distribution  of  Time  Deposits  over  $100,000  as of  December  31, 2001.

Maturity Distribution of all Time Deposits as of December 31, 2001.

Interest Rate Sensitivity as of December 31, 2001.

Item 2.  Properties:

The Corporation owns no real property except through its subsidiary bank.
Community Banks owns the following  buildings:  150 Market Street,  Millersburg,
Dauphin County,  Pennsylvania (the corporate  headquarters);  13-23 South Market
Street, Elizabethville, Dauphin County, Pennsylvania; 3679 Peters Mountain Road,
Halifax,  Dauphin County,  Pennsylvania;  906 North River Road, Halifax, Dauphin
County,  Pennsylvania;  800  Peters  Mountain  Road,  Dauphin,  Dauphin  County,
Pennsylvania;  Main and Market Streets,  Lykens,  Dauphin County,  Pennsylvania;
Route 209, Tower City, Porter Township, Schuylkill County, Pennsylvania; 29 East
Main  Street,  Tremont,  Schuylkill  County,  Pennsylvania;  Second and  Carroll
Streets, St. Clair,  Schuylkill County,  Pennsylvania;  Port Carbon Highway, St.
Clair, Schuylkill County, Pennsylvania;  300 East Independence Street, Shamokin,
Northumberland County,  Pennsylvania;  Route 61, R.D. 1, Orwigsburg,  Schuylkill
County,  Pennsylvania;  One South Arch Street,  Milton,  Northumberland  County,
Pennsylvania;  30 S. Church Street, Hazleton, Luzerne County, Pennsylvania;  702
West Main Street, Valley View, Schuylkill County,  Pennsylvania;  Route 25, East
Main Street,  Valley View, Schuylkill County,  Pennsylvania;  735 Center Street,
Ashland, Schuylkill County, Pennsylvania;  300 Hobart Street, Gordon, Schuylkill
County,  Pennsylvania;  9-11 N. Centre Street,  Pottsville,  Schuylkill  County,
Pennsylvania;  One Westside Drive,  Shamokin Dam,  Snyder County,  Pennsylvania;
2796 Old Post Road, Linglestown,  Dauphin County,  Pennsylvania;  5060 Jonestown
Road, Lower Paxton,  Dauphin County,  Pennsylvania;  201 St. John's Church Road,
Camp  Hill,  Hampden  Township,  Cumberland  County,  Pennsylvania;  100 E. King
Street, East Berlin, Adams County, Pennsylvania; 3421 Carlisle Road, Dover, York
County,  Pennsylvania;  29  N.  Washington  Street,  Gettysburg,  Adams  County,
Pennsylvania;  57-59 Main Street, Glen Rock, York County,  Pennsylvania;  234 N.
Main Street,  Loganville,  York County,  Pennsylvania;  16576  Susquehanna Trail
South, New Freedom, York County, Pennsylvania;  Corner of Noss Road & Route 616,
York New Salem,  York County,  Pennsylvania;  and 3093 Cape Horn Road, Red Lion,
York County, Pennsylvania.

In addition to the offices  above,  Community  Banks leases offices at Main
Street,  Pillow, Dauphin County,  Pennsylvania,  pursuant to a lease which, with
renewal  options,  will extend to the year 2008; 600 Carlisle  Street,  Hanover,
York County, Pennsylvania, pursuant to a lease which, with renewal options, will
extend to the year 2006; 509 Greenbriar Road,  York, York County,  Pennsylvania,
pursuant to a lease which,  with renewal options,  will extend to the year 2029;
and 460 High Street,  Hanover,  York County,  Pennsylvania,  pursuant to a lease
which, with renewal options, will extend to the year 2002. Also, the Bank leases
offices at 390 E. Penn Drive, Enola, Cumberland County, Pennsylvania;  Route 93,
Conyngham,  Luzerne County,  Pennsylvania;  77 Airport Road,  Hazleton,  Luzerne
County,   Pennsylvania;   6700  Derry  Street,   Rutherford,   Dauphin   County,
Pennsylvania;  339 Main Street, LaVelle,  Schuylkill County,  Pennsylvania;  750
East Park Drive, Harrisburg, Dauphin County, Pennsylvania.

Community Banks also owns real property through its subsidiary, PSB Realty,
at the following  locations:  1191 Eichelberger  Street,  Hanover,  York County,
Pennsylvania;  155 Glen  Drive,  Manchester,  York  County,  Pennsylvania;  1345
Baltimore  Street,  Hanover,  York  County,  Pennsylvania;  5625 York Road,  New
Oxford,  Adams County,  Pennsylvania;  and 2508 Eastern  Boulevard,  York,  York
County, Pennsylvania.

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

Item 3.  Legal Proceedings:

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

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

No matters were  submitted to a vote of security  holders during the fourth
quarter of 2001.

APPENDIX A

`RETURN ON EQUITY AND ASSETS
                                                        FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999, 1998, AND 1997

                                                   2001              2000             1999              1998             1997
                                                  -----             -----            -----             -----            -----
Return on average equity                          12.21%            15.08%           14.40%            12.22%           11.36%

Return on average assets                            .97%             1.12%            1.22%             1.21%            1.12%

Average equity to average assets                   7.96%             7.45%            8.44%             9.88%            9.85%

Dividend payout ratio                             43.25%            37.48%           36.70%            40.09%           37.69%`

APPENDIX A
Continued

`AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT SECURITIES
                                                                              (dollars in thousands)

                                                                        At December 31, 2001, 2000, and 1999
                                                             2001                       2000                         1999
                                                   -----------------------     -----------------------     -----------------------
                                                                Estimated                    Estimated                   Estimated
                                                    Amortized        Fair       Amortized         Fair      Amortized         Fair
                                                        Cost       Value            Cost        Value           Cost        Value
                                                   -----------------------     -----------------------     -----------------------

Mortgage-backed U.S. government agencies           $  74,403    $  74,370      $  74,685    $  74,689      $   80,887   $   77,626
U.S. Government corporations and agencies            144,640      142,544        147,422      144,410         149,103      139,873
Obligations of states and political sub-
   divisions                                         172,223      169,993        102,741      104,173          92,851       86,658
Corporate securities                                  99,561       98,405         42,350       42,498          35,638       35,658
Equity  securities                                    57,846       58,589         23,689       24,049          20,056       20,725
                                                   ----------   ----------     ----------   ----------      ----------   ----------
   Total                                            $548,673     $543,901       $390,887     $389,819        $378,535     $360,540
                                                   ==========   ==========     ==========   ==========      ==========   ==========`

`COMMUNITY BANKS, INC. AND SUBSIDIARIES
                                                              MATURITY DISTRIBUTION OF SECURITIES (Fair Value)
                                                                           (dollars in thousands)
                                                                          as of December 31, 2001

                                                             One          Five                                             Weighted
                                              Within        Through      Through      After                   Average       Average
                                             One Year    Five Years   Ten Years     Ten Years     Total      Maturity      Yield (a)
                                             ---------------------------------------------------------------------------------------
U.S. Government agencies                     $  7,576       $38,285     $115,056   $  55,997     $216,914    8yr.  8 mos.    6.03%
Obligations of states and political
   subdivisions                                 2,730        24,474       50,453      92,336      169,993   11yr.  0 mos.    7.74%
Other                                           2,449         8,157       43,496     102,892      156,994   12yr.  3 mos.    5.75%
                                             --------       -------     --------   ---------     --------

      Total                                   $12,755       $70,916     $209,005    $251,225     $543,901   10yr.  5 mos.    6.48%
                                             ========       =======     ========    ========     ========
Percentage of total                               2.4%         13.0%        38.4%       46.2%       100.0%
                                                =====         =====        =====       =====        =====
Weighted average yield (a)                       5.13%         6.63%        6.25%       6.70%        6.48%
                                                =====         =====        =====       =====        =====


(a)  Weighted  average  yields were computed on a tax  equivalent  basis using a
     federal tax rate of 35%.`

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

APPENDIX A
Continued

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

                                                2001                 2000              1999              1998               1997
                                        --------------------------------------------------------------------------------------------
                                          Amount  Percent    Amount  Percent   Amount  Percent    Amount  Percent    Amount Percent
Commercial, financial and agricultural   $158,223   18.4%   $135,612   16.6%  $107,419   15.0%  $105,416    16.7%  $ 86,832   15.4%
Real estate-construction                   21,225    2.5      22,403    2.7     17,003    2.4     17,643     2.8      5,815    1.0
Real estate-mortgage                      554,354   64.5     540,639   66.0    464,680   65.0    390,152    62.0    369,521   65.5
Personal-installment                      107,893   12.6     109,976   13.4    117,317   16.4    104,388    16.6     92,485   16.4
Other                                      17,209    2.0      10,228    1.3      8,583    1.2     12,169     1.9      9,347    1.7
                                         --------   -----   --------   -----  --------   -----  --------    -----  --------   -----
                                          858,904  100.0%    818,858  100.0%   715,002  100.0%   629,768   100.0%   564,000  100.0%
                                         --------           --------          --------          --------           --------
                                                    =====              =====             =====              =====             =====
Less:
   Unearned discount                       (1,626)            (3,984)           (6,986)          (10,018)           (11,799)
   Reserve for loan losses                (12,132)           (10,328)           (8,976)           (8,608)            (8,535)
                                         --------           --------          --------          --------           --------
                                         $845,146           $804,546          $699,040          $611,142           $543,666
                                         ========           ========          ========          ========           ========`

The Corporations loan
activity is principally with customers located within its local market area. The
Corporation continues to maintain a diversified loan portfolio and has no
significant loan concentration in any economic sector. Commercial, financial,
and agricultural loans consist principally of commercial lending secured by
financial assets of businesses including accounts receivable, inventories and
equipment, and, in most cases, include liens on real estate. Real estate
construction and mortgage loans are primarily 1 to 4 family residential loans
secured by residential properties within the banks market area.
Personal-installment loans consist principally of secured loans for items such
as automobiles, property improvement, household and other consumer goods. The
Corporation continues to sell fixed rate mortgages in the secondary market to
manage interest rate risk. Historically, relative credit risk of commercial,
financial and agricultural loans has generally been greater than that of other
types of loans.

APPENDIX A
Continued

`MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
                                                         RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL
                                                                   AND REAL-ESTATE CONSTRUCTION LOANS
                                                                      (dollars in thousands)
                                                                      as of December 31, 2001


                                                                        Maturity Distribution

                                                    One Year          One to          Over Five
                                                     Or Less        Five Years          Years              Total
                                                    --------        ----------        ---------         --------
Commercial, financial and
   agricultural                                      $60,739          $41,202           $56,282         $158,223
Real estate-construction                              21,225              ---               ---           21,225
                                                     -------          -------           -------         --------
                                                     $81,964          $41,202           $56,282         $179,448
                                                     =======          =======           =======         ========

                                                                        Interest Sensitivity

                                                    Variable           Fixed             Total
                                                    --------        ----------        ---------
Due in one year or less                            $  79,632         $  2,332         $  81,964
Due after one year                                    80,393           17,091            97,484
                                                     -------          -------           -------
                                                    $160,025          $19,423          $179,448
                                                     =======          =======           =======`

APPENDIX A
Continued

`NON-PERFORMING LOANS (a)
                                                                                (dollars in thousands)
                                                                                   as of December 31

                                                        2001             2000              1999             1998            1997
                                                        ----             ----              ----             ----            ----
Loans past due 90 days or more:
   Commercial, financial and agricultural            $ 1,002        $       8           $   146          $    47         $     53
   Mortgages                                             405              495               147              353              467
   Personal installment                                  239               98                73               36               77
   Other                                                  13               11                12                7               21
                                                    --------         --------          --------          -------         --------
                                                       1,659              612               378              443              618
                                                    --------         --------          --------          -------         --------

Loans renegotiated with borrowers                        ---              205               254              248              626

Loans on which accrual of interest has been discontinued:
    Commercial, financial and agricultural             3,783            2,042             2,231            3,037            2,951
     Mortgages                                         6,952            3,445             3,203            2,419            3,700
     Other                                               355              356               222              282              346
                                                    --------         --------          --------          -------         --------
                                                      11,090            5,843             5,656            5,738            6,997
                                                    --------         --------          --------          -------         --------
Other real estate owned                                  631              416               615              853            1,423
                                                    --------         --------          --------          -------         --------

Total                                                $13,380           $7,076            $6,903           $7,282           $9,664
                                                    ========         ========          ========          =======         ========`

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

The  approximate  amount  that would have been  accrued on those loans for which
interest was discontinued in 2001 was $605,000. Interest income from these loans
would have approximated $649,000 in 2000.

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

APPENDIX A
Continued

`LOAN LOSS EXPERIENCE
                                                                          (dollars in thousands)
                                                           For the years ended December 31, 2001, 2000, 1999, 1998, and 1997

                                                       2001              2000             1999                1998           1997
                                                       ----              ----             ----                ----           ----

Loans at year-end, net of unearned income           $857,278          $814,874         $708,016            $619,750       $552,201
                                                    ========          ========         ========            ========       ========
Average loans balance (a)                           $838,178          $768,204         $665,422            $579,926       $526,564
                                                    ========          ========         ========            ========       ========
Balance, allowance for loan losses,
          January 1                                 $ 10,328          $  8,976         $  8,608            $  8,535       $  7,538

Net charge-offs (b)                                   (3,276)           (1,511)          (1,220)             (1,981)          (820)
Provision for loan losses,                             5,080             2,863            1,588               2,054          1,817
                                                    --------          --------         --------            --------       --------

Balance, allowance for loan losses,
          December 31                               $ 12,132          $ 10,328         $  8,976            $  8,608       $  8,535
                                                    ========          ========         ========            ========       ========
Net charge-offs to loans at year end                    .38%              .19%             .17%                .32%           .15%
Net charge-offs to average loans (a)                    .39%              .20%             .18%                .34%           .16%

Balance of allowance for loan losses
          to loans at year end                         1.42%             1.27%            1.27%               1.39%          1.55%


(a)  Averages are a combination of monthly and daily averages.

(b) For detail, see Schedule of Loans Charged Off and Recovered.`

The allowance for loan losses is based upon management's  continuing  evaluation
of the loan  portfolio.  A review  as to loan  quality,  current  macro-economic
conditions and  delinquency  status is performed at least on a quarterly  basis.
The provision for loan losses is adjusted  quarterly  based upon current review.
The table on page 13 presents an allocation by loan  categories of the allowance
for loan  losses at  December 31 for the last five  years.  In  retrospect,  the
specific allocation in any particular category may prove excessive or inadequate
and  consequently  may be  reallocated in the future to reflect the then current
condition.  Accordingly,  the entire  allowance is available to absorb losses in
any category.

APPENDIX A
Continued

The amount of the allowance  assigned to each component of the loan portfolio is
derived from a combination of factors.  Estimation  methods and assumptions used
in the process are reviewed  periodically  by both management and a committee of
the board of directors.  The  methodology  used by the Corporation in estimating
the allowance has not changed during 2001.

The Corporation's allowance for loan losses is based upon management's quarterly
review of the loan  portfolio.  The  purpose  of the  review  is to assess  loan
quality, identify impaired loans, analyze delinquencies,  ascertain loan growth,
evaluate  potential  charge-offs  and  recoveries,  and assess general  economic
conditions in the markets its affiliates serve.

Commercial and real estate loans are internally risk rated by the  Corporation's
loan officers and periodically reviewed by loan quality personnel.  Consumer and
residential  real estate loans are  generally  analyzed in the aggregate as they
are of relative small dollar size and homogeneous in nature.

In  addition   to  economic   conditions,   consideration   of  loan   portfolio
diversification, delinquency and historic loss experience, consideration is also
given to examinations performed by the regulatory authorities.

To determine the allowance and  corresponding  loan loss  provision,  the amount
required for specific  loans is first  determined.  For certain  commercial  and
construction  loans, this amount is based upon specific borrower data determined
by reviewing  individual  non-performing,  delinquent,  or potentially  troubled
credits.  The remaining  commercial as well as consumer,  and  residential  real
estate  loans are  evaluated  as part of various  pools.  These  pool  reserves,
generally are based upon historic  charge-offs  and delinquency  history,  other
known trends and expected  losses over the  remaining  lives of these loans,  as
well as the  condition  of local,  regional  and  national  economies  and other
qualitative factors.

To ensure adequacy to a higher degree of confidence,  a portion of the allowance
for loan  losses is  considered  unallocated.  The  unallocated  portion  of the
allowance is the amount which, when added to these allocated amounts, brings the
total to the amount deemed adequate by management at that time. This unallocated
portion  is  available  to absorb  losses  sustained  anywhere  within  the loan
porfolios.

During 2001 management  deemed it appropriate to reduce the relative  portion of
the total allowance  allocated to real  estate-mortgage  loans to 8% from 15% at
year-end  2000.  The  corporation  has  accompanied  the downward  trends in the
relationships of net charge-offs to average loans and non-performing  loans with
a reduction in the relationship of the allowance to total loans.

The provision for loan losses totaled $5,080,000 for the year ended December 31,
2001,  compared to $2,863,000,  $1,588,000,  $2,054,000,  and $1,817,000 for the
years  ended  December  31,  2000,  1999,  1998,  and  1997,  respectively.  The
relationship of the allowance for loan losses to loans at year end  approximated
1.42%  compared  to ratios of 1.27% to 1.55% for the  previous  four  years.  In
reviewing the adequacy of the allowance for loan losses,  management  considered
the  relationship of nonaccrual  loans,  renegotiated  loans, and accruing loans
contractually  past  due 90  days or more to  total  assets.  This  relationship
approximated  .84%,  .51%,  .55%,  .63%, and .94% at year-end 2001,  2000, 1999,
1998, and 1997, respectively.

APPENDIX A
Continued

`LOANS CHARGED OFF AND RECOVERED
                                                                                 (dollars in thousands)
                                                            For the years ended December 31, 2001, 2000, 1999, 1998, and 1997

                                                       2001              2000             1999                1998           1997
                                                       ----              ----             ----                ----           ----

Loans charged off:
   Commercial, financial and agricultural            $2,275           $   303          $   489              $1,304        $   312
   Real estate-mortgage                                 484               521              190                 248            361
   Personal installment                                 108               215              903                 833            941
   Other                                                909               886               81                  77             96
                                                     ------           -------          -------              ------        -------
Total                                                 3,776             1,925            1,663               2,462          1,710
                                                     ------           -------          -------              ------        -------
Loans recovered:
   Commercial, financial and agricultural               120                23              140                  53            442
   Real estate-mortgage                                 108                83               43                 104             79
   Personal installment                                  18               298              243                 299            345
   Other                                                254                10               17                  25             24
                                                     ------           -------          -------              ------        -------
Total                                                   500               414              443                 481            890
                                                     ------           -------          -------              ------        -------
    Net charge-offs                                  $3,276            $1,511           $1,220              $1,981        $   820
                                                     ======           =======          =======              ======        =======

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

                                                       2001              2000             1999                1998           1997
                                                       ----              ----             ----                ----           ----

Loans:
   Commercial, financial and agricultural          $  9,285          $  5,268           $3,030              $3,008         $2,771
    Real estate-construction                             10                14                9                   7             10
    Real estate-mortgage                                965             1,593            1,509               1,726          2,274
    Installment                                       1,030             1,748            1,575               1,566          2,013
    Unallocated                                         842             1,705            2,853               2,301          1,467
                                                     ------           -------          -------              ------        -------
Balance                                             $12,132           $10,328           $8,976              $8,608         $8,535
                                                     ======           =======          =======              ======        =======


*See Schedule "Loan Account Composition" for the percent of loan classification
to total loans.`

APPENDIX A
Continued

`MATURITY DISTRIBUTION OF TIME
                          DEPOSITS OF $100,000 OR MORE
                             (dollars in thousands)
                             as of December 31, 2001

Remaining to Maturity:
Less than three months                                         $20,893
Three months to six months                                      17,895
Six months to twelve months                                     17,512
More than twelve months                                         23,092
                                                             ---------
                                                               $79,392
                                                             =========



                          MATURITY DISTRIBUTION OF ALL
                                  TIME DEPOSITS
                             (dollars in thousands)
                             as of December 31, 2001


Remaining Maturity:
One year or less                                              $347,250
After one year through two years                                95,077
After two years through three years                             48,458
After three years through four years                            25,957
After four years through five years                             13,661
After five years                                                 2,522
                                                             ---------
                                                              $532,925
                                                             =========`

APPENDIX A
Continued

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

The  positive  GAP between the  Corporation's  interest-earning  assets and
interest-bearing  liabilities maturing or repricing within one year approximated
2% of total assets at December 31, 2001.

Significant  maturity/repricing  assumptions  (based on internal  analysis)
include the presentation of all savings, Money Market, and NOW accounts as being
34% interest  rate  sensitive . Equity  securities  are reflected in the longest
time interval.  Assumed pay downs on  mortgage-backed  securities and loans have
also been included in all time intervals.

The  following  table sets for the  scheduled  repricing or maturity of the
Corporation's   interest-earning  assets  and  interest-bearing  liabilities  at
December 31, 2001.

APPENDIX A
Continued

`Interest Rate Sensitivity
------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2001                            1-90               90-180          180-365           1 year
Dollars in thousands                            days                days             days           or more             Total
----------------------------------------------------------------------------------------------------------------------------------

Assets
Interest-bearing deposits in
   other banks                               $   1,372                ---              ---               ---            $1,372
Investment securities                           68,219          $  17,765        $  50,893          $407,024           543,901
Loans, net of unearned income*                 234,412             86,765           99,620           436,481           857,278
Loans held for sale                             10,479                ---              ---               ---            10,479
------------------------------------------------------------------------------------------------------------------------------------
Total                                         $314,482           $104,530         $150,513          $843,505        $1,413,030
------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Savings                                       $103,899                ---              ---          $206,014        $  309,913
Time                                            87,065          $  80,664         $123,221           162,583           453,533
Time in denominations of
   $100,000 or more                             20,893             17,895           17,512            23,092            79,392
Short-term borrowings                           60,002                ---              ---               ---            60,002
Long-term debt                                  21,367                ---              ---           300,788           322,155
------------------------------------------------------------------------------------------------------------------------------------
Total                                         $293,226          $  98,559         $140,733          $692,477        $1,224,995
------------------------------------------------------------------------------------------------------------------------------------


Interest Sensitivity Gap
Periodic                                     $  21,256          $   5,971          $ 9,780          $151,028
Cumulative                                                         27,227           37,007           188,035
Cumulative gap as a percentage
   of earning assets                                 2%                 2%               3%               13%

*Does not include nonaccrual loans.`

APPENDIX A
Continued

Forward-Looking Statements:

Incorporated  by reference is the  information  appearing under the heading
"Forward-Looking Statements" on page 32 of the Annual Report to Stockholders for
the year ended December 31, 2001 (hereafter referred to as the "Annual Report").

Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Significant Assumptions Utilized in Managing Interest Rate Sensitivity

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

APPENDIX A
Continued

Embedded Options

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

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

Interest Rate Indices

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

APPENDIX A
Continued

Interest Rate Sensitivity Measurement

In  addition  to  periodic  gap  reports   comparing  the   sensitivity  of
interest-earning assets and interest-bearing  liabilities to changes in interest
rates,  management  also  utilizes a report  which  measures the exposure of the
Corporation's  economic  value of  equity  to  interest  rate  risk.  The  model
calculates  the  present  value of  assets,  liabilities  and  equity at current
interest  rates,  and at  hypothetically  higher and lower interest rates at one
percent  intervals.  The  present  value of each  major  category  of  financial
instruments  is  calculated  by the model  using  estimated  cash flows based on
prepayments,  early withdrawals,  weighted average  contractual rates and terms,
and discount  rates for similar  financial  instruments.  The resulting  present
value of longer term  fixed-rate  financial  instruments  are more  sensitive to
change  in a higher  or lower  interest  rate  scenario,  while  adjustable-rate
financial   instruments   largely   reflect  only  a  change  in  present  value
representing  the difference  between the contractual and discounted rates until
the next  interest  rate  repricing  date.  The  information  provided  by these
analyses provides some indication of the potential for interest rate adjustment,
but does not  necessarily  mean that the rate  adjustment  will occur or that it
will  occur  in  accordance  with  the   assumptions.   Despite  these  inherent
limitations,  Community  believes  that the tools  used to  manage  its level of
interest rate risk provide an appropriate measure of market risk exposure.

The  following  table  reflects  the  estimated  present  value of  assets,
liabilities and equity using the model for Community Banks,  Inc. as of December
31, 2001 at current interest rates and hypothetically, higher and lower interest
rates of one and two percent.

`Base
                                                           -2%               -1%        Present Value          +1%            +2%
                                                     -------------------------------------------------------------------------------
                                                                                    (dollars in thousands)
                   Assets
Cash, interest-bearing time deposits,
    and federal funds sold                           $   46,136        $    46,136     $    46,136       $   46,136       $  46,136
Investment securities                                   568,553            553,066         543,901          522,093         506,606
Loans, net of unearned income                           903,412            886,053         871,674          854,103         839,387
Loans held for sale                                      10,856             10,649          10,479           10,689          10,867
Other assets                                             64,072             64,072          64,072           64,072          64,072
                                                     ----------        -----------     -----------       ----------       ---------

     Total assets                                    $1,593,029        $ 1,559,976     $ 1,536,262       $1,497,093      $1,467,068
                                                     ==========        ===========     ===========       ==========      ==========
               Liabilities
Deposits                                             $1,022,022         $1,015,948      $1,009,947       $1,004,019     $   998,161
Short-term borrowings                                    60,002             60,002          60,002           60,002          60,002
Long-term debt                                          333,645            329,032         324,492          320,025         315,629
Other liabilities                                        13,103             13,103          13,103           13,103          13,103
                                                     ----------        -----------     -----------       ----------       ---------

     Total liabilities                                1,428,772          1,418,085       1,407,544        1,397,149       1,386,895
                                                     ----------        -----------     -----------       ----------       ---------

     Total stockholders' equity                         164,257            141,891         128,718           99,944          80,173
                                                     ----------        -----------     -----------       ----------       ---------
     Total liab. and stockholders'
        equity                                       $1,593,029         $1,559,976      $1,536,262       $1,497,093      $1,467,068
                                                     ==========        ===========     ===========       ==========      ==========`

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters:

Incorporated  by reference is the  information  appearing under the heading
"Market  for the  Corporation's  Common  Stock and  Related  Securities  Holders
Matters" on page 33 of the Annual Report.

Item 6.  Selected Financial Data:

Incorporated  by reference is the  information  appearing under the heading
"Financial Highlights" on page 23 of the Annual Report.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results of Operations:

Incorporated by reference is the  information  appearing under the headings
"Rate/Volume Analysis";  "Average Balances,  Effective Interest Differential and
Interest  Yields";  and  "Management's's  Discussion of Financial  Condition and
Results of Operations" on pages 24 through 35 of the Annual Report.

Item 8.  Financial Statements and Supplementary Data:

The Corporation has established various accounting policies that govern the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  its  financial  statements.  The  significant
accounting  policies of the  Corporation  are  described in the footnotes to the
consolidated   financial   statements.   Certain  accounting   policies  involve
significant  judgments and assumptions by management that have a material impact
on the carrying value of certain assets and  liabilities;  management  considers
such accounting policies to be critical accounting  policies.  The judgments and
assumptions  used by management  are based on historical  experiences  and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions  made by management,  actual results
could differ from these  judgments  and  estimates,  which could have a material
impact on the  carrying  values of assets  and  liabilities  and the  results of
operations of the Corporation.  The Corporation  believes that the allowance for
loan losses,  which is discussed in the section titled "Allocation of Allowance"
requires the most significant judgments and estimates used in the preparation of
its consolidated  financial  statements.  See "Footnote 2 Summary of Significant
Accounting Policies" for a detailed description of the Corporation's  estimation
process and methodology related to the allowance for loan losses.

The consolidated financial statements,  together with the report thereon of
PricewaterhouseCoopers LLP dated January 24, 2002, are incorporated by reference
to pages 6 through 22 of the Annual Report.

Item 9.  Disagreements on Accounting and Financial Disclosures:

None.

Item 10.  Directors and Executive Officers of the Registrant:

The  following  table  sets  forth  the  name and age of each  director  of
Community Banks, Inc. as well as the director's business  experience,  including
occupation  for the past 5 years,  the  period  during  which he has served as a
director of Community  Banks,  N.A.  (Formerly Upper Dauphin National Bank), and
the number and  percentage  of  outstanding  shares of Common  Stock of the Bank
beneficially owned by said directors as of December 31, 2001.

`Business Experience                                 Amount and             Percentage of
                                       Including Principal                                   Nature of              Outstanding
                                       Occupation for the             Director             Beneficial               Common Stock
 Name and Age                           Past Five Years               Since (1)            Ownership (2)               Owned
-------------                           ---------------               ---------            -------------        -------------------

Eddie L. Dunklebarger                  Chairman/Pres/CEO                 1999                 174,513                   1.95%
     Age 48                               CTY/CBNA/PSB                                            (3)
                                          Prior to 3/31/98
                                          Pres/CEO PSB

Thomas L. Miller                       Retired Chairman/                 1966                  70,111                    .79%
     Age 69                               CEO of CTY &                                        (4)
                                          CBNA

Kenneth L. Deibler                     Self-Employed                     1966                  39,087                    .44%
     Age 79                               Insurance Broker                                        (5)
                                          Elizabethville, PA

Robert W. Rissinger                    Sec./Treasurer                    1968                 290,157                   3.28%
     Age 75                               Alvord Polk Tool Co.                                    (6)
                                          (Cutting Tools)
                                          Engle Rissinger Auto Group
                                          Millersburg, PA

Allen Shaffer                          Attorney-at-Law                   1961                 148,344                   1.68%
     Age 76                               Millersburg and                                         (7)
                                          Harrisburg, PA


 James A. Ulsh                         Attorney-at-Law                   1977                  20,472                    .23%
     Age 55                               Mette, Evans&                                       (5)
                                          Woodside
                                          Harrisburg, PA`

`Business Experience                                  Amount and             Percentage of
                                       Including Principal                                   Nature of              Outstanding
                                       Occupation for the             Director             Beneficial               Common Stock
 Name and Age                           Past Five Years               Since (1)            Ownership (2)               Owned
-------------                           ---------------               ---------            -------------        -------------------

Samuel E. Cooper                       Retired Superintendent            1992                   4,188                  .05%
     Age 68                                Warrior Run School                                     (5)
                                           District
                                           Turbotville, PA

Ronald E. Boyer                         President,                       1981                  29,500                  .33%
     Age 64                                Alvord-Polk Tool Co.                                   (8)
                                           (Manufacturing of Cutting tools)
                                           Millersburg, PA.

Peter DeSoto                            CEO, J.T. Walker                 1981                  52,705                  .60%
     Age 62                                Industries, Inc.                                       (5)
                                           (manufacturing of metal
                                           products)
                                           Elizabethville, PA

Thomas W. Long                          Partner                          1981                  13,041                  .15%
     Age 72                                Millersburg Hardware                                  (12)
                                           Millersburg PA

Donald  L. Miller                       President, Miller Bros.          1981                 103,449                 1.17%
     Age 72                                Dairy                                                  (5)
                                           Millersburg, PA

John W. Taylor, Jr.                     President-Air Brake              1998                  25,858                  .29%
     Age 71                               &Power Equip. Co.                                   (9)

Earl L. Mummert                         Consulting Actuary               1998                  32,935                  .37%
     Age 57                                Conrad M. Siegel, Inc                                 (10)

Wayne H. Mummert                        Retired U.S. Postal              1998                  74,364                  .84%
     Age 68                                Service/Farmer                                        (11)`





1. Includes service as a director of CBNA (formerly Upper Dauphin National Bank), a
wholly-owned subsidiary of the Corporation, prior to 1983 and service as a
director of the Corporation after 1983.
2. The securities beneficially owned by an individual are determined in
accordance with the definition of beneficial ownership set forth in
the regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the wife and/or children of
the individual and any other relative who has the same home as such individual,
as well as other securities which the individual has or shares voting or
investment power or has the right to acquire under outstanding stock options
within 60 days after December 31, 2001. Beneficial ownership may be disclaimed
as to certain of the securities.
3. Includes 373 shares owned by Mr. Dunklebargers wife, 11,896 shares owned
by Mr. Dunklebargers children, 13,060 shares in his 401(k) Plan, 10,026
shares in his IRA, 1,440 shares held in an ESPP, and 100,651 stock options (ISOs
and NQs) to acquire shares.
4. Includes stock options to acquire 27,321 shares and 985 shares held in his IRA.
5. Includes stock options to acquire 1,575 shares.
6. Includes  7,968  shares owned by Alvord Polk Tool Co.,  Inc.,  the stock of
     which is held 50% by Robert  Rissinger  and 50% by Ronald  Boyer.  Includes
     17,757  shares  owned by  Engle  Ford,  Inc.,  50,473  shares  owned by Mr.
     Rissinger's  wife,  12,244 shares owned by Engle Ford,  Inc. Profit Sharing
     Plan,  90,486  shares held by Mr.  Rissinger's  IRA,  and stock  options to
     acquire 1,575 shares.
7. Includes 2,500 shares held by Mr. Shaffers Retirement Plan, stock options to
acquire 1,575 shares, and 94,500 shares owned by the Polk Foundation of which
Mr. Shaffer is chairman and holds voting and investment power for the shares.
8. Includes  7,968  shares  owned by Alvord Polk Tool Co.,  Inc.  the stock of
     which is held 50% by Robert  Rissinger  and 50% held by Ronald  Boyer,  626
     shares held by Mr. Boyer's wife, and stock options to acquire 1,575 shares.
9. Includes 1,399 shares owned by Mr. Taylors wife, 1,000 shares held in Mr.
Taylors IRA, and stock options to acquire 1,575 shares.
10. Includes  13,191  shares  held in Mr.  Mummert's  IRA and stock  options to
     acquire 3,894 shares.
11. Includes  16,671  shares held by Mr.  Mummert's  wife and stock  options to
     acquire 3,894 shares.
12. Includes stock options to acquire 525 shares.

Section 16(a) Beneficial Ownership Reporting Compliance

In 2001, to the knowledge of the Corporation,  one director, Allen Shaffer,
filed a Form 4 11 days late with the  Securities  and Exchange  Commission.  All
executive  officers  timely filed all reports with the  Securities  and Exchange
Commission.

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

Executive Officers:

The following table sets forth the executive officers of Community
Banks, Inc., their ages, their positions with Community Banks, Inc. and the
beneficial ownership (as determined in accordance with the rules and regulations
of the Securities and Exchange Commission) of Common Stock of the Corporation
owned by each of such persons as of December 31, 2001.

`Business Experience                                 Amount and             Percentage of
                                       Including Principal                                   Nature of              Outstanding
                                       Occupation for the             Director             Beneficial               Common Stock
 Name and Age                           Past Five Years               Since (1)            Ownership (2)               Owned
-------------                           ---------------               ---------            -------------        -------------------

Eddie L. Dunklebarger                   Chairman/President/CEO           1999                 174,513                 1.95%
     Age 48                                CTY/CBNA/PSB                                           (3)
                                           Prior to 3/31/98
                                           Pres/CEO of PSB

Terry L. Burrows                        Senior Vice President            1977                  36,382                  .41%
     Age 53                             Director of Risk Management                               (4)
                                        Prior to 12/31/01
                                        Executive Vice President/
                                           Finance

Donald F. Holt                          Executive Vice President/        2001                       0                    0%
     Age 45                                Finance  (8)

Robert W. Lawley                        Executive Vice President/        1980                  17,251                  .19%
     Age 47                                Operations                                             (5)

Anthony N. Leo                          Executive Vice President/        1999                  20,028                  .23%
     Age 41                                Fin. Services&Adm.                                 (6)

Jeffrey M. Seibert                      Executive Vice President/        1999                  58,758                  .66%
     Age 42                                Banking Services                                       (7)


(1)  Initial year employed in this capacity.

(2)  See footnote 2 on page 23.

(3)  See footnote 3 on page 23.

(4)  Includes  244 shares  held in an ESPP and stock  options to acquire  10,453
     shares.`

`(5)  Includes  15 shares  held by Mr.  Lawley's  children  and stock  options to
     acquire 17,165 shares.

(6)  Includes 98 shares held in an ESPP, 6,064 shares held by a 401(k) and stock
     options to acquire 13,767 shares.

(7)  Includes  856 shares held in an ESPP,  8,666  shares held in Mr.  Seibert's
     IRA,  6,181  shares  held by a 401(k) and stock  options to acquire  34,045
     shares

(8)  Mr. Holt became the chief  financial of CTY and Community Banks on December
     31, 2001 and was  previously  employed by Keystone  Financial,  Inc. as its
     senior vice president and  controller  from 1987-1998 and as executive vice
     president and chief financial officer from 1999-2000. During 2001, Mr. Holt
     served as vice president of finance and  administration of the Pennsylvania
     Chamber of Business and Industry.`

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

`Amount and Nature
                                  of Beneficial
                                Ownership (1)(2)


                                                                        Percent
              Title of Class          Direct       Indirect(3)         of Class
              --------------          ------       ----------          --------
                  Common            1,174,002       294,201              16.08%



(1)  See footnote 2 on page 23.

(2)  Included  in these  totals  are  shares  held by  director  emeriti  of the
     Corporation as follows:

Leon E. Kocher - 32,540 shares which includes 14,241 shares held by Mr. Kochers
wife, and stock options to acquire 1,050 shares.

Raymond N. Leidich - 79,683 shares which includes 39,054 shares held by Mr.
Leidichs wife, and stock options to acquire 1,575 shares.

Ernest L. Lowe - 68,947 shares which inlcudes 219 shares held by Mr. Lowes wife,
463 shares held in a 401(k), 1,742 shares held by Mr. Lowes IRA, and stock
options to acquire 28,919 shares.

Joseph J. Monahan - 22,733 shares.

Harry B. Nell - 39,105 shares which includes 992 shares held by Mr. Nells wife,
and stock options to acquire 3,369 shares.

(3)  The 7,968 shares owned by  Alvord-Polk,  Inc. are counted only once in this
     total. Alvord-Polk,  Inc. is 50% owned by Robert W. Rissinger and 50% owned
     by Ronald  E.  Boyer.  Thus,  these  shares  are  indicated  above as being
     beneficially owned by both Mr. Rissinger and Mr. Boyer.`

Item 11.  Executive Compensation:

Information regarding executive compensation is omitted from this report as
the  holding  company  will file a  definitive  proxy  statement  for its annual
meeting of  shareholders  to be held May 7, 2002; and the  information  included
therein with respect to this item is incorporated herein by reference.

Pension Plan:

Community  Banks  maintains  a  pension  plan  for  some of its  employees.
Employees  hired prior to December 31, 1998 became  participants  in the pension
plan on January 1 or July 1 after  completing one year of service (12 continuous
months and 1,000 hours  worked) and  reaching age 21. The cost of the pension is
actuarially  determined  and paid by  Community  Banks.  The  amount of  monthly
pension is equal to 1.15% of average  monthly pay, plus .60% of average  monthly
pay in excess of $650, multiplied by the number of years of service completed by
an employee.  The years of service for the  additional  portion are limited to a
maximum of 37. Average monthly pay is based upon the 5 consecutive plan years of
highest pay in the last 10 years. The maximum amount of annual compensation used
in determining  retirement  benefits is $170,000.  A participant is eligible for
early retirement after reaching age 60 and completing five years of service. The
early retirement  benefit is the actuarial  equivalent of the pension accrued to
the date of early  retirement.  As of December 31, 2001, the following  officers
have been  credited  with the  following  years of service:  Ernest L. Lowe - 17
years of service,  Robert W. Lawley-26 years of service, and Terry L. Burrows-28
years of service.

In 1999, the Board of
Directors amended the plan so that pension benefits will be offset by employer
contributions to the CTY 401(k) Plan. Employees hired after December 31, 1998
are not eligible to participate in the pension plan. The amounts shown on the
following table assumes an annual retirement benefit for an employee who chose a
straight life annuity and who will retire at age 65. These amounts are not yet
offset for the employer contribution in the 401(k) Plan.

`PENSION PLAN TABLE
                                                                   Years of Service
------------------------------------------------------------------------------------------------------------------------------------
                                       15               20                25               30                35                40
------------------------------------------------------------------------------------------------------------------------------------
Remuneration

$35,000......................       $ 8,486           $11,314          $14,143           $16,971         $ 19,800          $ 22,138
$55,000......................       $13,736           $18,314          $22,893           $27,471         $ 32,050          $ 35,778
$75,000......................       $18,986           $25,314          $31,643           $37,971         $ 44,300          $ 49,418
$95,000......................       $24,236           $32,314          $40,393           $48,471         $ 56,550          $ 63,058
$115,000....................        $29,486           $39,314          $49,143           $58,971         $ 68,800          $ 76,698
$135,000....................        $34,736           $46,314          $57,893           $69,471         $ 81,050          $ 90,338
$150,000....................        $38,673           $51,564          $64,455           $77,346         $ 90,237          $100,568
$175,000....................        $43,923           $58,564          $73,205           $87,846         $102,487          $114,208
$200,000....................        $43,923           $58,564          $73,205           $87,846         $102,487          $114,208
$225,000....................        $43,923           $58,564          $73,205           $87,846         $102,487          $114,208
$250,000....................        $43,923           $58,564          $73,205           $87,846         $102,487          $114,208
$275,000....................        $43,923           $58,564          $73,205           $87,846         $102,487          $114,208`

Directors' Compensation:

In 2001,  each CTY director  received a quarterly fee of $750. Each outside
director received a fee of $250 for each Board meeting  attended.  Each director
who was not an executive  officer also received $250 for each committee  meeting
attended.

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

Refer to Item 10 on pages 21 through 25.

Item 13.  Certain Relationships and Related Transactions:

(a) Transaction with Management and Others

Incorporated by reference is the information  appearing in Note 12 (Related
Parties) of Notes to Consolidated  Financial Statements on page 18 of the Annual
Report.

(b) Certain Business Relationships

Allen Shaffer, a director of the Corporation,  is an attorney practicing in
Harrisburg  and  Millersburg,  Pennsylvania,  who has been  retained in the last
fiscal year by the Corporation and who the Corporation proposes to retain in the
current  fiscal  year.  James A.  Ulsh,  a  director  of the  Corporation,  is a
shareholder/employee  of the law firm of Mette,  Evans,&Woodside,  Harrisburg,
Pennsylvania,  which the  Corporation  has  retained in the last fiscal year and
proposes to retain in the  current  fiscal  year.  Thomas J.  Carlyon,  director
emeritus of Community  Banks, is a partner in the law firm of Carlyon&McNelis,
Hazleton,  Pennsylvania,  which the  Corporation has retained in the last fiscal
year and  proposes to retain in the current  fiscal  year.  Earl L.  Mummert,  a
director of the Corporation,  is an actuarial  consultant with Conrad M. Siegel,
Inc.,  Harrisburg,  Pennsylvania,  which  provides  actuarial  services  to  the
Corporation.

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

Item 14.  Exhibits, Financial Statements Schedules and Reports on Form 8-K:

`Reference (page)
                                                                                          ------------------
        (a) (1)    Consolidated Financial Statements                                     Form      Annual Report to
                   Report of Independent Public                                          10-K        Shareholders
                                                                                        -----     ----------------
                        Accountants                                                      ---            22

                        Balance Sheets as of December 31, 2001
                          and 2000                                                       ---             6

                        Statements of Income for each of the three years
                          ended December 31, 2001                                        ---             7

                        Statements of Changes in Stockholders' Equity for each of the
                         three years ended December 31, 2000.                            ---             8

                        Statements of Cash Flows for each of the three years ended December
                        31, 2001.                                                        ---             9

                        Notes to Financial Statements                                    ---         10-22`

(3)  Exhibits

(3) Articles of Incorporation and By-Laws. Incorporated by reference to the Proxy
Statements dated April 14, 1987 and April 12, 1988 and Amendment 2 to Form S-2 dated May 13, 1987.

(13) Portions of the Annual Report to Security Holders incorporated by reference
within this document is filed as part of this report.

(21) Subsidiaries  of the  Registrant  (See Item 1, pages 2 and 3.)

(b)  The  registrant  did not file on Form 8-K during  the fourth  calendar
quarter of the year ending December 31, 2001

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements  on Form  S-8(File  No.  0-15786 and File No.  33-24908) of Community
Banks,  Inc. of our report dated January 24, 2002  relating to the  consolidated
financial statements, which appears in the Annual Report to Shareholders,  which
is incorporated in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
One South Market Square
Harrisburg, Pennsylvania
March 27, 2002

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Date: March 6, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.

`/S/   (Donald F. Holt)                  Ex. Vice President and         2/13/02
----------------------------------
      (Donald F. Holt)                  Chief Financial Officer

/S/   (Ronald E. Boyer)                 Director                       2/13/02
----------------------------------
      (Ronald E. Boyer)

/S/   (Samuel E. Cooper)                Director                       2/13/02
----------------------------------
      (Samuel E. Cooper)

/S/   (Kenneth L. Deibler)              Director                       2/13/02
----------------------------------
      (Kenneth L. Deibler)

/S/   (Peter DeSoto)                    Director                       2/13/02
----------------------------------
      (Peter DeSoto)

/S/   (Thomas W. Long)                  Director                       2/13/02
----------------------------------
      (Thomas W. Long)

/S/   (Donald L. Miller)                Director                       2/13/02
----------------------------------
      (Donald L. Miller)

/S/   (Thomas L. Miller)                Director                       2/13/02
----------------------------------
      (Thomas L. Miller)`

`/S/   (Earl L. Mummert)                 Director                       2/13/02
----------------------------------
      (Earl L. Mummert)

/S/   (Wayne H. Mummert)                Director                       2/13/02
----------------------------------
      (Wayne H. Mummert)

/S/   (Robert W. Rissinger)             Director                       2/13/02
----------------------------------
      (Robert W. Rissinger)

/S/   (Allen Shaffer)                   Director                       2/13/02
----------------------------------
      (Allen Shaffer)

/S/   (John W. Taylor, Jr.)             Director                       2/13/02
----------------------------------
      (John W. Taylor, Jr.)

/S/   (James A. Ulsh)                   Director                       2/13/02
----------------------------------
      (James A. Ulsh)`

`Financial Trends
                              Community Banks, Inc.
                                       And
                                  Subsidiaries


                                                                                           Percent Change
                                                2001         2000          1999         2001/2000   2000/1999

Per-Share Data
------------------------------------------------------------------------------------------------------------------------------------
Net income (basic)                          $    1.55    $    1.60     $    1.51         (3.1)%        6.0%
Net income (diluted)                             1.52         1.58          1.49         (3.8)         6.0
Cash dividends                                    .67          .60           .55         11.7          9.1


Balance Sheet Data -At Year End                          (dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Total assets                               $1,509,734   $1,308,713    $1,151,344         15.4%        13.7%
Total loans                                   857,278      814,874       708,016          5.2         15.1
Deposits                                    1,003,225      919,241       826,167          9.1         11.3
Core (Tier 1) capital                         113,383      103,613        96,633          9.4          7.2


Profitability Ratios
------------------------------------------------------------------------------------------------------------------------------------
Return on average assets                          .97%        1.12%         1.22%
Return on average stockholders' equity          12.21%       15.08%        14.40%
Efficiency ratio (1)                            55.33%       55.42%        55.54%


Asset Quality
Ratios
------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to
     total loans                                 1.42%        1.27%         1.27%
Allowance for loan losses to
     non-performing loans                          95%         155%          143%
Non-performing assets to
     total assets                                 .89%         .54%          .60%`

`Graphs

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

1.04   1.25   1.49  1.58   1.52         1.12   1.21  1.22   1.12   .97            11.36   12.22   14.40  15.08  12.21

 97     98     99    00     01           97    98     99     00     01             97      98      99     00     01


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

 .40   .51    .55   .60     .67         675    728   826    919     1,003          552  620   708   815   857

  97    98     99    00      01         97     98    99     00       01            97    98   99     00   01


(1) Excluding merger and restructuring related expenses in 2001.`

`2001                 2000
                                                             ---------------------------------
ASSETS

Cash and due from banks                                    $     44,764          $     42,166
Interest-bearing time deposits in other banks                     1,372                 2,568
Investment securities, available for sale (market value)        543,901               389,819
Federal funds sold                                                  ---                 6,280
Total loans                                                     857,278               814,874
     Less: Allowance for loan losses                            (12,132)              (10,328)
                                                           -------------         -------------
         Net loans                                              845,146               804,546
Premises and equipment, net                                      22,640                21,587
Intangible assets                                                   968                 1,059
Other real estate owned                                             631                   416
Loans held for sale                                              10,479                 2,719
Accrued interest receivable and other assets                     39,833                37,553
                                                           -------------         -------------
     Total assets                                            $1,509,734            $1,308,713
                                                           =============         =============
LIABILITIES

Deposits:
     Demand (non-interest bearing)                         $    160,387          $    155,796
     Savings                                                    309,913               257,178
     Time                                                       453,533               426,573
     Time in denominations of $100,000 or more                   79,392                79,694
                                                           -------------         -------------
     Total deposits                                           1,003,225               919,241
Short-term borrowings                                            60,002                36,093
Long-term debt                                                  322,155               239,613
Accrued interest payable and other liabilities                   13,103                 9,788
                                                           -------------         -------------
     Total liabilities                                        1,398,485             1,204,735
                                                           -------------         -------------

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; 8,968,000 and 8,545,000 shares
     issued in 2001 and 2000, respectively                       44,839                42,726
Surplus                                                          35,906                29,155
Retained earnings                                                36,923                38,723
Accumulated other comprehensive income (loss),
     net of tax (benefit) of  $(2,167) and $(374),
     respectively                                                (4,024)                 (694)
Less: Treasury stock of 119,000 and 300,000
     shares, at cost, respectively                               (2,395)               (5,932)
                                                           -------------         -------------
     Total stockholders' equity                                 111,249               103,978
                                                           -------------         -------------
     Total liabilities and stockholders' equity              $1,509,734            $1,308,713
                                                           =============         =============`

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

`-------------------------------------------
                                                                2001          2000           1999
                                                            -------------------------------------------
Interest income:
     Interest and fees on loans                               $69,925        $66,791        $55,844
     Interest and dividends on investment securities:
         Taxable                                               20,075         20,570         17,064
         Exempt from federal income tax                         7,172          4,812          5,103
     Federal funds interest                                       800            750            579
     Other interest income                                        103             71             92
                                                             --------       --------       --------
         Total interest income                                 98,075         92,994         78,682
                                                             --------       --------       --------

Interest expense:
     Interest on deposits:
         Savings                                                6,820          6,954          6,823
         Time                                                  24,461         23,712         18,721
         Time in denominations of $100,000 or more              4,270          4,013          2,340
     Interest on short-term borrowings and
         long-term debt                                        15,683         13,228          8,997
     Federal funds purchased and repo interest                    906          1,292          1,553
                                                             --------       --------       --------
         Total interest expense                                52,140         49,199         38,434
                                                             --------       --------       --------
         Net interest income                                   45,935         43,795         40,248
Provision for loan losses                                      5,080           2,863          1,588
                                                             --------       --------       --------
         Net interest income after provision for
           loan losses                                         40,855         40,932         38,660
                                                             --------       --------       --------

Other income:
     Investment management and trust services                     632            527            458
     Service charges on deposit accounts                        3,406          2,731          2,282
     Other service charges, commissions and fees                1,955          1,638          1,116
     Investment security gains                                  1,704            469            251
     Insurance premium income and commissions                   1,483          1,266            765
     Gains on loan sales                                        1,367            404            607
     Other income                                               1,594          1,113            909
                                                             --------       --------       --------
         Total other income                                   12,141           8,148          6,388
                                                             --------       --------       --------

Other expenses:
     Salaries and employee benefits                            18,528         16,466         14,936
     Net occupancy expense                                      5,267          4,504          4,070
     Insurance subsidiary activities                              740            586            497
     Merger and restructuring related expenses                  1,968             --             --
     Other operating expense                                   10,018          8,907          7,998
                                                             --------       --------       --------
         Total other expenses                                  36,521         30,463         27,501
                                                             --------       --------       --------
         Income before income taxes                            16,475         18,617         17,547
Provision for income taxes                                      2,879          4,702          4,257
                                                             --------       --------       --------
         Net income                                           $13,596        $13,915        $13,290
                                                             ========       ========       ========

Basic earnings per share                           1]       $    1.55      $    1.60      $    1.51
                                                             ========       ========       ========

Diluted earnings per share                         1]       $    1.52      $    1.58      $    1.49
                                                             ========       ========       ========


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

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

Balance, December 31, 1998                      $39,182    $17,989    $36,074        $  3,130     $(2,082)         $ 94,293
     Comprehensive income:
         Net income                                                    13,290                                        13,290
         Change in unrealized gain (loss) on
           securities, net of tax of $(7,984) and
           reclassification adjustment of $251                                        (14,827)                      (14,827)
     Total comprehensive income                                                                                      (1,537)
Cash dividends ($.55 per share)                                        (4,877)                                       (4,877)
5% stock dividend  (323,000 shares)               1,616      6,080     (7,696)
Net increase in treasury stock (82,000 shares)                                                     (1,885)           (1,885)
Issuance of additional shares (21,000 shares)       105        190       (359)                        379               315
                                                --------   --------   --------       ---------    --------         ---------
Balance, December 31, 1999                       40,903     24,259     36,432         (11,697)     (3,588)           86,309
     Comprehensive income:
         Net income                                                    13,915                                        13,915
         Change in unrealized gain (loss) on
           securities, net of tax of $5,925 and
           reclassification adjustment of $469                                                     11,003            11,003
     Total comprehensive income                                                                                      24,918
Cash dividends ($.60 per share)                                        (5,216)                                       (5,216)
5% stock dividend (348,000 shares)                1,740      4,612     (6,352)
Net increase in treasury stock (125,000 shares)                                                    (2,344)           (2,344)
Issuance of additional shares (16,000 shares)        83        284        (56)                                          311
                                                --------   --------   --------       ---------    --------         ---------

Balance, December 31, 2000                       42,726     29,155     38,723            (694)     (5,932)          103,978
Comprehensive income:
         Net income                                                    13,596                                        13,596
Change in unrealized gain (loss) on
           securities, net of tax of $(1,297) and
           reclassification adjustment of $1,704                                       (2,408)                       (2,408)
         Change in unfunded pension liability,
           net of tax of $(497)                                                          (922)                         (922)
                                                                                                                   ---------
Total comprehensive income                                                                                           10,266
Cash dividends ($.67 per share)                                        (5,880)                                       (5,880)
5% stock dividend (426,000 shares)                2,130      6,773     (8,903)
Purchases of treasury stock (28,000 shares)                                                          (689)             (689)
Issuance of additional shares ( 209,000 net
shares of treasury stock reissued and
3,000 shares of common stock canceled)              (17)       (22)      (613)                      4,226             3,574
                                                --------   --------   --------       ---------    --------         ---------
Balance, December 31, 2001                      $44,839    $35,906    $36,923         $(4,024)    $(2,395)         $111,249
                                                ========   ========   ========       =========    ========         =========`

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 The Glen Rock State Bank.
The accompanying notes are an integral part of the consolidated financial
statements.

`2001            2000             1999
                                                                       ----------------------------------------------

Operating Activities:
     Net income                                                         $ 13,596         $ 13,915          $ 13,290
     Adjustments to reconcile net income to net
         cash provided by operating activities:
         Provision for loan losses                                         5,080            2,863             1,588
         Depreciation and amortization                                     3,081            3,615             2,091
         Investment security gains                                        (1,704)            (469)             (251)
         Loans originated for sale                                       (94,933)         (23,440)          (33,285)
         Proceeds from sales of loans                                     88,540           25,125            33,207
         Gains on loan sales                                              (1,367)            (404)             (607)
         Change in other assets, net                                         (92)         (13,653)            1,038
         Increase in accrued interest payable and other
           liabilities, net                                                4,237            1,533               561
                                                                       ---------        ---------         ---------
              Net cash provided by operating activities                   16,438            9,085            17,632
                                                                       ---------        ---------         ---------

Investing Activities:
     Net (increase)decrease in interest-bearing time
       deposits in other banks                                             1,196             (447)             (737)
     Proceeds from sales of investment securities                        124,490           28,343            38,136
     Proceeds from maturities of investment securities                   134,308           15,708            36,775
     Purchases of investment securities                                 (417,679)         (57,486)         (124,803)
     Net increase in total loans                                         (46,343)        (108,924)          (90,604)
     Net increase in premises and equipment                               (3,532)          (5,868)           (2,949)
                                                                       ---------        ---------         ---------
              Net cash used by investing activities                     (207,560)        (128,674)         (144,182)
                                                                       ---------        ---------         ---------

Financing Activities:
     Net increase in total deposits                                       83,984           93,074            98,214
     Net increase in short-term borrowings                                23,909           19,345             3,838
     Proceeds from issuance of long-term debt                             83,236          160,757            46,000
     Repayment of long-term debt                                            (694)        (135,009)          (11,007)
     Cash dividends                                                       (5,880)          (5,216)           (4,877)
     Purchases of treasury stock                                            (689)          (2,344)           (1,885)
     Proceeds from issuance of common stock                                3,574              311               315
                                                                       ---------        ---------         ---------
              Net cash provided by financing activities                  187,440          130,918           130,598
                                                                       ---------        ---------         ---------
              Increase (decrease) in cash and cash equivalents            (3,682)          11,329             4,048

Cash and cash equivalents at beginning of year                            48,446           37,117            33,069
                                                                       ---------        ---------         ---------
Cash and cash equivalents at end of year                                $ 44,764         $ 48,446          $ 37,117
                                                                       =========        =========         =========`

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

1.   ORGANIZATION AND BASIS OF PRESENTATION:

Community Banks,  Inc.  (Corporation) is a financial  holding company whose
wholly-owned  subsidiaries include Community Banks, Community Banks Investments,
Inc. (CBII) and Community Banks Life Insurance Company (CBLIC).  All significant
intercompany transactions have been eliminated in consolidation. The Corporation
operates  through its main office in Millersburg,  Pennsylvania,  and through 41
branch  banking  offices  located  in  Adams,  Cumberland,   Dauphin,   Luzerne,
Northumberland, Schuylkill, Snyder, and York Counties in Pennsylvania. Community
Banks provides a wide range of services through its network of offices.  Lending
services  include  secured  and  unsecured  commercial  loans,  residential  and
commercial  mortgages and various forms of consumer  lending.  Deposit  services
include a variety of  checking,  savings,  time and money market  deposits.  The
Corporation  also  provides   specialized   services  through  its  wholly-owned
subsidiaries.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The more significant accounting policies of the Corporation are:

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, 2001 and 2000, there were no securities  identified as "held-to-maturity" or
"trading."  All  other   securities   are  classified  as   "available-for-sale"
securities  and reported at fair value.  Changes in unrealized  gains and losses
for "available-for-sale"  securities, net of applicable taxes, are recorded as a
component of stockholders'  equity.  Quoted market values,  when available,  are
used to  determine  the fair  value of  "available-for-sale".  If quoted  market
prices are not available,  then fair values are estimated using quoted prices of
instruments with similiar characteristics.

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

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

The allowance for loan losses is evaluated on a regular basis by management
and is based upon  management's  periodic  review of the  collectibility  of the
loans in light of  historical  experience,  the  nature  and  volume of the loan
portfolio,  adverse  situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This  evaluation is  inherently  subjective  as it requires  estimates  that are
susceptible to significant revision as additional information becomes available.

A loan is  considered  impaired  when,  based on  current  information  and
events,  it is  probable  that the  Corporation  will be unable to  collect  the
scheduled   payments  of  principal  or  interest  when  due  according  to  the
contractual  terms of the loan  agreement.  Factors  considered by management in
determining  impairment  include  payment  status,  collateral  value,  and  the
probability of collecting  scheduled  principal and interest  payments when due.
Loans that

experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record, and the amount
of the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans over
$250,000 by either the present value of expected future cash flows discounted at
the loans effective interest rate, the loans obtainable market
price, or the fair value of the collateral if the loan is collateral dependent.

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

Loans  continue to be classified as impaired  unless they are brought fully
current and the  collection  of scheduled  interest and  principal is considered
probable.  When an impaired loan or portion of an impaired loan is determined to
be  uncollectible,  the  portion  deemed  uncollectible  is charged  against the
related valuation allowance, and subsequent recoveries,  if any, are credited to
the valuation allowance.

Premises and equipment are stated at cost,  less  accumulated  depreciation
and amortization. Depreciation is calculated using accelerated and straight-line
methods  over the  estimated  useful  lives of the  related  assets as  follows:
banking premises, 20 to 40 years,  furniture,  fixtures,  and equipment,  3 to 5
years.  Leasehold  improvements are amortized over the shorter of the lease term
or 20 years.  Long-lived  assets are reviewed for impairment  whenever events or
changes in business  circumstances indicate the carrying value of the assets may
not be recovered.  Maintenance and repairs are expensed as incurred, while major
additions  and  improvements  are  capitalized.  Gain or loss on  retirement  or
disposal of individual  assets is recorded as income or expense in the period of
retirement or disposal.

Goodwill,   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.  Identifiable  intangibles  relate to acquisitions of branch offices from
other banks.  These  intangibles  are being  amortized over their assumed useful
lives.  Periodically,   the  Corporation  evaluates  goodwill  and  identifiable
intangible  assets for  impairment  based on  undiscounted  operating cash flows
whenever  significant events or changes occur which might impair the recovery of
recorded assets.

The Corporation has a noncontributory defined benefit pension plan covering
current and former  employees of a  predecessor  bank.  Pension costs are funded
currently  subject to the full funding  limitation  imposed under federal income
tax  regulations.  The defined  benefit  pension plan was amended during 2000 to
disallow  the  admittance  of any future  participants  into the plan;  however,
previous plan  participants  are still  accruing  benefits  under the plan.  The
Corporation maintains a 401(k) savings plan covering substantially all employees
which allows  employees to invest a percentage of their  earnings,  matched to a
certain amount specified by the  Corporation.  Contributions to the savings plan
which are  included in salaries  and  benefits  expense  amounted to $938,000 in
2001, $865,000 in 2000, and $669,000 in 1999.

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 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 are applied either to the outstanding
principal  balance or recorded as interest income,  depending upon  management's
assessment of the ultimate  collectibility of principal and interest.  (See also
Note 5). Loan  origination fees and certain direct  origination  costs are being
deferred  and the net  amount  amortized  as an  adjustment  of the yield on the
related loan under the interest method, generally over the contractual life.

Real estate  acquired  through  foreclosure  is carried at the lower of the
recorded amount of the loan for which the foreclosed  property previously served
as  collateral or the current  appraised  value of the property at transfer date
less estimated  selling cost.  Prior to foreclosure,  the recorded amount of the
loan is written down, if necessary, to the appraised value of the real estate to
be acquired by charging the allowance for loan losses.  During 2001,  2000,  and
1999 transfers from loans to real estate acquired  through  foreclosure  totaled
$663,000, $555,000, and $1,118,000, respectively.

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

Cash and cash  equivalents  included  cash and due from  banks and  federal
funds sold. The Corporation  made cash payments of $3,610,000,  $5,035,000,  and
$4,308,000, and $52,112,000,  $48,491,000,  and $38,121,000 for income taxes and
interest, respectively, in 2001, 2000, and 1999.

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

The Corporation reports  comprehensive  income in accordance with Statement
of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive  Income."
Components of comprehensive  income, as detailed in the Consolidated  Statements
of  Changes  in  Stockholders'  Equity,  are  net of tax.  Comprehensive  income
includes  a  reclassification  adjustment  for  net  realized  investment  gains
included in net income of $1,704,000, $469,000, and $251,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.

In June 2001, the FASB issued Statement of Financial  Accounting  Standards
(SFAS) No. 141,  "Business  Combinations,  and SFAS No. 142,  Goodwill and Other
Intangible Assets".

SFAS No. 141 provides that all business combinations shall be accounted for
using the purchase method of accounting.  Previously,  the  pooling-of-interests
method was required when certain  criteria were met. The  provisions

of SFAS No. 141 will apply to all business combinations initiated after June 30, 2001 or all business
combinations accounted for by the purchase method that are completed after June
30, 2001.

SFAS No. 142 provides  that  goodwill  shall not be amortized but should be
tested for  impairment on an annual  basis,  using  criteria  prescribed in this
statement. If the carrying amount of goodwill exceeds its implied fair value, as
recalculated,  an  impairment  loss  equal to the  excess  shall be  recognized.
Recognized  intangible  assets other than goodwill will continue to be amortized
over their useful lives and reviewed for impairment.

The  Corporation's   intangible  assets  at  December  31,  2001,   include
approximately  $151,000 of  goodwill.  The  remaining  $817,000  of  intangibles
recorded at December  31, 2001  represents  unamortized  intangibles  related to
acquisitions  of branch offices from other banks.  These  intangibles  are being
amortized over their assumed useful lives.

SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed Of", was issued by the FASB on
October 3, 2001 and is effective for fiscal years  beginning  after December 15,
2001. This statement establishes a single accounting model for the impairment or
disposal of  long-lived  assets,  including  discontinued  operations.  SFAS 144
superseded  Statement  of  Financial  Standards  No.  121,  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of"
(SFAS 121),  and APB  Opinion No. 30,  "Reporting  the Results of  Operations  -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently  Occurring Events and Transactions".  The provisions of
SFAS 144 are effective in fiscal years  beginning  after December 15, 2001, with
early adoption permitted,  and in general are to be applied prospectively.  This
statement  is not  expected  to  have a  material  impact  on the  Corporation's
financial position or results of operations.

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

Certain amounts  reported in prior years have been  reclassified to conform
with  the  2001  presentation.   These  reclassifications  did  not  impact  the
Corporation's financial condition or results of operations.

The amortized cost and fair value of investment  securities at December 31,
2001 and 2000 are as follows:

`------------------------------------------------------------------------------------------
                                                              2001                                          2000
                                          ------------------------------------------------------------------------------------------
                                                       Gross        Gross                            Gross        Gross
                                          Amortized   Unrealized  Unrealized    Fair   Amortized   Unrealized  Unrealized     Fair
                                            Cost       Gains        Losses     Value    Cost         Gains       Losses       Value
                                          ------------------------------------------------------------------------------------------
                                                                                 (in thousands)

U.S. government corporations and agencies  $144,640  $   316     $  (2,412)  $142,544  $147,422    $   323      $(3,335)   $144,410
Mortgage-backed U.S. government agencies.    74,403      423          (456)    74,370    74,685        468         (464)     74,689
Obligations of states and political
subdivisions                                172,223    1,911        (4,141)   169,993   102,741      2,459       (1,027)    104,173
Corporate securities                         99,561    1,732        (2,888)    98,405    42,350      1,178       (1,030)     42,498
Equity securities                            57,846      872          (129)    58,589    23,689        744         (384)     24,049
                                          ------------------------------------------------------------------------------------------
       Total                               $548,673   $5,254     $ (10,026)  $543,901  $390,887     $5,172      $(6,240)   $389,819
                                           ========   ======     ==========  ========  ========    =======      ========   ========`

The amortized cost and fair value of all investment  securities at December
31, 2001, by contractual  maturity,  are shown below.  Expected  maturities will
differ from contractual  maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties.

`Amortized               Fair
                                                         Cost               Value
                                                     --------------------------------
                                                             (in thousands)

Due in one year or less                              $  12,999           $  12,740
Due after one year through five years                   56,091              56,666
Due after five years through ten years                 188,284             185,455
Due after ten years                                    159,050             156,081
                                                    ----------           ---------
                                                       416,424             410,492
Mortgage-backed securities                              74,403              74,370
Equity securities                                       57,846              58,589
                                                    ----------          ----------
                                                      $548,673            $543,901
                                                    ==========          ==========`

Proceeds from sales of investments in debt  securities  were  $124,238,000,
$27,565,000  and  $37,628,000  in 2001,  2000,  and  1999,  respectively.  Gross
investment  security gains and losses of $2,064,000  and $360,000,  respectively
were  recognized  in 2001.  Gross  gains and losses of  $722,000  and  $253,000,
respectively,  were  recognized in 2000.  Gross gains and losses of $607,000 and
$356,000, respectively were recognized in 1999.

At December 31, 2001 and 2000,  investment securities with carrying amounts
of approximately  $224,057,000 and $238,744,000,  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. Such
securities,  however,  do 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.

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

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

Real estate                                            $313,880         $317,045
Commercial real estate                                  270,552          244,732
Commercial                                              158,223          135,612
Personal installment                                    107,893          109,976
Other                                                   17,209           10,228
                                                     ----------      -----------
                                                       $867,757         $817,593
                                                        =======          =======`

Loans held for resale  amounted to  $10,479,000  and $2,719,000 at December
31, 2001 and 2000, respectively.  These loans are primarily fixed-rate mortgages
and education loans.

Changes in the allowance for loan losses are as follows:

`December 31
                                                             -----------------------------------------------------
                                                                 2001                 2000                1999
                                                             -----------------------------------------------------
                                                                                 (in thousands)


Balance, January 1                                             $10,328              $  8,976             $8,608
Provision for loan losses                                        5,080                 2,863              1,588
Loan charge-offs                                                (3,776)               (1,925)            (1,663)
Recoveries                                                         500                   414                443
                                                               --------             ---------           --------
Balance, December 31                                           $12,132               $10,328             $8,976
                                                               ========             =========           ========`

Nonperforming loans and
other real estate are comprised of the following:

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


Loans past due 90 days or more and still accruing interest:
     Commercial, financial and agricultural                     $1,002         $     8
     Mortgages                                                     405             495
     Personal installment                                          239              98
     Other                                                          13              11
                                                              --------         -------
                                                                 1,659             612
                                                              --------         -------

Restructured Loans                                                 ---             205
                                                              --------         -------

Loans on which accrual of interest has been discontinued:
     Commercial, financial and agricultural                      3,783           2,042
     Mortgages                                                   6,952           3,445
     Other                                                         355             356
                                                              --------         -------
                                                                11,090           5,843
                                                              --------         -------
Other real estate                                                  631             416
                                                              --------         -------
     Total                                                     $13,380          $7,076
                                                              ========         =======`

At December 31, 2001 and 2000, the recorded  investments in loans for which
impairment has been recognized totaled $8,558,000 and $4,550,000.  The valuation
allowance for impaired loans totaled  $1,835,000 at December 31, 2001. There was
no valuation  allowance for impaired  loans at December 31, 2000.  For the years
ended December 31, 2001 and 2000, the average  recorded  investments in impaired
loans approximated $7,303,000 and $5,057,000,  respectively. Interest recognized
on impaired  loans on the cash basis for the year ending  December  31, 2001 was
not  significant.   Interest  income   recognized  on  impaired  loans  in  2000
approximated $131,000.

Premises and equipment are comprised of the following:

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

Banking premises                                                      $23,727         $22,837
Furniture, fixtures, and equipment                                     18,773          16,603
Leasehold improvements                                                    440             438
                                                                   ----------     -----------
                                                                       42,940          39,878
Less accumulated depreciation and amortization                        (20,300)        (18,291)
                                                                   ----------     -----------
                                                                      $22,640        $21,587
                                                                   ==========     ===========`

Depreciation  and  amortization  expense charged to operations  amounted to
approximately  $2,497,000,  $2,212,000,  and $2,089,000 in 2001, 2000, and 1999,
respectively.

Short-term borrowings consist of the following:

`December 31
                                                                       ----------------------------------------------
                                                                            2001     Rate          2000     Rate
                                                                       ----------------------------------------------
                                                                                    (dollars in thousands)

Securities sold under agreements to repurchase                          $  4,466     1.03%     $  1,886       5.41%
Federal funds purchased                                                   54,871     1.88%       32,700       6.64%
Treasury tax and loan note                                                   665     1.57%        1,507       5.41%
                                                                        --------               --------
                                                                         $60,002                $36,093
                                                                        ========               ========`

Interest   incurred  on  Federal  funds  purchased  and  other   short-term
borrowings  amounted to  $240,000,  $564,000,  and  $386,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.

At December 31, 2001,  long-term  debt consists of long-term  advances from
the FHLB of Pittsburgh totaling  $300,788,000 and repurchase agreements totaling
$21,367,000.  The long-term  advances were issued under variable and fixed rates
and are due to mature from 2002 to 2017.  The  Corporation  pledged  residential
mortgages in the amounts of $42,899,000 and $53,978,000 at December 31, 2001 and
2000, respectively,  as required under the terms of the credit facility with the
FHLB.  Monthly  payments of interest are required to be paid to the Federal Home
Loan Bank at rates  ranging from 3.31% to 6.66% for variable  advances and fixed
rates presently 6.31%,  with principal due at maturity.  The FHLB has the option
to convert  the fixed rate  advances  to  variable  rates at any point  prior to
maturity of the advance.  Quarterly payments of interest are required to be paid
on the repurchase  agreements at a fixed rate,  presently 1.88%,  with principal
due  at  maturity.   Interest  on  long-term   debt  amounted  to   $16,349,000,
$13,956,000,  and $10,164,000  for the years ended December 31, 2001,  2000, and
1999, respectively.

`Maturities on long-term debt at December 31, 2001 are as follows:

     2002                            $   36,367,000
     2003                            $    5,000,000
     2004                            $          ---
     2005                            $          ---
     2006                            $          ---
     Subsequent to 2006              $  280,788,000`

The following table sets forth the pension plan's funded status at December
31, 2001 and 2000 and pension cost at and for the years ended December 31, 2001,
2000, and 1999.

`----------------------------------------------------------------------------------------------------------------
(in thousands)                                                                             2001            2000
----------------------------------------------------------------------------------------------------------------

Changes in benefit obligation:
   Projected benefit obligation, beginning of year                                       $5,420           $5,079
     Service cost                                                                           130              109
     Interest cost                                                                          373              349
     Benefits paid                                                                         (214)            (170)
     Amendments                                                                              73              ---
     Experience loss                                                                         60               53
                                                                                         -------          -------
   Projected benefit obligation, end of year                                             $5,842           $5,420
                                                                                         =======          =======
Change in plan assets:
   Fair value of plan assets, beginning of year                                          $5,394           $5,198
     Actual return on plan assets                                                           (97)             366
     Benefits paid                                                                         (214)            (170)
                                                                                         -------          -------
   Fair value of plan assets, end of year                                                $5,083           $5,394
                                                                                         =======          =======
Funded status, end of year                                                               $ (759)          $  (26)
     Unrecognized net transition asset                                                       (4)             (13)
     Unrecognized prior service cost                                                       (704)            (887)
     Unrecognized net cost                                                                2,342            1,836
     Recognition of additional minimum liability                                         (1,419)             ---
                                                                                         -------          -------
Prepaid pension cost (accrued pension liability), end of year                            $ (544)          $  910
                                                                                         =======          =======`

`------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)                                                                     2001            2000             1999
------------------------------------------------------------------------------------------------------------------------------------
Periodic pension cost:
     Weighted average discount rate                                                        7.0%            7.0%             7.0%
     Expected long-term rate of return                                                     9.0%            9.0%             9.0%
     Rate of increase in future compensation levels                                        4.0%            4.0%             4.0%

Components of net periodic benefit cost:
     Service cost benefit earned during year                                            $   130          $   109          $   130
     Interest cost on projected benefit obligation                                          373              349              300
     Expected return on plan assets                                                        (477)            (459)            (438)
Net amortization:
     Net transition asset                                                                    (9)              (8)              (8)
     Prior service cost                                                                    (110)            (110)            (110)
     Net loss                                                                               130              130              119
Glen Rock State Bank pension expense                                                        ---              ---              173
                                                                                       --------         --------         ---------
Pension cost                                                                           $     37          $    11          $   166
                                                                                       ========         ========         =========`

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

`For the Year Ended 2001      For the Year Ended 2000        For the Year Ended 1999
                                            -----------------------      -----------------------        -----------------------
                                                            Per-Share                    Per-Share                      Per-Share
                                           Income   Shares     Amount    Income  Shares     Amount     Income   Shares     Amount
                                           ------   ------     ------    ------  ------     ------     ------   ------     ------
                                                                    (in thousands except  per share data)


Basic EPS:

  Income available to common
     stockholders                         $13,596    8,793      $1.55    $13,915  8,695      $1.60    $13,290    8,799      $1.51
                                           ======                ====     ======               ====    ======                ====
Effect of Dilutive Securities:

  Incentive stock options
     outstanding                                       178                          110                            137
                                                    ------                      -------                        -------

Diluted EPS:

  Income available to common
     stockholders and assumed
     conversion                           $13,596    8,971      $1.52    $13,915  8,805      $1.58    $13,290    8,936      $1.49
                                           ======                ====     ======              ====     ======                ====`

The provision for income taxes consists of the following:

`2001           2000           1999
                                                                             ----------------------------------------
                                                                                        (in thousands)

         Current                                                               $3,785         $5,442         $4,365
         Deferred                                                                (906)          (740)          (108)
                                                                               -------        -------        -------
                                                                               $2,879         $4,702         $4,257
                                                                               =======        =======        =======`

The components of the net deferred tax asset (liability) as of December 31,
2001, 2000, and 1999 were as follows:

`2001          2000            1999
                                                                             -----------------------------------------
                                                                                        (in thousands)

Deferred tax assets:
     Loan loss provision...........................................             $4,088         $3,069          $2,246
     Non-accrual loan interest income..............................                294            310             419
     Unrealized loss on marketable equity securities...............              1,670            373           6,298
     Unfunded pension adjustment...................................                497            ---             ---
     Miscellaneous.................................................                172            147             118
     Deferred compensation.........................................                485            393             198
                                                                               -------        -------         -------
         Total deferred tax assets.................................             $7,206         $4,292          $9,279
                                                                               -------        -------         -------

Deferred tax liabilities:
     Depreciation..................................................             $  591        $   624         $   634
     Accretion of discount.........................................                750            336             226
     Pension expense...............................................                319            319             322
     Miscellaneous.................................................                ---            167              66
                                                                               -------        -------         -------
         Total deferred tax liability..............................              1,660          1,446           1,248
                                                                               -------        -------         -------
         Net deferred asset (liability)............................             $5,546         $2,846          $8,031
                                                                               =======        =======         =======



                                                                                 2001          2000            1999
                                                                            --------------------------------------------------
                                                                                         (in thousands)

Provision on pre-tax income at statutory rate......................             $5,766         $6,501          $6,120
Effect of tax-exempt interest income...............................             (2,379)        (1,643)         (1,696)
Goodwill amortization..............................................                 64             84              94
Nondeductible expense related to acquisition.......................                163            ---             ---
Other, net.........................................................               (371)           (62)           (163)
Officer life insurance, net........................................               (364)          (178)            (98)
                                                                               -------        -------         -------
Total provision for income taxes...................................             $2,879         $4,702          $4,257
                                                                               =======        =======         =======`

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

As of December 31, 2001,  shares  totaling  955,505 were authorized but not
awarded under the Plan. The stock options  generally vest from one to five years
from the date of grant,  and  expire no later  than ten years  after the date of
grant. The changes in outstanding options are as follows:

`Weighted
                                            Average
                                          Shares Under         Exercise Price
                                             Option              Per Share
--------------------------------------------------------------------------------
Balance December 31, 1998                   562,796               $14.48
Issued                                       88,000                22.50
Exercised                                   (37,185)                9.96
Forfeited                                       ---                  ---
--------------------------------------------------------------------------------
Balance December 31, 1999                   613,611               $15.90
Issued                                      121,700                19.23
Exercised                                   (34,753)               10.60
Forfeited                                    (2,627)               23.74
--------------------------------------------------------------------------------
Balance December 31, 2000                   697,931               $16.72
Issued                                      110,000                26.40
Exercised                                   (94,706)               12.73
Forfeited                                      (421)               19.67
--------------------------------------------------------------------------------
Balance December 31, 2001                   712,804               $18.74
--------------------------------------------------------------------------------`

Exercise prices for options
outstanding as of December 31, 2001, ranged from $5.97 to $26.40. The following
table provides certain information with respect to stock options outstanding at
December 31, 2001:

`Weighted           Weighted
                                                                                              Average            Average
                                                                         Shares              Exercise            Remaining
                                                                          Under                Price           Contractual
Range of exercise prices per share                                       Option               Per Share        Life in Years
------------------------------------------------------------------------------------------------------------------------------------
Under $7.92                                                               4,388              $  5.97               ---
$7.93-$10.56                                                             61,301              $  9.38               3.3
$10.57-$13.20                                                            62,824               $11.03               4.8
$13.21-$15.84                                                            65,020               $13.62               3.5
$15.85-$18.48                                                            27,630               $17.06               8.2
$18.49-$21.12                                                           285,772               $19.76               7.9
$21.13-$23.76                                                            95,869               $22.52               5.4
$23.77-$26.40                                                           110,000               $26.40               9.9
------------------------------------------------------------------------------------------------------------------------------------
                                                                        712,804               $18.74               6.8
------------------------------------------------------------------------------------------------------------------------------------`

The following table provides certain information with respect to stock options
exercisable at December 31, 2001:

`Weighted           Weighted
                                                                                              Average            Average
                                                                         Shares              Exercise            Remaining
                                                                          Under                Price           Contractual
Range of exercise prices per share                                       Option               Per Share        Life in Years
------------------------------------------------------------------------------------------------------------------------------------
Under $7.92                                                               4,388               $ 5.97               ---
$7.93-$10.56                                                             61,301               $ 9.38               3.3
$10.57-$13.20                                                            62,824               $11.03               4.8
$13.21-$15.84                                                            65,020               $13.62               3.5
$15.85-$18.48                                                            27,630               $17.06               8.2
$18.49-$21.12                                                           145,921               $19.95               7.6
$21.13-$23.76                                                            90,530               $22.45               6.0
------------------------------------------------------------------------------------------------------------------------------------
                                                                        457,614               $16.59               5.7
------------------------------------------------------------------------------------------------------------------------------------`

In electing to follow APB
25 for expense recognition purposes, the Corporation is obliged to provide the
expanded disclosures required under SFAS 123 for stock-based compensation
granted. The weighted average fair values at date of grant for options granted
during fiscal 2001, 2000, and 1999 were $8.28, $3.63, and $5.45, respectively,
and were estimated using the Black-Scholes option valuation model with the
following weighted average assumptions for 2001, 2000, and 1999, respectively:
dividend yield of 2.6%, 3.3%, and 2.9%; volatility of 26%, 21%, and 23%; risk
free interest rates of 5.5%, 5.6%, and 6.1%; and expected life in years of 8.7,
4.9, and 5.5.

If the Corporation had
adopted the provisions of SFAS 123, the impact on reported net income and
earnings per share would have been as follows:

`2001             2000              1999
                                                                  ----             ----              ----
Net income                                                 $  (361,795)     $  (384,981)      $  (374,923)
Earnings per share:
Basic                                                      $      (.04)     $      (.04)      $      (.04)
Diluted                                                    $      (.04)     $      (.04)      $      (.04)`

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

`2001            2000            1999
                                                                -------------------------------------------
                                                                               (in thousands)

              Balance beginning of period                         $11,035       $  8,888          $6,928
              Additions                                            10,311          2,537           5,555
              Amounts collected                                    (7,204)          (390)         (3,595)
                                                                  --------      ---------         -------
              Balance end of period                               $14,142        $11,035          $8,888
                                                                  ========      =========         =======`

`2001             2000
                                                                  ------------------------------
                                                                           ( in thousands)
Condensed Balance Sheets:
     Cash and investments                                        $    2,369        $     106
     Investment in banking subsidiary                               106,813          101,162
     Investment in nonbank subsidiaries                               3,128            2,223
     Other assets                                                       475              487
                                                                 -----------      -----------
       Total assets                                                $112,785         $103,978
                                                                 ===========      ===========
     Other liabilities                                           $    1,536        $     ---
     Stockholders' equity                                           111,249          103,978
                                                                 -----------      -----------
       Total liabilities and stockholders' equity                  $112,785         $103,978
                                                                 ===========      ===========`

`2001        2000        1999
                                                                             -------------------------------------
                                                                                          (in thousands)
Condensed Statements of Income:
     Dividends from:
           Banking subsidiary                                                  $ 4,396      $ 7,300     $  5,415
           Nonbank subsidiaries                                                    ---          ---        1,854
     Other income (expense)                                                       (686)        (595)        (491)
                                                                               --------     --------    --------
Income before equity in undistributed earnings of subsidiaries                   3,710        6,705        6,778
                                                                               --------     --------    --------
Equity in undistributed earnings of:
     Banking subsidiary                                                          9,205        6,818        8,073
     Nonbank subsidiaries                                                          681          392       (1,561)
                                                                               --------     --------    --------
                                                                                 9,886        7,210        6,512
                                                                               --------     --------    --------
Net income                                                                     $13,596      $13,915      $13,290
                                                                               ========     ========    ========
Condensed Statements of Cash Flows:
   Operating activities:
     Net income                                                                $13,596      $13,915      $13,290
         Adjustments to reconcile net cash provided by
            operating activities:
         Undistributed earnings of:
              Banking Subsidiary                                                (9,205)      (6,818)      (8,073)
              Nonbank subsidiaries                                                (681)        (392)       1,561
         Other, net                                                              1,548           61           84
                                                                               --------     --------    --------
              Net cash provided by operating activities                          5,258        6,766        6,862
Investing activities:
         Additional investment in Peoples State Bank                               ---          ---       (1,000)
                                                                               --------     --------    --------
              Net cash used in investment activities                               ---          ---       (1,000)
                                                                               --------     --------    --------

Financing Activities:
     Proceeds from issuance of common stock                                      3,574          564          266
     Purchases of treasury stock                                                  (689)      (2,674)      (1,885)
     Dividends paid                                                             (5,880)      (4,600)      (4,343)
                                                                               --------     --------    --------
              Net cash used by financing activities                             (2,995)      (6,710)      (5,962)
                                                                               --------     --------    --------
              Net change in cash and cash equivalents                            2,263           56         (100)
     Cash and cash equivalents at beginning of year                                106           50          150
                                                                               --------     --------    --------
     Cash and cash equivalents at end of year                                 $  2,369    $     106    $      50
                                                                               ========     ========    ========`

Community  Banks  is  subject  to legal  limitations  as to the  amount  of
dividends that can be paid to its shareholder (the Corporation). The approval of
certain banking regulatory authorities is required if the total of all dividends
declared by the bank exceeds  limits as defined by the  regulatory  authorities.
Community Banks could declare dividends in 2002 without  regulatory  approval of
$16,023,000  plus an additional  amount equal to the banks' retained net profits
in 2002 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 totaled
$440,000 at December 31, 2001 and 2000.

At  December  31,  2001  and  2000  both  subsidiary  banks  exceeded  well
capitalized  leverage ratio, tier 1 capital ratio, and total risk-based  capital
ratio  standards.  The following  table  illustrates  the capital ratios for the
Corporation on a consolidated basis:

`Well                      Corporation
                                       Regulatory             Capitalized                    December 31,
                                        Minimum                  Ratio                  2001          2000
                                        ------------------------------------------------------------------

Leverage ratio                           4.0%                    5.0%                   7.5%          7.9%
Tier 1 capital ratio                     4.0%                    6.0%                  10.5%         10.7%
Total risk-based capital ratio           8.0%                   10.0%                  11.8%         11.7%`

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, 2001, are
as follows:

`Contract or Notional Amount
                                                                                 ---------------------------
                                                                                      (in thousands)
Financial instruments whose contract amounts represent credit risk:
         Commitments to originate loans                                                 $    132,325
         Unused lines of credit                                                         $     43,297
         Standby letters of credit                                                      $     19,481
         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.

The following is a summary of the quarterly  results of operations  for the
years ended December 31, 2001 and 2000:

`Three Months Ended
                                          ------------------------------------------------------------------------------------------
                                                                 2001                                       2000


                                             Mar. 31     June 30   Sept. 30    Dec. 31    Mar. 31    June 30     Sept. 30    Dec. 31
                                           ----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
                                                                (dollars in thousands except per share data)
Interest income                              $24,376     $24,523   $24,567      $24,609   $21,492    $22,605    $24,004    $24,893
Interest expense                              13,401      13,280    13,148       12,311    10,973     11,757     13,059     13,410
                                           ----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Net interest income                           10,975      11,243    11,419       12,298    10,519     10,848     10,945     11,483
Provision for loan losses                      1,573         871     1,306        1,330       361        525        658      1,319
                                           ----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------

Net interest income after provision for
     loan losses                               9,402      10,372    10,113       10,968    10,158     10,323     10,287     10,164
Other income                                   1,948       2,164     2,325        2,633     1,704      1,895      2,028      1,648
Investment security gains  (losses)             (128)        366     1,018          448       168         50        140        111
Gains on mortgage sales                          163         378       326          500        65         93         92        154
Other expenses                                10,612       8,172     8,287        9,450     7,451      7,596      7,745      7,671
                                           ----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Income before income taxes                       773       5,108     5,495        5,099     4,644      4,765      4,802      4,406
Income taxes                                     (35)      1,077     1,176          661     1,154      1,228      1,215      1,105
                                           ----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Net income                                 $     808    $  4,031   $ 4,319      $ 4,438  $  3,490   $  3,537    $ 3,587   $  3,301
                                           =========== ========== =========== ========== ========== ========== ========== ==========

Basic earnings per share                      $  .10     $   .46   $   .49      $   .50   $   .40    $   .41    $   .41    $   .38
Diluted earnings per share                    $  .10     $   .45   $   .48      $   .49   $   .39    $   .40    $   .41    $   .38
Dividends per share                           $  .16     $   .17   $   .17      $   .17   $   .14    $   .15    $   .15    $   .16



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

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

The  carrying  values for cash and due from  banks,  interest-bearing  time
deposits,  and federal funds sold is deemed to be the same as those assets' fair
values.

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.

For variable-rate  loans that reprice frequently with no significant change
in credit risk, fair value equals carrying value. The fair values for fixed-rate
residential  mortgage  loans,  consumer loans,  commercial,  and commercial real
estate loans are estimated by discounting the future cash flows using comparable
current  rates at which  similar  loans  would be made to  borrowers  at similar
credit risk.  The carrying  value of accrued  interest  adjusted for credit risk
equals its fair value.  The fair value of loans held for sale is based on quoted
market prices for similar  loans sold in  securitization  transactions.  DEPOSIT
LIABILITIES: The fair values of demand and savings deposits equal their carrying
values.  Adjusting  such fair value for any value from  retaining  those deposit
relationships  in the  future is  prohibited.  That  component,  known as a core
deposit intangible,  is not considered in the value disclosed nor is it recorded
in the  balance  sheet.  The  carrying  values for  variable  rate money  market
accounts  approximate  their fair values at the reporting  date. Fair values for
fixed-rate  certificates of deposit are estimated using rates currently  offered
for similar deposits.

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

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

Substantially  all of the  Corporation's  unused  commitments  to originate
loans and unused  lines of credit are at  variable  rates or will be provided at
the  prevailing  fixed rate when the loans are originated or the lines are used.
The fair value of off-balance-sheet items approximate their carrying value.

The  following  table  summarizes  the  carrying  values and fair values of
financial instruments at December 31, 2001 and 2000:

`December 31,
                                                                 -------------------------------------------------------------------
                                                                                2001                          2000
                                                                 -------------------------------------------------------------------
                                                                                    Estimated                     Estimated
                                                                     Carrying          Fair        Carrying          Fair
                                                                      Value           Value          Value          Value
                                                                 -------------------------------------------------------------------
                                                                                             (in thousands)
              Financial assets:
                Cash and due from banks, interest-bearing time
                  deposits, and federal funds sold               $     46,136   $     46,136    $     51,014   $     51,014
                Investment securities                                 543,901        543,901         389,819        389,819
                Total loans                                           857,278        871,674         814,874        795,625
                Less: Allowance for loan losses                       (12,132)           ---         (10,328)           ---
                                                                 -------------  -------------   -------------  -------------
                    Net loans                                         845,146        871,674         804,546        795,625
                Loans held for sale                                    10,479         10,479           2,719          2,719
                                                                 -------------  -------------   -------------  -------------
                   Total                                           $1,445,662     $1,472,190      $1,248,098     $1,239,177
                                                                 =============  =============    ============= =============
              Financial liabilities:
                Deposits                                           $1,003,225     $1,009,947     $   919,241    $   916,647
                Short-term borrowings                                  60,002         60,002          36,093         36,093
                Long-term debt                                        322,155        324,492         239,613        239,523
                                                                 -------------  -------------   -------------  -------------
                   Total                                           $1,385,382     $1,394,441      $1,194,947     $1,192,263
                                                                 =============  =============    ============= =============`

On March 30, 2001 Community Banks, Inc. (Community) completed its merger of
The Glen Rock State Bank (Glen Rock). Glen Rock has five banking offices located
in York County, Pennsylvania.  Community issued 1,205,000 shares of common stock
for all of the  outstanding  common  stock of Glen Rock.  This  transaction  was
accounted  for as a  pooling  of  interests  and  combined  unaudited  financial
information is as follows:

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

`--------------------------------------------------------------------------------------------------------
Year Ended December 31                               2000                             1999
--------------------------------------------------------------------------------------------------------
                                                    (dollars in thousands except per share)
--------------------------------------------------------------------------------------------------------

                                                           Community / Community /
                                              Community     Glen Rock        Community      Glen Rock
                                             As Reported      Combined      As Reported      Combined
--------------------------------------------------------------------------------------------------------
Net interest income                            $37,858        $43,795        $34,051         $40,248
Provision for loan losses and lease losses       2,308          2,863          1,298           1,588
Other income                                     7,363          8,148          5,668           6,388
Other expenses                                  25,774         30,463         22,937          27,501
                                              --------       --------       --------        --------
Income before taxes                             17,139         18,617         15,484          17,547
Taxes                                            4,288          4,702          3,681           4,257
                                              --------       --------       --------        --------
Net income                                     $12,851        $13,915        $11,803         $13,290
                                              ========       ========       ========        ========
Basic earnings per share                     $    1.82      $    1.60      $    1.65       $    1.51
Diluted earnings per share                   $    1.79      $    1.58      $    1.62       $    1.49
                                              ========       ========       ========        ========`

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

In our opinion, based on our audits and the report of other auditors, the accompanying consolidated
balance sheets and the related consolidated statements of income, changes in
stockholders equity, and cash flows present fairly, in all material
respects, the financial position of Community Banks, Inc. (Corporation) and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Corporations management; our responsibility is to express an opinion
on these financial statements based on our audits. The consolidated financial
statements give retroactive effect to the merger of Glen Rock State Bank on
March 30, 2001 in a transaction accounted for as a pooling of interests, as
described in Note 18 to the consolidated financial statements. We did not audit
the financial statements of Glen Rock State Bank, which statements reflect total
assets of $187,000,000 as of December 31, 2000 and net interest income of
$5,937,000 and $6,197,000 for each of the two years in the period ended December
31, 2000. Those statements were audited by other auditors whose report thereon
has been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for the Corporation, is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.

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

                                                2001           2000           1999           1998           1997
                                            ----------------------------------------------------------------------------
                                                             (dollars in thousands except per share data)
BALANCE SHEET DATA:
Investment securities                      $   543,901    $   389,819    $   360,540     $  333,209      $  260,638
Total loans                                    857,278        814,874        708,016        619,750         552,201
Total assets                                 1,509,734      1,308,713      1,151,344      1,023,407         880,220
Total deposits                               1,003,225        919,241        826,167        727,953         675,475
Long-term debt                                 322,155        239,613        213,865        178,872          96,009
Stockholders' equity                           111,249        103,978         86,309         94,293          88,346
Total average assets                         1,398,521      1,238,870      1,093,262        930,191         838,729
Total average stockholders' equity             111,381         92,255         92,274         91,905          82,619

EARNINGS DATA:
Net interest income                             45,935         43,795         40,248         36,039          33,915
Provision for loan losses                        5,080          2,863          1,588          2,054           1,817
Net interest income after provision
     for loan losses                            40,855         40,932         38,660         33,985          32,098
Other income                                    12,141          8,148          6,388          5,574           4,688
Other expense                                   36,521         30,463         27,501         24,446          23,335
Provision for income taxes                       2,879          4,702          4,257          3,882           4,058
Net income                                      13,596         13,915         13,290         11,231           9,393

PER SHARE DATA:
Basic earnings per shar                           1.55           1.60           1.51           1.27            1.06
Diluted earnings per share                        1.52           1.58           1.49           1.25            1.04
Cash dividends                                     .67            .60            .55            .51             .40
Book value                                       12.57          12.01           9.85          10.69            9.99
Average diluted shares outstanding           8,970,950      8,805,318      8,935,628      9,001,251       8,997,809

PROFITABILITY RATIOS:
Return on average assets                           .97%          1.12%          1.22%          1.21%           1.12%
Return on average stockholders' equity           12.21%         15.08%         14.40%         12.22%          11.36%
Net interest margin (FTE)                         3.83%          4.01%          4.20%          4.38%           4.53%
Efficiency ratio                                 55.33%         55.42%         55.54%         55.88%          55.99%

CAPITAL AND LIQUIDITY RATIOS:
Stockholders' equity to total assets              7.37%          7.95%          7.50%          9.21%          10.04%
Net loans to assets                              55.98%         61.48%         60.72%         59.72%          61.76%

ASSET QUALITY RATIOS:
Allowance for loan losses to total loans
     outstanding                                  1.42%          1.27%          1.27%          1.39%           1.55%
Allowance for loan losses to non-performing
     loans                                          95%           155%           143%           134%            104%
Non-performing loans to total loans
     outstanding                                  1.49%           .82%           .89%          1.04%           1.49%
Non-performing assets to total assets              .89%           .54%           .60%           .71%           1.10%`

This review of Community  Banks,  Inc.  (Community)  is being  presented in
order to provide a thorough  analysis of its financial  condition and results of
its operations for the year ended December 31, 2001. On March 30, 2001 Community
consummated  the merger of Glen Rock State Bank (Glen Rock),  which added nearly
$190  million  of assets  and five  offices  to the  Community  franchise.  This
transaction  was  accounted  for  under  the  pooling  of  interests  method  of
accounting and all prior periods have been restated accordingly. Throughout this
presentation, net income and yield on earning assets have been prepared on a tax
equivalent basis, and balances represent average daily balances unless otherwise
indicated.

The  year  2001  was a  critical  transitional  period  in the  growth  and
development of Community Banks,  Inc., as it sought to expand its role as a more
complete provider of financial services.  During the year,  Community took steps
to broaden its name recognition throughout its market and simultaneously improve
the efficacy of its banking operations.  This effort culminated in the merger of
its separate banks into a single bank charter effective January 1, 2002, under a
single name,  Community  Banks.  Community  solidified its presence in the vital
south central  Pennsylvania  market through the merger of Glen Rock and expanded
its product  offerings  through its ownership  interests in two title  insurance
agencies. Community also continued to evolve its existing office network through
strategic de novo expansion into higher growth markets,  and by announcing sales
of offices with less attractive  demographic  trends that will be consummated in
2002.  Shortly  after the end of 2001,  Community  announced  the formation of a
strategic alliance to offer insurance services under a joint marketing agreement
with American Insurance Administrators, Inc. (AIA), a central Pennsylvania-based
insurance agency.  All of these initiatives were planned and executed to enhance
Community's  ability to serve the expanding needs of its marketplace and growing
customer base.

Earnings  per share for 2001 reached  $1.52,  which was nearly equal to the
performance of $1.58 achieved during 2000.  Similarly,  net income reached $13.6
million in 2001 versus  $13.9  million in 2000.  Results in 2001 were  adversely
affected by nonrecurring  special charges associated with merger activity and by
a  higher  provision  for  loan  losses.  The  increase  in  the  provision  was
commensurate  with the level of increase in net  charge-offs and with the growth
in the loan portfolio during the year. Earnings performance during 2001 resulted
in a return on average assets (ROA) of .97% and a return on average equity (ROE)
of 12.21%,  representing  a decline in the ROA and ROE  performance  achieved in
2000 of 1.12% and 15.08%, respectively.

The performance of financial institutions is inexorably linked to a variety
of factors,  including underlying national economic trends and the frequency and
velocity of interest rate fluctuations.  Such trends, and management's proactive
response  thereto,  can strongly  influence the overall  profit  performance  of
companies within the financial services sector. While these trends were affected
by a number of  significant  shifts during the course of 2001,  the year will be
forever  remembered  for the tragic  events of September  11 and their  profound
impact on our national consciousness.  The impact of this tragedy, combined with
our  nation's  collective  resolve and prompt  military  response,  is likely to
influence global dynamics for the foreseeable future.

As  Community  entered  2001,  it had  begun  to  assess  the  benefits  of
establishing  a single bank  charter  while moving  forward with its  previously
announced merger with Glen Rock. At the same time,  national economic  observers
were beginning to recognize the growing  potential for a  recessionary  downturn
due,  in  part,  to the  weakening  of the  technology,  telecommunications  and
internet  sectors  and  the  resulting  decline  in  stock  market  valuations.

Throughout the year, the Federal Reserve Board and its Chairman, Alan Greenspan, initiated a series of
unprecedented cuts in the benchmark fed funds rate that was expected to ensure
the availability of credit and to forestall or mitigate the impact of an
economic slump. Despite these efforts, the economy continued to soften,
resulting in profit warning announcements by a number of large public companies.
It was under these circumstances that the nation was awakened to the massive
destruction and loss of life brought on by the events of September 11, 2001. The
anticipated economic downturn was suddenly accelerated as a consequence of the
attack, producing immediate curtailments in the airline and tourism industries.
The reverberations from the economic aftershocks produced a dampening effect on
other segments of the economy, and required emergency political initiatives to
bolster homeland security and to rescue the suddenly beleaguered airline
industry. At the same time, Congress continued its debate over the benefits of
the tax cut bill, which had been expected to provide much-needed economic
stimulus as part of President George W. Bushs election year fiscal plan.
Near the end of 2001, the economy was further damaged by the revelations
associated with the failure of Enron, the nations largest energy company
prior to the time of its collapse. The expected fallout from this event, which
raised anxiety levels over the integrity of the capital markets, employee
retirement plans, and regulatory oversight, is likely to carry over into 2002
and beyond.

The  aftermath of the events of 2001 will likely  influence  the  financial
services industry well into 2002. While these events are expected to impact most
sectors of the economy to varying  degrees,  the  comparatively  stable  markets
served by Community's geographic footprint are not expected to bear the brunt of
a normal cyclical downturn.  An extended period of economic  slowdown,  however,
will require vigilant monitoring of risk management trends,  including the vital
credit  quality  function.  Community  has yet to uncover any  systemic  adverse
developments  in its credit  quality  metrics,  but will  continue to assess the
impact of a slowing  economy  on overall  asset  quality.  Alternatively,  there
remains  considerable  cause for optimism  about the future,  stemming  from the
underlying  resilience of the U.S. economy,  the initial success of our nation's
military  initiatives,  and the resurgence of the country's  patriotic sentiment
and sense of  resolve.  Community  will  monitor  the  impact of these and other
important  trends  as it  oversees  the  evolution  of  its  financial  services
franchise. That evolution will continue to be driven by initiatives that seek to
enhance the level of personal  service to customers and to expand both the depth
and breadth of product  offerings  delivered  through  its various  distribution
channels.

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

The following  table compares net interest  income and net interest  margin
components between 2001 and 2000 (in thousands):

`2001                            2000                          Change
                                              Yield/                          Yield/                          Yield/
                              Amount            Rate           Amount           Rate          Amount            Rate


Interest income                $102,351          7.81%          $95,866          8.24%         $6,485         (0.43)%
Interest expense                 52,140          4.63%           49,199          4.66%          2,941         (0.03)%
                              ----------     ----------       ----------     ----------     ----------      ----------
Net interest income             $50,211                         $46,667                        $3,544
                              ----------                      ----------                    ----------

Interest spread                                  3.18%                           3.58%                        (0.40)%
Impact of
     non-interest
     funds                                       0.65%                           0.43%                         0.22 %
                                             ----------                      ----------                     ----------

Net interest margin                              3.83%                           4.01%                        (0.18)%
                                             ----------                      ----------                     ----------`

Interest  rate trends  during 2001  reflected a decline  from 2000 and were
influenced by the pattern of continuous  easing of the federal funds rate by the
Federal  Reserve Board.  These  reductions,  and the parallel  declines in other
benchmark  rate  indices,  fueled a reduction in the overall  level of rates not
experienced for decades.  These rate reductions occurred throughout the year and
had the most profound impact on earning asset yields, accompanied by only modest
reductions in funding costs. Deposit pricing was less responsive to overall rate
declines  because  rates  paid on certain  repriceable  deposit  categories  had
reached levels where further downward rate adjustments had become  competitively
less practical.  Given  Community's asset sensitive  interest rate posture,  the
earning asset base was repricing at a velocity  ahead of the pace of adjustments
to term deposit  funding  costs,  resulting in the  compression  of net interest
margin throughout much of the year.  Despite the compressing  effect of interest
rates on net interest margin during 2001, Community realized an overall increase
in net interest income due to growth in both earning assets and funding sources,
including an expansion of its deposit base.

The following is a comparison of the average yield curve for U.S.  Treasury
instruments for specific  intervals between three months and thirty years, which
serves as an illustration of the relative  comparability of interest rate trends
between 2000 and 2001.

While interest rate trends depressed the overall yield on both loans
and earning assets, the rate environment also facilitated increased borrower
demand for more affordably priced loan products and growth in the balances of
loans and earning assets. Assets grew to nearly $1.4 billion, an increase of
almost 13% from the $1.2 billion of assets recorded in 2000. Earning assets,
which comprise nearly 94% of total assets, also grew nearly 13% to $1.3 billion.
This growth fueled increases in interest income sufficient to overcome the
impact of lower rates on asset yields, resulting in an increase in interest
income of nearly 7%.

Asset yields declined 43 basis points from 8.24% in 2000 to 7.81% in
2001. These yields were consistent with the steady decline in the interest rate
indices used to price individual loan products. Loan yields dropped from 8.73%
in 2000 to 8.39% in 2001 and significantly influenced the overall decline in
earning asset yields and the decline in interest income. More importantly,
however, the overall loan portfolio grew 9.1% from $768 million to $ 838
million, an increase of nearly $70 million. Community also recorded an increase
in the volume of tax-exempt securities, which grew an additional $62 million.
These two categories fueled the increase of $147 million in earning assets. Such
growth was sufficient to overcome the negative impact of lower interest rates on
earning asset yields and provided a $6.5 million improvement in interest income
performance.

While interest rates negatively affected earning assets yields,
Community experienced mostly modest reductions in the cost of funds, which
declined only 3 basis points from 4.66% to 4.63% in 2001. Given the decline in
rates throughout the year, conventional wisdom would suggest that declines in
earning asset yields would be counterbalanced by declines in deposit and other
funding costs. In 2001, however, funding costs, along with changes in the
composition of deposits and other funding sources, were influenced by additional
dynamics, explained as follows:

- During the year, Community standardized a segment of its interest-bearing demand
deposits and discontinued interest payments on these categories after rate
declines forced rate offerings to negligible levels. Affected customer accounts
were shifted into the non-interest bearing demand category, consistent with the
structural and contractual changes made to these deposit arrangements. As a
result, Community experienced an increase in the contribution of non-interest
funding sources from 43 basis points to 65 basis points during the year.
- The shift of low-cost deposit accounts from interest bearing categories into
non-interest bearing accounts increased the aggregate cost of funds for the
remaining interest bearing categories. Many of the adjustable deposit
categories, including savings and money market accounts, experienced rate
adjustments commensurate with declines in interest rate indices during the year.
Unfortunately, these reductions were not sufficient to offset impact from the
reclassification of lower cost deposit accounts out of the interest-bearing
categories.
- Appropriate adjustments were made throughout the year to lower the funding costs
for deposit categories eligible for discretionary repricing. Regrettably, the
historically low interest rate levels present during much of the year
constrained continuing reductions. In effect, this trend created floors on
certain deposit categories that ordinarily would be considered repriceable in a
more conventional rate environment.
- Finally, while rates offered on term deposit categories were adjusted during the
year, these repricing opportunities were outpaced by the velocity and volume of
changes to earning asset pricing. This trend occurred as a result of
Communitys asset-sensitive balance sheet position for the first three
quarters of 2001.

Community navigated through these pricing pressures and was able to
reflect an increase of nearly 10% in its deposit base despite a lower rate
environment. The deposit base, which reached nearly $1 billion, also was
favorably influenced by consumer tendencies to increase the level of bank
deposits during periods of stock market volatility such as that experienced
during 2001. Additionally, consumer preferences for preservation of both
liquidity and investment principal during periods of economic and political
uncertainty also played a role in deposit growth trends.

In order to augment deposit-based funding sources and, at the same
time, accommodate customer needs, Community made strategic use of both
short-term borrowings and FHLB advances. These advances, which are
collateralized by mortgage receivables, are an important source of liquidity for
the Corporation.

A financial institution's ability to effectively blend the impact of
changing rates, shifting rate indices, customer preferences, and product
development initiatives can be measured by the performance of interest spread,
which is defined as the difference between earning asset yield and the cost of
funding sources. Net interest margin combines the impact of interest spread with
both investment of non-interest bearing funding sources and management of
non-earning assets. As a result of rate trends and other dynamics specific to
Community's balance sheet, the Corporation reported a decline in both interest
spread and net interest margin. Interest spread declined from 3.58% in 2000 to
3.18% in 2001. Net interest margin, however, reflected less of a decline from
4.01% to 3.83%. Fortunately, the decrease in net pricing did not result in
reduced net interest income due to the substantial growth in the earning asset
base.

The following table provides a comparison of earning asset yields,
funding costs, and other information for each of the four quarters of 2001 and
2000.

`2001
                                             Fourth            Third            Second           First
                                             Quarter          Quarter           Quarter         Quarter

Asset yield                                         7.37%             7.68%            7.96%           8.31%
Funding cost                                        4.07%             4.56%            4.84%           5.14%
                                        ---------------------------------------------------------------------
         Interest spread                            3.30%             3.12%            3.12%           3.17%
                                        ---------------------------------------------------------------------
         Net interest margin                        3.87%             3.75%            3.82%           3.90%
                                        ---------------------------------------------------------------------
Net interest income                               $13,569           $12,522          $12,244         $11,876
                                        ---------------------------------------------------------------------





                                                                       2000
                                             Fourth            Third            Second           First
                                             Quarter          Quarter           Quarter         Quarter

Asset yield                                         8.45%             8.34%            8.18%           8.10%
Funding cost                                        5.04%             4.75%            4.50%           4.36%
                                        ---------------------------------------------------------------------
         Interest spread                            3.41%             3.59%            3.68%           3.74%
                                        ---------------------------------------------------------------------
         Net interest margin                        3.75%             3.93%            4.05%           4.09%
                                        ---------------------------------------------------------------------
Net interest income                               $12,316           $11,642          $11,520         $11,189
                                        ---------------------------------------------------------------------`

In each of the first three quarters of 2001 the decline in interest
rates significantly influenced the overall direction of asset yields, consistent
with Community's asset sensitive position. The ability to adjust deposit rates,
most particularly term deposits, was constrained during much of the year. This
trend began to reverse in the fourth quarter as adjustable term deposits reached
scheduled maturities. As a consequence, interest spread and net interest margin
stabilized and improved slightly in the fourth quarter, reversing a trend of
declining quarterly spread and margin performance.

The provision for credit losses grew to almost $5.1million in 2001
versus $2.9 million in 2000. Similarly, the ratio of the reserve for loan losses
to loans also increased from 1.27% at the end of 2000 to 1.42% at the end of
2001. During 2001, Community reflected an increase in both the level of net
charge-offs and the absolute level of outstanding loans that influenced the
provision recorded during the year. In the coming year, Community intends to
remain attuned to the influence of unfolding economic conditions and their
potential impact on credit conditions and the adequacy of the reserve for loan
losses. At the end of 2001, the Corporation did experience an increase in the
level of non-performing loans, which grew to 1.49% of outstanding loans, a
measurable increase from the end of the prior year. See the reserve for loan
losses and asset quality sections of this review for additional information.

A critical driver of Community's 2001 performance related to strategic
initiatives undertaken to meet customer needs and provide access to expanded
financial services through the Corporation's growing distribution network.
Pursuant to these initiatives, Community expanded its menu of financial services
beyond that traditionally associated with an institution of its size and scope.
Excluding the impact of gains from security transactions, total non-interest
income grew 36%, from $7.7 million in 2000 to $10.4 million in 2001, and
substantially influenced the growth in total revenues experienced during 2001.
These amounts represented 17% and 14%, respectfully, of all net revenues derived
from these sources and from intermediation activities.

The largest single component of non-interest income is service charges
on deposits, which reached $3.4 million in 2001, a 25% increase from the $2.7
million recorded in the prior year. Growth in the absolute level of demand
deposits, the largest source of fees from deposit products, helped to propel the
increase. The growth was also attributed to the introduction of a new checking
product in many of Community's markets and the impact of such deposits on
improvement in revenues from overdrafts and other fee-related services.

Community experienced 19% growth in the other service charge category,
from $1.6 million in 2000 to $2.0 million in 2001. Much of the success in this
category relates to the rollout of the debit card feature to portions of the
customer base that historically had no access to these services. This change has
been particularly important to those customers from markets served by
predecessor institutions that have now been more fully integrated into the
Community franchise during 2001. The favorable impact of the ongoing rollout and
expanded customer usage of these services is expected to favorably influence
growth in debit card activity fees into 2002. Community also continues to record
increased usage and fees from its ATM network and from its ongoing relationship
with a major convenience store chain that provides customer access to ATM
machines within its stores.

Community has historically recognized revenues from credit- related
insurance premiums in connection with the activity of its wholly-owned captive
insurance company, Community Banks Life Insurance Company. Under its reinsurance
arrangement, the Corporation provides its lending customers with the ability to
obtain life and health insurance coverage that insures the payment of credit
facilities in the event of the death or disability of borrowers. This
arrangement provides a valued service to these borrowers and, at the same time,
presents the Corporation with a complimentary source of non-interest revenue. In
addition to credit reinsurance activities, Community also has expanded its
revenue stream to include commissions from title insurance activities. During
2001, the Corporation acquired ownership interest in two title insurance
companies that operate within Community's geographic footprint. These important
acquisitions provide a tangible sign of Community's strategic commitment to
expand its product base and to anticipate the financial needs of its growing
customer base. The acquisitions occurred in the first and third quarters of
2001, so that the first full year of operations for this line of business will
occur in 2002.

Investment management and trust services continue to be a vital
component of Community's full service approach to the delivery of financial
products. In addition to more traditional trust services, the Corporation
provides access to annuities, equities, mutual funds and other retail investment
products through its strategic partnership arrangement. Aggregate fees from such
services grew nearly 20% to $.6 million. The relative success of this
partnership arrangement has reinforced Community's predisposition to seek other
arrangements that allow for streamlined access to services not previously
available through its own distribution network. In the first quarter of 2002,
Community announced a joint marketing arrangement to offer a complete array of
personal and commercial property and casualty, as well as individual and group
life and health insurance products. These activities are expected to fulfill a
vital customer need and, at the same time, leverage the expertise of strategic
partners that will avoid the costly delays sometimes associated with entering
new lines of business.

The Corporation derives revenue from the origination and sale of
mortgage loans into the secondary market. During 2001, gains from loan sales
aggregated nearly $1.4 million representing an increase of over 300% from 2000.
The low rate environment in 2001, and its impact on consumer preferences for
fixed rate mortgages, significantly enhanced Community's performance. The
ability to sell such mortgages in the secondary market provides a valuable tool
in the management of interest rate risk.

During the year, security gains aggregating over $1.7 million were
realized compared with $.5 million in the prior year. Such gains were realized
pursuant to management's ongoing effort to review investment holdings and
portfolio strategy during periods of changing economic conditions.

Excluding the impact of merger-related expenses incurred in connection
with the merger of Glen Rock, total non-interest expenses grew over 13% or just
over $4 million year over year. The following table summarizes the changes in
expenses from 2000 to 2001 (in thousands):

`Change
                                                        2001        2000        Amount         %

Salary and employee benefits                          $18,528     $16,466       $2,062         13%
Net occupancy expense                                   5,267       4,504          763         17%
Insurance subsidiary activities                           740         586          154         26%
Merger and restructuring related charges                1,968     -              1,968         N/A
Other operating expenses                               10,018       8,907        1,111         12%

                                                 --------------------------------------------------
            Total                                     $36,521     $30,463       $6,058         20%
                                                 ==================================================`

Salary and benefit expenses, which grew from $16.5 million in 2000 to
$18.5 million in 2001, accounted for almost one half of the total increase in
recurring non-interest expenses. The increase was affected by a number of
factors including the annual merit increase, employees added through the
expansion of Community's distribution network in both 2000 and 2001, and by
expenses related to employees added in fee-based activities such as title
insurance and investment management services.

Occupancy expenses grew by 17% during 2001 and were influenced by the
full year impact of office openings in 2000 and by those offices that opened in
2001. The increase also included the partial year impact of the establishment of
executive offices in Harrisburg, Pennsylvania.

Other expenses grew from $8.9 million in 2000 to $10.0 million in 2001,
an increase of 12%. Again, the expenses associated with both the expansion of
Community's distribution network as well as those linked with the convergence of
bank charters and operating processes influenced this growth. These increases
occurred in telecommunications, travel, office supplies and automated teller
processing fees. A substantial portion of the increases was commensurate with
the growth in related fee income sources.

Merger expenses related to the Glen Rock transaction approximated $2.0
million and included items such as severance for separated employees, investment
banking, legal and accounting expenses incurred in connection with finalizing
the merger in the first quarter of 2001.

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

BALANCE SHEET OVERVIEW

At the end of 2001, total assets reached $1.5 billion compared to $1.3
billion at the end of the prior year.

Growth was fueled by aggregate funding
increases generated through both deposits and utilization of other funding
sources such as FHLB advances. Community recorded increases in loan balances,
which reached $857 million at the end of 2001, compared to $815 million at the
end of the prior year. The pace of growth in loans was limited slightly by the
aftermath of geopolitical and economic events in the third and fourth quarter of
2001, which served to constrain the comparatively robust growth that had existed
throughout 2000 and much of 2001.

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

During 2001, Community recorded increases in its holdings of
obligations of state and political subdivisions, corporate securities and equity
securities. These strategies are reflective of the Corporation's investment
objectives and, at the same time, are considerate of its capacity to maximize
the return through utilization of investments with tax-advantaged features.

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

At December 31, 2001, and 2000, management classifies investment
securities with amortized cost and fair values of $549 million and $544 million,
and $391 million and $390 million, respectively, as available for sale. Gross
unrealized gains and loses relating to investment securities were $5.3 million
and $10.0 million, and $5.2 million and $6.2 million, respectively, at year-end
2000 and 2001.

At the end of 2001, the net unrealized loss on investments available
for sale was $3.1 million on a net of tax basis, compared to $.7 million at the
end of 2000. Such unrealized losses were reflected in shareholders' equity at
the end of both periods.

On an annualized basis, loan growth trends reflected the continuing
success of Community's approach to providing credit services within its local
markets. Loan balances grew at a healthy 9% and averaged $838 million during
2001. The following summarizes the changes that occurred within the major
categories of loans from 2000 to 2001 (in thousands).

`Change
                                      2001            2000            Amount          %
                                      ----            ----            ------          -

Commercial                         $146,831         $125,196         $21,635       17.3%
Commercial real estate              257,248          229,048          28,200       12.3%
Consumer real estate                306,795          291,314          15,481        5.3%
Personal                            113,860          113,320             540        0.5%
Other                                13,444            9,326           4,118       44.2%

                           --------------------------------------------------------------
      Total                        $838,178         $768,204         $69,974        9.1%
                           ==============================================================`

Changes in loan balances during the year were responsive to Community's
strategic focus on commercial relationships, which experienced growth of over
17% to $147 million during 2001. Likewise, growth in commercial real estate
lending grew 12 % to $257 million, and reflected a strong emphasis on commercial
credits secured by real estate collateral. On the residential consumer real
estate front, most new mortgage originations were sold into the secondary market
and gains related thereto are recognized as a separate component of other
income. This category also includes home equity loans. Aggregate growth in
residential real estate is constrained by sales of new originations but has been
bolstered by favorable growth in home equity loans, generating 5% increase in
balances. Personal loans, which include both direct and indirect automobile
loans, were stable from 2000 to 2001 and were hampered by the amount of
below-market financing offered by automakers, particularly in the last quarter
of 2001.

The following sets forth activity within the allowance for credit
losses beginning January 1, 1999 (in thousands).

`2001        2000        1999
                                                       ----        ----        ----

Balance at January 1,                                $10,328      $8,976      $8,608

       Loans charged off                              (3,776)     (1,925)     (1,663)
       Recoveries                                        500         414         443
       Provision charged to operations                 5,080       2,863       1,588

                                                -------------------------------------
Balance at December 31                               $12,132     $10,328      $8,976
                                                =====================================`

The level of charge-offs increased from prior period trends and related
directly to the charge-offs of a limited number of isolated commercial credits.
These credits had originated from unrelated sectors of the

economy and raised no concerns over the existence of a systemic pattern of credit quality
deterioration. In a broader sense, however, management will continue to monitor
for credit weakening that would be associated with a protracted or more severe
economic downturn.

The following sets forth information regarding various segments of the
loan portfolio, collectively referred to as risk elements. These segments
include both nonperforming assets and those loans past due for 90 days or more.
Nonperfoming assets include nonaccrual loans, restructurings, and other real
estate. Nonaccrual loans are loans for which interest income is not accrued due
to concerns about the collection of interest and/or principal. Restructured
loans may involve renegotiated interest rates, repayments terms, or both,
because of deterioration in the financial condition of the borrower. The
following table provides a comparative summary of nonperforming assets and total
risk elements at the end of each of the last two years (in thousands).

`2001                  2000
                                                                     ----                  ----

Nonaccrual loans                                                   $11,090                $5,843
Restructurings                                                           -                   205
                                                    ---------------------------------------------
         Nonperforming loans                                        11,090                 6,048
Other real estate                                                      631                   416
                                                    ---------------------------------------------
         Nonperfoming assets                                        11,721                 6,464
Loans past due 90 days or more                                       1,659                   612

                                                    ---------------------------------------------
         Total risk elements                                       $13,380                $7,076
                                                    =============================================`

While the trend reflecting aggregate increases has been closely
monitored, management has identified no underlying trend as to changes in the
risk profile of Community.

Over time, the relationship of nonperfoming assets and total risk
elements can be expected to maintain a relationship to the level of the
allowance for loan losses, as actual credit losses arising from these troubled
loan categories would be expected to be absorbed by the allowance. The following
provides a comparative analysis of these relationships.

`2001                  2000
                                                                    ----                  ----
Ending allowance to
         nonperforming assets                                       104%                  160%

Ending allowance to
         total risk elements                                         91%                  146%`

In determining the adequacy of the allowance for loan losses,
management establishes specific reserves for certain problem commercial loans
based on the present value of expected future cash flows or the fair value of
the underlying collateral for impaired loans, and for pools of other commercial
loans based upon historical losses adjusted for qualitative factors. All other
loans are grouped by risk category and are reserved based upon historical loss
experience adjusted for portfolio activity and current conditions. While
allocations are made to specific loans and pools of loans, the allowance is
available for all loan losses.

Community has assessed all of the above factors in the establishment of
the allowance for loan losses. The determination as to the adequacy of the
allowance reflects management's judgment, and was based upon collateral, local
market conditions, various estimates, and other information that requires
subjective analysis. These factors, which are prone to change, are monitored by
management to evaluate their potential impact on management's assessment of the
adequacy of the allowance. Based on its evaluation of loan quality, management
believes that the allowance for loan losses at December 31, 2001 was adequate to
absorb probable losses within the loan portfolio.

Deposit balances remain the primary source of funding for financial
institutions and Community recognized notable growth of nearly 10% in this
important core-funding source, summarized as follows:

`Change
                                                     2001             2000              Amount              %
                                                     ----             ----              ------              -

Demand                                           $150,218          $83,064             $67,154          80.8%
Savings                                           292,187          319,045             (26,858)         (8.4)%
Time                                              457,196          416,903              40,293           9.7%
Time  $100,000 or more                             77,321           69,687               7,634          11.0%
                                        ----------------------------------------------------------------------
                                                 $976,922         $888,699             $88,223           9.9%
                                        ======================================================================`

Deposit balances were influenced by a number of dynamics including the
shift of funds into the non-interest category, the impact of stock market
volatility on savings patterns, and consumer preferences for the liquidity and
stability of bank deposits during periods of uncertainty. Over the last several
years, bank deposits have made up a smaller segment of the average consumer's
total asset mix. This trend had been influenced by the accessibility and lure of
the equity markets and an increasing preference to pursue wealth accumulation
through tax-advantaged retirement plans such as 401(k) plans. While these trends
will continue to affect deposit trends, Community has been proactive in
accommodating customer needs by providing access to many types of investment
products while continuing to provide competitively priced deposit vehicles.
Further, Community intends to continue to provide competitive deposit products
designed to meet the needs of customers interested in the stability and
liquidity of bank deposits.

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

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

The primary source of capital for Community is through earnings
retention. The Corporation's capital management and planning process is reviewed
by its Board of Directors and seeks to provide its shareholders with a
sustainable level of dividends that is considerate of a variety of factors,
including the prospects for sustainable core profit performance.

Management of overall capital levels requires the use various
techniques designed to meet or exceed regulatory guidelines, to ensure suitable
levels of capital for a given asset base, and to provide an appropriate rate of
return to shareholders. Community uses a number of these techniques, including
share repurchase, issuance of cash dividends and regular stock dividends, to
manage the level of capital to optimum levels.

Regulators have established standards for the monitoring and
maintenance of appropriate levels of capital for financial institutions. All
regulatory capital guidelines are now based upon a risk-based supervisory
approach that has been designed to ensure effective management of capital levels
and associated business risk.

The following table provides Community's risk-based capital position at
the end of 2001 along with a comparison to the various regulatory capital
requirements.

`December 31,         "Well          Regulatory
                                          2001          Capitalized"       Minimums

Leverage ratio                            7.5%               5%               4%
Tier 1 capital ratio                     10.5%               6%               4%
Total risk-based capital ratio           11.8%              10%               8%`

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

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

liquidity management policy and practices.

Community and its affiliates are subject to periodic examinations by
the various regulatory agencies. These examinations include, but are not limited
to, procedures designed to review lending practices, credit quality, liquidity,
compliance and capital adequacy. No comments were received from these various
bodies that would have a material adverse effect on Community's liquidity,
capital resources, or operations.

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

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

Community reported its highest ever performance in 2000 as net income
rose to $13.9 million versus $13.3 million in 1999. Performance in 2000 resulted
in fully diluted earnings per share of $1.58, a 6% increase over the $1.49
recorded in 1999. Results reflected an ROA and ROE for the period of 1.12% and
15.08%, respectively, and compared favorably to the ROA of 1.22% and ROE of
14.40% achieved in 1999. Performance highlights reflected improvements in net
interest income, a modest increase in the provision for loan losses, continued
growth in non-interest sources of revenue and increases in expense levels
commensurate with improvements in revenue sources.

Interest income from earning assets grew from $81.7 million in 1999 to
$95.9 million in 2000, an increase of 17%. This increase was fueled by a 13%
increase in the level of earning assets, including a 15% improvement in the
level of loans outstanding. While the majority of the growth in interest income
resulted from the expansion of loans and earning assets, community also
benefited from the impact of higher interest rates and their impact on loan
yields. Loan yields rose from 8.43% in 1999 to 8.73% in 2000. This 30 basis
point improvement in loan yields was the primary driver of the increase in
earning asset yields from 7.93% in 1999 to 8.24% in 2001.

The overall rise in interest rates from 1999 to 2000 also affected the
cost of interest bearing funding sources. The higher rates offered on deposits
resulted in growth in the more rate-sensitive retail offerings, primarily time
deposits that grew 18% year over year. Not surprisingly, the average rate paid
on time deposits grew 59 basis points from 5.11% to 5.70%. Community also
increased its use of FHLB advances that grew from $190 million in 1999 to $233
million in 2000. The higher volume of deposits and other funding sources,
combined with the impact of higher interest rates on pricing, resulted in a 28%
increase in funding costs from $38.4 million to $49.2 million.

While the higher interest rate environment had the net effect of
compressing net interest margin from 4.20% in 1999 to 4.01% in 2000, Community
was able to manage its impact on net interest income performance, which grew 8%
from $43.3 million to $46.7 million. Much of this improvement was attributed to
the growth in loans, earning assets, and overall funding levels.

Management continues to emphasize opportunities that are complimentary
to services traditionally offered by financial institutions. At the same time,
Community has remained focused on its traditional sources of revenue. For
example, significant increases were achieved in 2000 in Community's fee income
from service charges on deposits and from premiums from credit insurance
activities that grew 20% and 65%, respectively. Many of the increases in the
overall level of service charges were reflective of higher volumes of loans and
deposits that, in turn, provided growth in associated fee opportunities.

Non-interest expenses grew nearly 11% from $27.5 million in 1999 to
$30.5 million in 2000. Such increases reflected a rate of growth that was highly
correlated with the pace of franchise expansion and an improved technology
infrastructure. Franchise expansion included the opening of three new offices in
2000 and the necessary hiring of staff additions. Technology improvements
included Community's improved telephone banking services and the impact of the
costs of such improvements on telecommunications expenses. All of theses
enhancements were driven by Community's ongoing objective to improve its
delivery system for both new and existing customers.

The Corporation's effective tax rate was relatively stable between the
two years, reaching 25% in 2000 compared to 24% in 1999 and was responsive to
the levels of both taxable income and the relative mix of tax-advantaged
investments.

The shares of Community Banks, Inc. (CTY) are traded on the American Stock Exchange and are transferred
through local and regional brokerage houses. The Corporation has approximately
3,370 shareholders as of December 31, 2001. 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
2001                           Low          High           2000                                Low         High
-------------------------------------------------------------------------------------------------------------------------------------

First Quarter.................$20.37      $21.88           First Quarter......................$16.21     $20.86
Second Quarter................ 21.10       29.85           Second Quarter..................... 15.06      20.71
Third Quarter................. 21.60       29.80           Third Quarter...................... 19.52      21.54
Fourth Quarter................ 24.30       27.25           Fourth Quarter..................... 18.21      22.14`

Holders of the common stock
of the Corporation are entitled to such dividends as may be declared from time
to time by the Board of Directors out of funds legally available therefore.
Community Banks, Inc. has paid cash dividends per share of common stock during
the last five years as follows: 1997 - $0.40 , 1998 - $0.51, 1999 - $0.55, 2000
- $0.60, and 2001 - $0.67. The market prices listed above are based on
historical market quotations and have been restated to reflect stock dividends
and splits.

`2001                                 2000    1999

                                                        Average                            Average                           Average
                                             Interest    Rates                   Interest   Rates                  Interest   Rates
                                  Average     Income/   Earned/      Average     Income/   Earned/    Average       Income   Earned/
                                 Balance(c)  Expense(a)  Paid (a)   Balance(c)  Expense(a) Paid (a)  Balance(c)   Expense(a) Paid(a)
Assets:

   Cash and due from banks      $   36,129                         $   31,909                       $   28,703
                                ----------                         ----------                       ----------
   Earning assets:
      Interest-bearing deposits
       in other banks                2,126  $    103     4.84%          1,204   $     71    5.90%        2,282    $    92      4.03%
                                ----------                         ----------                       ----------
      Investment securities:
         Taxable                   300,040    20,075     6.69         293,899     20,570    7.00       260,448     17,064      6.55
         Tax-exempt (b)            152,960    11,034     7.21          91,447      7,403    8.10        95,453      7,851      8.22
                                ----------                         ----------                       ----------
      Total investment
       securities                  453,000                            385,346                          355,901
                                ----------                         ----------                       ----------
      Federal funds sold            16,221       800     4.93           7,807        750    9.61         6,969        579      8.31
                                ----------                         ----------                       ----------
    Total loans (b)                838,178    70,339     8.39         768,204     67,072    8.73       665,422     56,126      8.43
                                ----------  ---------    ----      ----------   --------    ----    ----------    -------     -----
       Total earning assets      1,309,525  $102,351     7.81       1,162,561    $95,866    8.24     1,030,574    $81,712      7.93
                                ----------  ---------    ----      ----------   --------    ----    ----------    -------     -----
      Allowance for loan losses    (11,745)                            (9,496)                          (8,866)
      Premises, equipment, and
         other assets               64,612                             53,896                           42,851
                                ----------                         ----------                       ----------
         Total assets           $1,398,521                         $1,238,870                       $1,093,262
                                ==========                         ==========                       ==========
Liabilities:
   Demand deposits             $   150,218                       $     83,064                       $   63,205
                                ----------                         ----------                       ----------
   Interest-bearing liabilities:
      Savings deposits             292,187     6,820     2.33         319,045      6,954    2.18       318,892      6,823      2.14
                                ----------                         ----------                       ----------
      Time deposits:
         $100,000 or greater        77,321                             69,687                           45,598
         Other                     457,196                            416,903                          366,433
                                ----------                         ----------                       ----------
      Total time deposits          534,517    28,731     5.38         486,590     27,725    5.70       412,031     21,061      5.11
                                ----------                         ----------                       ----------
      Total time and savings
         deposits                  826,704                            805,635                          730,923
      Short-term borrowings         12,344       240     1.94          15,698        564    3.59         8,472        386      4.56
      Long-term debt               286,569    16,349     5.71         233,354     13,956    5.98       189,588     10,164      5.36
                                ----------  ---------    ----      ----------   --------    ----    ----------    -------     -----
        Total interest-bearing
            liabilities          1,125,617 $  52,140     4.63       1,054,687    $49,199    4.66       928,983    $38,434      4.14
                                ----------  ---------    ----      ----------   --------    ----    ----------    -------     -----
   Accrued interest, taxes and
      other liabilities             11,305                              8,864                            8,799
                                ----------                         ----------                       ----------
        Total liabilities        1,287,140                          1,146,615                        1,000,987
   Stockholders' equity            111,381                             92,255                           92,275
                                ----------                         ----------                       ----------
        Total liabilities and
           stockholders' equity $1,398,521                         $1,238,870                       $1,093,262
                                ==========                         ==========                       ==========
Interest income to earning
   assets                                                7.81%                              8.24%                              7.93%
Interest expense to earning
   assets                                                3.98                               4.23                               3.73
                                                         ----                               ----                              -----

      Effective interest
         differential                       $ 50,211     3.83%                   $46,667    4.01%                 $43,278      4.20%



(a)   Amortization of net deferred fees included in interest income and rate
      calculations.
(b)   Interest income on all tax-exempt securities and loans have been adjusted
      to tax equivalent basis utilizing a Federal tax rate of 35% in 2001, 2000,
      and 1999.
(c)   Averages are a combination of monthly and daily averages.`

`2001 vs 2000                      2000 vs 1999
                                                 ------------------------------------------------------------------------
                                                    Volume      Rate      Total          Volume      Rate     Total
                                                  -----------------------------------------------------------------------

Increase (decrease) in interest income:
    Loans                                         $  5,948    $(2,681)    $3,267       $  8,896     $2,050    $10,946
  Investment securities:
       Taxable                                         425       (920)      (495)         2,284      1,222      3,506
Tax-exempt                                           4,521       (890)    (3,631)          (332)      (116)      (448)
                                                  --------   --------   --------       --------   --------   --------
          Total                                      4,946     (1,810)     3,136          1,952      1,106      3,058
    Federal funds sold                                 538       (488)        50             74         97        171
    Interest-bearing deposits in other
      banks                                             47        (15)        32            (54)        33        (21)
                                                  --------   --------   --------       --------   --------   --------
       Total                                        11,479     (4,994)     6,485         10,868      3,286     14,154
                                                  --------   --------   --------       --------   --------   --------

Increase (decrease) in interest expense:
    Savings deposits                                  (601)       467       (134)             3        128        131
    Time deposits                                    2,624     (1,618)     1,006          4,068      2,596      6,664
    Short-term borrowings                             (103)      (221)      (324)           274        (96)       178
    Long-term debt                                   3,049       (656)      2,393         2,528      1,264      3,792
                                                  --------   --------   --------       --------   --------   --------
       Total                                         4,969     (2,028)     2,941          6,873      3,892     10,765
                                                  --------   --------   --------       --------   --------   --------
    Increase (decrease) in effective
      interest differential                       $  6,510    $(2,966)   $ 3,544         $3,995    $  (606)   $3,389
                                                  ========   ========   ========       ========   ========   ========`

(a) Table shows approximate effect on the effective interest differential of volume and rate changes for the
years 2001 and 2000. 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 35% in 2001, 2000,
and 1999.

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

`Average       Increase (Decrease)             Average       Increase (Decrease)
                                            Balance             Since                     Balance             Since
                                             2001                2000                       2000               1999
                                        -------------    --------------------         -------------    --------------------
                                                                      (dollars in thousands)
                                                            Amount         %                              Amount         %
                                                            ------         -                              ------         -
Funding sources:

   Deposits and borrowed funds:

     Non-interest bearing               $   150,218      $  67,154      80.8          $    83,064      $  19,859      31.4
     Interest-bearing                       826,704         21,069       2.6              805,635         74,712      10.2
                                        -----------     ----------      ----         ------------     ----------      ----
          Total deposits                    976,922         88,223       9.9              888,699         94,571      11.9

   Borrowed funds                           298,913         49,861      20.0              249,052         50,992      25.7
   Other liabilities                         11,305          2,441      27.5                8,864             65       0.7
   Shareholders' equity                     111,381         19,126      20.7               92,255            (20)     ----
                                        -----------     ----------      ----         ------------     ----------      ----
          Total sources                  $1,398,521       $159,651      12.9           $1,238,870       $145,608      13.3
                                        ===========     ==========      ====         ============     ==========      ====
Funding uses:

   Interest-earning assets:

     Short-term investments             $    18,347      $   9,336     103.6          $     9,011    $      (240)     (2.6)
     Investment securities                  453,000         67,654      17.6              385,346         29,445       8.3
         Total loans                        838,178         69,974       9.1              768,204        102,782      15.4
                                        -----------     ----------      ----         ------------     ----------      ----

           Total interest earning assets  1,309,525        146,964      12.6            1,162,561        131,987      12.8

   Cash and due from banks                   36,129          4,220      13.2               31,909          3,206      11.2
   Other assets                              52,867          8,467      19.1               44,400         10,415      30.6
                                        -----------     ----------      ----         ------------     ----------      ----

          Total uses                     $1,398,521       $159,651      12.9           $1,238,870       $145,608      13.3
                                        ===========     ==========      ====         ============     ==========      ====`