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

For the fiscal year ended December 31, 2000      Commission file number 0-15786
                          -----------------                             -------

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

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

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.                Yes      X      No
                                                      ----------     ---------

As of March 1,  2001,  the  aggregated  market  value  (based on recent  selling
prices)  of  the  voting  stock  of the  registrant  held  by its  nonaffiliates
(5,740,658 shares) was $117,970,522

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

          7,046,687 shares of common stock outstanding on March 1, 2001

                       DOCUMENTS INCORPORATED BY REFERENCE

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

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

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

                                        1

<PAGE>
                                                                  PART I
Item 1.  Business:
-----------------

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

     The Corporation  conducts a full service  commercial  banking  business and
provides  trust services in Adams County,  Cumberland  County,  Dauphin  County,
southern  Luzerne County,  Northumberland  County,  western  Schuylkill  County,
Snyder County, and York County. The Corporation currently has 36 offices.  There
are 70 offices of commercial banks and savings and loan associations  within its
market area with which the  Corporation  competes.  Deposits of the  Corporation
represent  approximately  17% of the total  deposits  in the  market  area.  The
Corporation  has 3 offices in Adams  County,  1 office 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 7 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 $835,000 for the
year ended December 31, 2000.  During 1985 the  Corporation  formed CBII to make
investments  primarily in equity securities of other banks. Total assets of CBII
at December 31, 2000 were $3,738,000.

     The  Corporation  has  approximately  401 full and part-time  employees and
considers its employee relations to be satisfactory.

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

     In 1989, the Federal Board issued final risk-based  capital  guidelines for
bank holding  companies  which were phased in through  December  31,  1992.  The
intent of regulatory  capital  guidelines is to measure  capital  adequacy based
upon the  credit  risk of various  assets  and  off-balance  sheet  items.  Risk
categories,  weighted at 0%, 20%, 50% and 100%, are specifically identified. The
sum of the results of each such category is then related to the adjusted capital
account of the  Corporation.  The minimum required capital ratio at December 31,
2000, was 8 percent. The Corporation's December 31, 2000 ratio approximated 11.3
%. 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

                                       2
<PAGE>

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,
2000,  approximated 8%. Risk-based capital requirements replace previous capital
guidelines which established minimum primary and total capital requirements.

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

     Quantitative measures established by regulation to ensure capital adequacy
requires CBNA and PSB to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2000, that CBNA and
PSB meet all capital adequacy requirements to which they are subject.

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

<TABLE>
<S>                                                     <C>                                  <C>                             <C>
At December 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
                                                        Tier 1 Capital               Total Risk-Based Capital       Capital Leverage
                                                         Ratio (A)                           Ratio (B)                     Ratio (C)
------------------------------------------------------------------------------------------------------------------------------------


Required Minimum                                              4.0%                              8.0%                           4.0%
Community Banks, N.A.                                        10.6                              11.6                            7.9
Peoples State Bank                                            9.9                              11.0                            7.8
Community Banks, Inc.                                        10.3                              11.3                            7.8

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

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

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


     On   November   12,   1999,   President   Clinton   signed   into  law  the
Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act
of 1999)  which  will,  when  effective  March 11,  2000,  permit  bank  holding
companies to become  financial  holding  companies  and thereby  affiliate  with
securities firms and insurance companies and engage in other activities that are
financial  in nature.  A bank  holding  company may become a  financial  holding
company if each of its subsidiary banks is well capitalized, is well managed and
has at least a


                                       3

<PAGE>

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

     Pursuant to the provisions of the Gramm-Leach-Bliley  Act, Community Banks,
Inc. became a financial holding company, June 26, 2000.

                                        4

<PAGE>

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



     Pages 5, 21,  and  22  of  the  Community  Banks,  Inc.  Annual  report  to
          stockholders dated December 31, 2000 contain the following information
          concerning:

     Financial Highlights,  Average Balances,  Effective Interest  Differential,
          and Interest Yields for the three years ended December 31, 2000.

     Rate/Volume Analysis for the two years ended December 31, 2000.

     Appendix A attached to Part I contains information concerning:

     Return on Equity and Assets for the five years ended December 31, 2000.

     Amortized cost and Estimated  Market Values of Investment  Securities as of
          December 31, 2000, 1999, and 1998.

     Maturity Distribution of Securities as of December 31, 2000 (Market Value).

     Loan Account  Composition as of December 31, 2000,  1999,  1998,  1997, and
          1996.

     Maturities and  Sensitivity  to Changes in Interest  Rates for  Commercial,
          Financial, and Agricultural Loans as of December 31, 2000.

     Non-performing Loans as of December 31, 2000,  1999,  1998, 1997, and 1996.
          Loan Loss Experience for the five years ended December 31, 2000.

     Loans Charged Off and Recovered for the five years ended December 31, 2000.

     Allowance for Loan Losses as of December 31, 2000,  1999,  1998,  1997, and
          1996.

     Maturity  Distribution  of Time  Deposits  over $100,000 as of December 31,
          2000.

     Maturity Distribution of all Time Deposits as of December 31, 2000.

     Interest Rate Sensitivity as of December 31, 2000.









                                        5

<PAGE>

Item 2.  Properties:

     The Corporation owns no real property except through its subsidiary  banks.
CBNA owns the  following  buildings:  150 Market  Street,  Millersburg,  Dauphin
County,  Pennsylvania (the corporate  headquarters);  13-23 South Market Street,
Elizabethville,   Dauphin  County,  Pennsylvania;  3679  Peters  Mountain  Road,
Halifax,  Dauphin County,  Pennsylvania;  906 North River Road, Halifax, Dauphin
County,  Pennsylvania;  800 Peters Mountain Road, Dauphin County,  Pennsylvania;
Main and Market Streets, Lykens, Dauphin County, Pennsylvania; Route 209, Porter
Township,  Schuylkill  County,  Pennsylvania;  29  East  Main  Street,  Tremont,
Schuylkill  County,  Pennsylvania;   Second  and  Carroll  Streets,  St.  Clair,
Schuylkill  County,  Pennsylvania;  Port Carbon Highway,  St. Clair,  Schuylkill
County,  Pennsylvania;  300 East Independence Street,  Shamokin,  Northumberland
County,  Pennsylvania;   Route  61,  R.D.  1,  Orwigsburg,   Schuylkill  County,
Pennsylvania;   One  South   Arch   Street,   Milton,   Northumberland   County,
Pennsylvania;  30 S. Church Street, Hazleton, Luzerne County, Pennsylvania;  702
West Main Street, Valley View, Schuylkill County,  Pennsylvania;  Route 25, East
Main Street,  Valley View, Schuylkill County,  Pennsylvania;  735 Center Street,
Ashland, Schuylkill County, Pennsylvania;  300 Hobart Street, Gordon, Schuylkill
County,  Pennsylvania;  9-11 N. Centre Street,  Pottsville,  Schuylkill  County,
Pennsylvania; One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania; and
2796 Old Post Road,  Linglestown,  Dauphin  County,  Pennsylvania.  In  addition
thereto,  CBNA  leases  an  office  at  Main  Street,  Pillow,  Dauphin  County,
Pennsylvania,  pursuant to a lease which,  with renewal options,  will extend to
the year 2008.  Also, the Bank leases  offices at 390 E. Penn Drive,  Cumberland
County,  Pennsylvania;  Route 93, Conyngham,  Luzerne County,  Pennsylvania;  77
Airport  Road,  Hazleton,  Luzerne  County,  Pennsylvania;  6700  Derry  Street,
Rutherford,   Dauphin  County,  Pennsylvania;  and  339  Main  Street,  LaVelle,
Schuylkill County, Pennsylvania.

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

     CBNA also owns or leases the following properties for the purpose of future
expansion:   5060  Johnstown  Road,  Lower  Paxton  Township,   Dauphin  County,
Pennsylvania  and 201 St.  Johns  Church  Road,  Camp  Hill,  Hampden  Township,
Cumberland County, Pennsylvania.

     PSB owns the following  buildings:  100 E. King Street, East Berlin,  Adams
County, Pennsylvania;  3421 Carlisle Road, Dover, York County, Pennsylvania; and
29 N. Washington Street,  Gettysburg,  Adams County,  Pennsylvania.  In addition
thereto,  PSB leases  offices at 600  Carlisle  Street,  Hanover,  York  County,
Pennsylvania,  pursuant to a lease which,  with renewal options,  will extend to
the year 2006;  509 Greenbriar  Road,  Gettysburg,  Adams 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. PSB also owns real
property through its subsidiary,  PSB Realty, at the following  locations:  1191
Eichelberger  Street,  Hanover,  York  County,  Pennsylvania;  155  Glen  Drive,
Manchester,  York County,  Pennsylvania;  1345 Baltimore Street,  Hanover,  York
County,  Pennsylvania;  5625 York Road, New Oxford, Adams County,  Pennsylvania;
and 2508 Eastern Boulevard, York, York County, Pennsylvania.

     PSB Realty owns the following property for the purpose of future expansion:
Centennial Commons, McSherrystown, Adams County, Pennsylvania.

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

                                        6

<PAGE>

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

Item 3.  Legal Proceedings:

     There  are  no  material  pending  legal  actions,  other  than  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 2000.


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


                                                                                                                        APPENDIX A

                                                                 RETURN ON EQUITY AND ASSETS
                                             FOR THE YEARS ENDED December 31, 2000, 1999, 1998, 1997, AND 1996
                                             -----------------------------------------------------------------

                                                   2000              1999             1998              1997             1996
                                                   ----              ----             ----              ----             ----

Return on average equity                          16.84%            15.41%           13.04%            11.49%           11.39%

Return on average assets                           1.22%             1.29%            1.31%             1.16%            1.18%

Average equity to average assets                   7.24%             8.35%           10.06%            10.12%           10.36%

Dividend payout ratio                             35.79%            36.80%           40.83%            39.66%           39.02%



</TABLE>

                                                                    7

<PAGE>

<TABLE>


                                                                APPENDIX A
                                                                Continued

                                           AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
                                                              SECURITIES
                                                        (dollars in thousands)
                                                 At December 31, 2000, 1999, and 1998
<S>                                                 <C>         <C>             <C>         <C>           <C>             <C>
                                                               2000                     1999                         1998
                                                   ----------------------       ---------------------      -------------------------
                                                                Estimated                   Estimated                      Estimated
                                                    Amortized        Fair      Amortized         Fair       Amortized           Fair
                                                         Cost       Value           Cost        Value            Cost          Value
                                                   ----------------------       ---------------------      -------------------------

Mortgage-backed U.S. government agencies            $  59,827   $  59,697       $ 61,788     $ 58,961        $ 82,887     $ 83,260
U.S. Government corporations and agencies             129,200     126,110        132,661      123,919          78,800       79,449
Obligations of states and political sub-
   divisions                                           95,376      96,615         84,778       78,853          85,771       87,676
Corporate securities                                   38,447      38,643         31,739       31,876          27,574       27,459
Equity  securities                                     21,430      21,790         17,797       18,466          13,284       14,698
                                                   ----------  ----------      ---------    ---------      ----------   ----------
   Total                                             $344,280    $342,855       $328,763     $312,075        $288,316     $292,542
                                                   ==========  ==========      =========    =========      ==========   ==========

</TABLE>

<TABLE>
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>            <C>
                                                COMMUNITY BANKS, INC. AND SUBSIDIARIES
                                            MATURITY DISTRIBUTION OF SECURITIES (Fair Value)
                                                         (dollars in thousands)
                                                         as of December 31, 2000

                                                   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                        $12,791     $43,847      $67,606    $  61,563     $185,807   15yr.  4 mos.    6.89%
Obligations of states and political
   Subdivisions                                   3,438      15,42        14,153       63,602       96,615   17yr.  8 mos.    8.12%
Other                                            21,790       8,162        3,846       26,635       60,433   14yr.  0 mos.    6.29%
                                               --------     --------- ----------   ----------   ----------

      Total                                     $38,019     $67,431      $85,605     $151,800     $342,855   15yr.  9 mos.    7.13%
                                                 ======      ======       ======      =======      =======
Percentage of total                               11.1%       19.6%        25.0%        44.3%         100%
                                                  =====       =====        =====        =====        =====
Weighted average yield (a)                        4.85%       7.17%        7.03%        7.73%        7.13%
                                                  =====       =====        =====        =====        =====

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

The  Corporation  monitors  investment  performance  and valuation on an ongoing
basis to evaluate investment

                                       8
<PAGE>

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.

<TABLE>

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

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

                                              2000                 1999              1998               1997              1996
                                      ----------------------------------------------------------------------------------------------
                                         Amount    Percent    Amount  Percent    Amount  Percent    Amount  Percent   Amount Percent
Commercial, financial and agricultural  $124,239   17.8%     $100,970  16.9%   $ 65,698   12.8%   $ 53,520  11.8%   $ 52,844   12.6%
Real-estate-construction                  20,230    2.9        14,670   2.5      17,381    3.4       5,553   1.2       5,724    1.4
Real estate-mortgage                     434,315   62.4       362,297  60.8     324,709   63.4     299,529  65.7     268,276   63.8
Personal-installment                     107,554   15.4       109,841  18.4      97,561   19.0      88,046  19.3      87,381   20.8
Other                                     10,161    1.5         8,523   1.4       6,931    1.4       9,182   2.0       5,982    1.4
                                      ----------------------------------------------------------------------------------------------
                                         696,499  100.0%      596,301 100.0%    512,280  100.0%    455,830 100.0%     420,207 100.0%
                                         -------  =====       ------- =====     -------  =====     ------- =====      ------- =====

Less:
   Unearned discount                      (3,984)              (6,986)          (10,018)           (11,799)          (11,965)
   Reserve for loan losses                (8,471)              (7,456)           (6,954)            (6,270)           (5,561)
                                         -------              -------            ------            -------             -----
                                        $684,044             $581,859          $495,308           $437,761          $402,681
                                         =======              =======           =======            =======           =======

</TABLE>

The Corporation's loan activity is principally with customers located within the
local market area.  The  Corporation  continues to maintain a  diversified  loan
portfolio and has no  significant  loan  concentration  in any economic  sector.
Changes in loan demand in 2000 resulted in increases in  commercial,  financial,
and agricultural loans of 23.0%.  Personal installment loans declined 2.1% while
real  estate  loans  increased  20.6%  during  this  same  period.   Commercial,
financial,  and agricultural  loans represented 17.8% of total loans at December
31, 2000 and consist  principally  of  commercial  lending  secured by financial
assets of businesses including accounts  receivable,  inventories and equipment,
and, in most cases,  include liens on real estate.  Real estate construction and
mortgage  loans  are  primarily  1 to 4  family  residential  loans  secured  by
residential  properties  within the bank's  market area.  Personal-  installment
loans  comprised  15.4%  of  total  loans  at  December  31,  2000  and  consist
principally   of  secured  loans  for  items  such  as   automobiles,   property
improvement,  household and other consumer goods.  The Corporation  continues to
sell fixed rate mortgages in the secondary market to avoid  associated  interest
rate risk.  Historically,  relative  credit risk of  commercial,  financial  and
agricultural loans has generally been greater than that of other types of loans.



                                        9

<PAGE>

                                                                      APPENDIX A
                                                                       Continued
<TABLE>


                                            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, 2000
<S>                                                  <C>              <C>           <C>           <C>

                                                                     Maturity Distribution

                                                     One Year          One to         Over Five
                                                      Or Less        Five Years         Years            Total
                                                     ---------       ----------       ----------         -----
Commercial, financial and
   agricultural                                      $61,099          $45,328           $17,812         $124,239
Real estate-construction                              11,138            9,092               ---           20,230
                                                      ------           ------            ------          -------
                                                     $72,237          $54,420           $17,812         $144,469
                                                      ======           ======            ======          =======

                                                                     Interest Sensitivity

                                                    Variable           Fixed            Total
                                                    --------          -------          -------
Due in one year or less                            $  77,637         $  2,845         $  80,482
Due after one year                                    53,689           10,298            63,987
                                                     -------           ------           -------
                                                    $131,326          $13,143          $144,469
                                                     =======           ======           =======


</TABLE>
                                       10

<PAGE>
<TABLE>
<S>                                               <C>                <C>              <C>               <C>             <C>
                                                                APPENDIX A
                                                                Continued

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

                                                        2000             1999              1998             1997             1996
                                                        ----             ----              ----             ----             ----
Loans past due 90 days or more:
   Commercial, financial and agricultural          $       8          $   146          $     47           $   53         $     20
   Mortgages                                             495              147               353              405              588
   Personal installment                                   98               73                34               72              189
   Other                                                  11               12                 7               21               11
                                                   ---------        ---------        ----------          -------        ---------
                                                         612              378               441              551              808
                                                    --------         --------          --------           ------         --------

Loans renegotiated with borrowers                        205              254               248              626              277

Loans on which accrual of interest has been discontinued:
    Commercial, financial and agricultural             1,364              435               866              926              791
     Mortgages                                         3,375            3,079             2,282            3,388            3,645
     Other                                               356              222               282              300              318
                                                    --------         --------          --------          -------         --------
                                                       5,095            3,736             3,430            4,614            4,754
                                                     -------          -------           -------           ------          -------
Other real estate owned                                  393              405               625              866              883
                                                    --------         --------          --------          -------         --------

Total                                                 $6,305           $4,773            $4,744           $6,657           $6,722
                                                       =====            =====             =====            =====            =====

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


The  approximate  amount  that would have been  accrued on those loans for which
interest was discontinued in 2000 was $363,000. Interest income from these loans
would have approximated $305,000 in 1999.

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


                                       11

<PAGE>

dependent  upon the demand for  commercial  real estate  projects  and a buyer's
ability to finance commercial real estate projects.
<TABLE>
<S>                                              <C>                  <C>             <C>                 <C>            <C>
                                                                APPENDIX A
                                                               -----------
                                                                Continued

                                                         LOAN LOSS EXPERIENCE
                                                        (dollars in thousands)
                          For the years ended December 31, 2000, 1999, 1998, 1997, and 1996

                                                       2000               1999             1998                1997          1996
                                                       ----               ----             ----                ----          ----

Loans at year-end, net of unearned income            $692,515          $598,315         $502,262            $444,031       $408,242
                                                      =======           =======          =======             =======        =======
Average loans balance (a)                            $645,716          $548,293         $467,094            $421,283       $385,956
                                                      =======           =======          =======             =======        =======
Balance, allowance for loan losses,
          January 1                                $    7,456        $    6,954       $    6,270          $    5,561     $    4,955

Net charge-offs (b)                                    (1,293)             (796)            (780)               (608)          (961)

Provision for loan losses,                              2,308             1,298            1,464               1,317          1,567
                                                  -----------         ---------        ---------           ---------      ---------

Balance, allowance for loan losses,
          December 31                              $    8,471        $    7,456       $    6,954          $    6,270     $    5,561
                                                      =======           =======          =======             =======        =======
Net charge-offs to loans at year end                      .19%              .13%             .16%                .14%           .24%

Net charge-offs to average loans (a)                      .20%              .15%             .17%                .14%           .25%


Balance of allowance for loan losses
          to loans at year end                           1.22%             1.25%            1.38%               1.41%          1.36%

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

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


The allowance for loan losses is based upon management's  continuing  evaluation
of the loan  portfolio.  A review  as to loan  quality,  current  macro-economic
conditions and  delinquency  status is performed at least on a quarterly  basis.

                                       12
<PAGE>

The provision for loan losses is adjusted  quarterly  based upon current review.
The table on page 10 presents an allocation by loan  categories of the allowance
for loan  losses at  December 31 for the last five  years.  In  retrospect,  the
specific allocation in any particular category may prove excessive or inadequate
and  consequently  may be  reallocated in the future to reflect the then current
condition.  Accordingly,  the entire  allowance is available to absorb losses in
any category.

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

The amount of the allowance  assigned to each component of the loan portfolio is
derived from a combination of factors.  Estimation  methods and assumptions used
in the process are received  periodically  by both management and a committee of
the board of directors. In general, the allowance was not materially affected by
changes in these estimation methods and assumptions during 2000.

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

During 2000 management  deemed it appropriate to reduce the relative  portion of
the total allowance allocated to real  estate-mortgage  loans to 14% from 16% at
year-end  1999.  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 $2,308,000 for the year ended December 31,
2000,  compared to $1,298,000,  $1,464,000,  $1,317,000,  and $1,567,000 for the
years  ended  December  31,  1999,  1998,  1997,  and  1996,  respectively.  The
relationship of the allowance for loan losses to loans at year end  approximated
1.22%  compared  to ratios of 1.25% to 1.41% for the  previous  four  years.  In
reviewing the adequacy of the allowance for loan losses,  management  considered
the  relationship of nonaccrual  loans,  renegotiated  loans,  other real estate
owned,  and  accruing  loans  contractually  past  due 90 days or more to  total
assets.  This  relationship  approximated  .56%,  .49%, .56%, .93%, and 1.03% at
year-end 2000, 1999, 1998, 1997, and 1996, respectively.



                                       13
<PAGE>
                                                                      APPENDIX A
                                                                       Continued
<TABLE>
<S>                                                     <C>             <C>             <C>                <C>               <C>
                                                     LOANS CHARGED OFF AND RECOVERED
                                                         (dollars in thousands)
                                    For the years ended December 31, 2000, 1999, 1998, 1997, and 1996
                                    -----------------------------------------------------------------


                                                         2000             1999             1998               1997             1996
                                                         ----             ----             ----               ----             ----

Loans charged off:
   Commercial, financial and agricultural              $   252          $     78          $   138          $     83         $    165
   Real estate-mortgage                                    443               190              223               361              382
   Personal installment                                    103               883              820               926            1,327
   Other                                                   886                81               77                96               93
                                                      --------         ---------        ---------           -------          -------
Total                                                    1,684             1,232            1,258             1,466            1,967
                                                       -------           -------          -------             -----            -----
Loans recovered:
   Commercial, financial and agricultural                    3               137               53               428              336
   Real estate-mortgage                                     83                43              104                63              131
   Personal installment                                    295               239              296               343              509
   Other                                                    10                17               25                24               30
                                                     ---------         ---------        ---------         ---------        ---------
Total                                                      391               436              478               858            1,006
                                                      --------          --------         --------          --------          -------
    Net charge-offs                                     $1,293           $   796          $   780           $   608          $   961
                                                         =====             =====            =====             =====            =====

</TABLE>
<TABLE>

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

                                                            2000              1999            1998              1997          1996
                                                            ----              ----            ----              ----          ----

Loans:
   Commercial, financial and agricultural                 $4,360            $2,286           $2,199            $1,663        $1,541
    Real estate-construction                                   6                 2              ---               ---             2
    Real estate-mortgage                                   1,188             1,178            1,366             1,780         1,868
    Installment                                            1,293             1,203            1,161             1,458         1,125
    Unallocated                                            1,624             2,787            2,228             1,369         1,025
                                                         -------           -------          -------           -------      --------
Balance                                                   $8,471            $7,456           $6,954            $6,270        $5,561
                                                           =====             =====            =====             =====         =====

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


                                                                   14

<PAGE>




                                                                      APPENDIX A
                                                                       Continued
<TABLE>
<S>                       <C>                                                           <C>
                                                      MATURITY DISTRIBUTION OF TIME
                                                      DEPOSITS OF $100,000 OR MORE
                                                         (dollars in thousands)
                                                         as of December 31, 2000
                                                        -------------------------

                         Remaining to Maturity:
                         Less than three months                                              $15,267
                         Three months to six months                                           17,611
                         Six months to twelve months                                          20,520
                         More than twelve months                                              18,224
                                                                                            --------
                                                                                             $71,622
                                                                                              ======






                                                      MATURITY DISTRIBUTION OF ALL
                                                              TIME DEPOSITS
                                                         (dollars in thousands)
                                                         as of December 31, 2000
                                                        -------------------------


                         Remaining Maturity:
                               One year or less                                             $287,388
                               After one year through two years                               77,823
                               After two years through three years                            35,053
                               After three years through four years                           19,033
                               After four years through five years                            12,940
                               After five years                                                2,181
                                                                                         -----------
                                                                                            $434,418
                                                                                             =======

</TABLE>


                                       15

<PAGE>
                                                                      APPENDIX A
                                                                       Continued



                            INTEREST RATE SENSITIVITY

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

     The  positive  GAP between the  Corporation's  interest-earning  assets and
interest-bearing  liabilities maturing or repricing within one year approximated
4% of total assets at December 31, 2000.

     Significant  maturity/repricing  assumptions  (based on internal  analysis)
include the presentation of all savings, Money Market, and NOW accounts as being
32% interest rate  sensitive . Equity  securities  are reflected in the shortest
time interval.  Assumed pay downs on  mortgage-backed  securities and loans have
also been included in all time intervals.

     The  following  table sets for the  scheduled  repricing or maturity of the
Corporation's   interest-earning  assets  and  interest-bearing  liabilities  at
December 31, 2000.

                                       16

<PAGE>
<TABLE>
                                                                      APPENDIX A
                                                                       Continued

<S>                                           <C>                <C>            <C>                <C>               <C>
Interest Rate Sensitivity
------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000                              1-90              90-180          180-365          1 year
Dollars in thousands                              days               days             days           or more            Total
------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits in
   other banks                               $    2,275              ----             ----              ----        $    2,275
Investment securities                            62,048          $  2,334       $    5,590          $272,883           342,855
Loans, net of unearned income*                  183,678            79,068           88,405           341,364           692,515
Loans held for sale                               2,719              ----             ----              ----             2,719
------------------------------------------------------------------------------------------------------------------------------------
Total                                          $250,720          $ 81,402        $  93,995          $614,247        $1,040,364
------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Savings                                       $  65,525              ----             ----          $134,508        $  200,033
Time                                             60,141           $64,815         $109,034           128,806           362,796
Time in denominations of
   $100,000 or more                              15,267            17,611           20,520            18,224            71,622
Short-term borrowings                            21,593              ----             ----              ----            21,593
Long-term debt                                    1,934              ----             ----           223,000           224,934
------------------------------------------------------------------------------------------------------------------------------------
Total                                           164,460          $ 82,426        $ 129,554        $  504,538       $   880,978
------------------------------------------------------------------------------------------------------------------------------------

Interest Sensitivity Gap
Periodic                                      $  86,260          $ (1,024)        $(35,559)        $ 109,709
Cumulative                                                         85,236           49,677           159,386
Cumulative gap as a percentage
   of earning assets                                  8%                8%               5%               15%

<FN>
*Does not include nonaccrual loans.
</FN>
</TABLE>
                                       17

<PAGE>
                                                                      APPENDIX A
                                                                       Continued
Forward-Looking Statements:
--------------------------

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

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

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

                                       18

<PAGE>

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

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

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

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

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

     Investment securities, other than mortgage-backed securities and those with
early call provisions,  generally do not have  significant  imbedded options and
repay  pursuant to specific  terms until  maturity.  While  savings and checking


                                       19
<PAGE>
deposits  generally may be withdrawn upon the customer's  request  without prior
notice, a continuing  relationship  with customers  resulting in future deposits
and  withdrawals  is  generally   predictable  resulting  in  a  dependable  and
uninterrupted  source of funds.  Time deposits  generally have early  withdrawal
penalties,  while term FHLB  borrowings and  subordinated  notes have prepayment
penalties,  which discourage customer withdrawal of time deposits and prepayment
of FHLB borrowings and subordinated notes prior to maturity.

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

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

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  following  table  reflects  the  estimated  present  value of  assets,
liabilities  and  equity  financial  instruments  using the model for  Community
Banks,  Inc. as of December 31, 2000  consolidated  with the  estimated  present
values of other financial  instruments of the  Corporation,  at current interest
rates  and  hypothetically,  higher  and  lower  interest  rates  of one and two
percent.
<TABLE>
<S>                                                  <C>                <C>             <C>             <C>             <C>
                                                                                            Base
                                                           -2%               -1%       Present Value          +1%              +2%
                                                    --------------------------------------------------------------------------------
                   Assets                                                         (dollars in thousands)
Cash, interest-bearing time deposits,
    and federal funds sold                          $     40,422      $     40,422     $     40,422    $     40,422     $     40,422
Investment securities                                    356,728           350,984          342,855         315,583          298,521
Loans, net of unearned income                            697,866           686,599          675,879         665,673          655,949
Loans held for sale                                        2,807             2,762            2,719           2,678            2,639
Other assets                                              51,332            51,332           51,332          51,332           51,332
                                                       ---------       -----------    -------------     -----------     ------------

     Total assets                                     $1,149,155        $1,132,099       $1,113,207      $1,075,688       $1,048,863
                                                       =========         =========        =========       =========        =========
               Liabilities
Deposits                                             $   785,871       $   781,121      $   776,428     $   771,791      $   767,209
Short-term borrowings                                     21,593            21,593           21,593          21,593           21,593
Long-term debt                                           233,625           229,184          224,895         220,753          216,751
Other liabilities                                          8,456             8,456            8,456           8,456            8,456
                                                     -----------       -----------      -----------     -----------      -----------

     Total liabilities                                 1,049,545         1,040,354        1,031,372       1,022,593        1,014,009
                                                     -----------       -----------      -----------     -----------      -----------

     Total stockholders' equity                           99,610            91,745           81,835          53,095           34,854
                                                     -----------       -----------      -----------     -----------      -----------
     Total liab. and stockholders'
        equity                                        $1,149,155        $1,132,099       $1,113,207      $1,075,688       $1,048,863
                                                     ===========       ===========      ===========     ===========      ===========

</TABLE>

                                       20

<PAGE>

                                     PART II


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

     Incorporated  by reference is the  information  appearing under the heading
"Market  for the  Corporation's  Common  Stock  and  Related  Securities  Holder
Matters"  on page 26 of the  Annual  Report to  Stockholders  for the year ended
December 31, 2000 (hereafter referred to as the "Annual Report").

Item 6.   Selected Financial Data
-------   -----------------------

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

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

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

Item 8.  Financial Statements and Supplementary Data:
-------  --------------------------------------------

     The consolidated financial statements,  together with the report thereon of
PricewaterhouseCoopers   LLP  dated  January  18,  2001,  are   incorporated  by
references to pages 6 through 20 of the Annual Report.


                                       21
<PAGE>


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

          None.

                                    PART III

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

     The  following  table  sets  forth  the  name and age of each  director  of
Community Banks, Inc. as well as the director's business  experience,  including
occupation  for the past 5 years,  the  period  during  which he has served as a
director of Community  Banks,  N.A.  (Formerly Upper Dauphin National Bank), and
the number and  percentage  of  outstanding  shares of Common  Stock of the Bank
beneficially owned by said directors as of December 31, 2000.

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

Ernest L. Lowe                         Chairman-CTY/CBNA/                1990                  55,236                    .78%
     Age 64                               PSB                                                     (8)
                                          Prior to 12/31/97
                                          Pres. of CTY &
                                          Ex.V.P. of CBNA

Eddie L. Dunklebarger                  President/CEO                     1998                 151,027                   2.15%
     Age 47                               CTY/CBNA/PSB                                           (15)
                                          Prior to 3/31/98
                                          Pres/CEO PSB

Thomas L. Miller                       Retired Chairman/                 1966                  73,421                   1.04%
     Age 68                               CEO of CTY &                                            (9)
                                          CBNA

Kenneth L. Deibler                     Self-Employed                     1966                  35,529                    .50%
     Age 78                               Insurance Broker
                                          Elizabethville, PA

Robert W. Rissinger                    Sec./Treasurer                    1968                 269,118                   3.82%
     Age 74                               Alvord Polk Tool Co.                                (3) (4)
                                          (Cutting Tools)
                                          Engle Rissinger Auto Group
                                          Millersburg, PA

Allen Shaffer                          Attorney-at-Law                   1961                  52,184                    .74%
     Age 75                               Millersburg and                                         (6)
                                          Harrisburg, PA

</TABLE>



                                       22

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


                                        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
-------------                           ---------------                  ---------            -------------       ------------------

James A. Ulsh                          Attorney-at-Law                     1977                  17,998                    .26%
     Age 54                               Mette, Evans &
                                          Woodside
                                          Harrisburg, PA

Samuel E. Cooper                       Retired Superintendent              1992                   2,415                    .03%
     Age 67                                Warrior Run School
                                           District
                                           Turbotville, PA

Susan K. Nenstiel                       Regional Dir. Of  Dev.             1996                     236                   ---
     Age 49                                Lutheran Welfare Serv.
                                           Hazleton, PA

Ronald E. Boyer                         President,                         1981                  25,874                    .37%
     Age 63                                Alvord-Polk Tool Co.                                   (5)
                                           (Manufacturing of Cutting tools)
                                           Millersburg, PA.

Peter DeSoto                            CEO, J.T. Walker                   1981                  48,697                    .69%
     Age 61                                Industries, Inc.
                                           (manufacturing of metal
                                           products)
                                           Elizabethville, PA

Thomas W. Long                          Partner                            1981                  10,591                    .15%
     Age 71                                Millersburg Hardware
                                           Millersburg PA

Donald  L. Miller                       President, Miller Bros.            1981                  97,023                   1.38%
     Age 71                                Dairy
                                           Millersburg, PA

Ray N. Leidich                          Retired Dentist                    1985                  74,390                   1.06%
     Age 72                                Tremont, PA                                            (7)
</TABLE>


                                       23

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


                                         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
-------------                            ---------------                ---------            -------------     -------------------

John W. Taylor, Jr.                     President-Air Brake               1998                  22,343                  .32%
     Age 70                                & Power Equip. Co.                                    (12)

Earl L. Mummert                         Consulting Actuary                1998                  30,941                  .44%
     Age 56                                Conrad M. Siegel, Inc                                 (13)

Wayne H. Mummert                        Retired U.S. Postal               1998                  74,278                 1.06%
     Age 67                                Service/Farmer                                        (14)

<FN>
(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, 2000.  Beneficial  ownership may be disclaimed
as to certain of the securities.

(3) Includes 7,365 shares owned by Alvord-Polk Tool Co., Inc. the stock of which
is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.

(4) Includes 16,412 shares owned by Engle Ford, Inc., 48,070 shares owned by Mr.
Rissinger's  spouse,  Shirley Rissinger,  and 11,661 shares owned by Engle Ford,
Inc. Profit Sharing Plan and 88,128 shares held by Mr. Rissinger's IRA.

(5) Includes  7,365 shares owned by  Alvord-Polk  Tool Co.,  Inc.,  the stock of
which is held 50% by Robert W.  Rissinger  and 50% by Ronald E.  Boyer,  and 579
shares owned by Mr. Boyer's wife, Judith Boyer.

(6) Includes 4,784 shares owned by Mr. Shaffer's Retirement plan.

(7) Includes 37,195 shares owned by Dr. Leidich's wife, Dolores Leidich.

(8) Includes 205 shares owned by Mr. Lowe's wife, Barbara and 25 shares owned by
Mr. Lowe's son and incentive stock options to acquire 36,920 shares,  228 shares
held in Mr. Lowe's 401K and 1,613 shares held in his IRA.

(9) Includes  incentive  stock  options to acquire  39,265 shares and 913 in his
IRA.


                                       24

<PAGE>

(10) Includes  incentive  stock  options to acquire  18,138 shares and 14 shares
registered to Mr. Lawley for his minor children.

(11) Includes incentive stock options to acquire 7,430 shares and 80 shares held
in his ESPP.

(12) Includes 1,333 shares owned by Mr. Taylor's wife,  LouAnn and 953 shares in
his IRA.

(13)  Includes  stock  options to acquire  2,208 shares and 20,812 shares in Mr.
Mummert's IRAs.

(14)  Includes  stock options to acquire 2,208 shares and 16,671 shares owned by
Mr. Mummert's wife Shirley.

(15) Includes 348 shares owned by Mr. Dunklebarger's wife, Connie, 10,996 shares
owned by Mr.  Dunklebarger's  children,  10,981 shares in his 401(k) plan, 9,549
shares in his IRA, and 88,007 stock options (ISO and NQ's) to acquire shares and
365 shares held in ESPP.

(16)  Includes  4,426  shares in his  401(k)  plan and 9,959  (ISO and NQ) stock
options to acquire shares.

(17)  Includes  5,723 shares in his 401(k) plan and 8,254 shares in his IRA, and
29,272 stock options to acquire shares and 275 shares held in ESPP.

</FN>
</TABLE>

Section 16(a) Beneficial Ownership Reporting Compliance


                                       25
<PAGE>



     In 2000, to the knowledge of the  Corporation,  all Executive  Officers and
directors timely filed all reports with the Securities and Exchange Commission.


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




                                       26

<PAGE>



Executive Officers:

     The following table sets forth the executive  officers of Community  Banks,
Inc., their ages, their positions with Community Banks,  Inc. and the beneficial
ownership (as  determined in accordance  with the rules and  regulations  of the
Securities and Exchange  Commission) of Common Stock of the Corporation owned by
each of such persons as of December 31, 2000.

<TABLE>
<S>                                     <C>                             <C>                 <C>                 <C>
                                         Business Experience                                 Amount and         Percentage of
                                         Including Principal                                 Nature of           Outstanding
                                         Occupation for the                                  Beneficial         Common Stock
 Name and Age                            Past Five Years                Term (1)            Ownership (2)          Owned
-------------                            ---------------                --------            -------------     ----------------

Ernest L. Lowe                          Chairman-CTY/                    1985                  55,236                  .78%
     Age 64                                CBNA/PSB                                               (8)
                                           Prior to 12/31/97
                                           Ex. V.P. of CBNA &
                                           Pres. of CTY

Eddie L. Dunklebarger                   President/CEO                    1998                 151,027                 2.15%
     Age 47                                CTY/CBNA/PSB                                          (15)
                                           Prior to 3/31/98
                                           Pres/CEO of PSB

Terry L. Burrows                        Executive Vice President/        1977                  30,425                  .43%
     Age 52                                Finance                                               (11)

Robert W. Lawley                        Executive Vice President/        1980                  18,218                  .26%
     Age 46                                Operations                                            (10)

Anthony N. Leo                          Executive Vice President/        1998                  14,475                  .21%
     Age 40                                Fin. Services & Adm.                                  (16)

Jeffrey M. Seibert                      Executive Vice President/        1998                  51,850                  .73%
     Age 41                                Banking Services                                      (17)

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

                                       27

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

<TABLE>


              <S>                                      <C>                             <C>                             <C>
                                                                           Amount and Nature
                                                                            of Beneficial
                                                                            Ownership (1)(2)
                                                                            ---------------
                                                                                                                        Percent
              Title of Class                                Direct                      Indirect (3)                    of Class
              --------------                                ------                      -----------                     --------
               Common                                    1,062,176                        175,782                       16.96%

<FN>
(1) See  footnote 2 on page 24.

(2)  Included  in these  totals  are  shares  held by  director  emeriti  of the
Corporation  as follows:  Leon E. Kocher - 29,991 shares which  includes  13,563
shares held by Mr. Kocher's wife,  Margaret.  Joseph J. Monahan - 22,848 shares.
Harry B. Nell - 36,215 shares which includes 917 shares held by Mr. Nell's wife,
Helen, and stock options to acquire 2,208 shares.

(3) The 7,365  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.
</FN>
</TABLE>


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

     Information regarding executive compensation is omitted from this report as
the  holding  company  will file a  definitive  proxy  statement  for its annual
meeting of  shareholders  to be held May 1, 2001; and the  information  included
therein with respect to this item is incorporated herein by reference.

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

     CBNA  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
reaching age 21. The cost of the pension is  actuarially  determined and paid by
CBNA. The amount of monthly  pension is equal to 1.15% of average monthly pay up
to $650, plus .60% of average  monthly pay in excess of $650,  multiplied by the
number of years of service  completed by an  employee.  The years of service for
the additional  portion are limited to a maximum of 37.  Average  monthly pay is
based upon the 5 consecutive plan years of highest pay preceding retirement. The
maximum amount of annual compensation used in determining retirement benefits is
$170,000.  A participant is eligible for early  retirement after reaching age of
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,  2000 the  following  officers  have  been  credited  with the
following  years of  service:  Ernest L.  Lowe-16  years of  service,  Robert W.
Lawley-25 years of service, and Terry L. Burrows-27 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  12/31/98 are not eligible to  participate  in the CBNA Pension Plan.  The
amounts shown on the following table assumes an annual retirement benefit for an
employee who chose a straight  life annuity and who will retire at age 65. These
amounts are offset for the employer contribution in the 401(k) Plan.


                                       28

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


                                                         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....................        $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$200,000....................        $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$225,000....................        $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$250,000....................        $41,298           $55,064          $68,830           $82,596          $96,362          $107,388
$275,000....................        $41,298           $55,064          $68,830           $82,596          $96,362          $107,388

</TABLE>

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

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

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

        Refer to Item 10 on pages 22 through 27.

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 17 of the Annual
Report.


                                       29
<PAGE>



     (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,  a director of
CBNA  ,  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.

                                     PART IV

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

           Balance Sheets as of December 31, 2000
              and 1999                                                                     ---                       6

           Statements of Income for each of the three years
              ended December 31, 2000                                                      ---                       7

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

           Statements of Cash Flows for each of the three
              years ended December 31, 2000.                                               ---                       9

           Notes to Financial Statements                                                   ---                   10-20

          All other schedules are omitted since the required  information is not
          applicable  or  is  not  present  in  amounts  sufficient  to  require
          submission on the schedule.
<FN>
         (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.

                                       30

<PAGE>



               (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, 2000

</FN>
</TABLE>

                       CONSENT OF INDEPENDENT ACCOUNTANTS
                       ----------------------------------

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements on Form S-8(File No. 333- 37236 and File No.  333-37232) of Community
Banks,  Inc. of our report dated January 18, 2001  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 26, 2001





                                       31

<PAGE>

                                   Signatures


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

                              Community Banks, Inc.

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


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.


(Terry L. Burrows)                   Ex. Vice President and              2/13/01
------------------
(Terry L. Burrows)                   Chief Financial Officer

(Ronald E. Boyer)                    Director                            2/13/01
------------------
(Ronald E. Boyer)

(Samuel E. Cooper)                   Director                            2/13/01
------------------
(Samuel E. Cooper)

(Kenneth L. Deibler)                 Director                            2/13/01
--------------------
(Kenneth L. Deibler)

(Peter DeSoto)                       Director                            2/13/01
--------------------
(Peter DeSoto)

(Eddie L. Dunklebarger)              President & CEO and                 2/13/01
-----------------------
(Eddie L. Dunklebarger)              Director

(Ray N. Leidich)                     Director                            2/13/01
-----------------
(Ray N. Leidich)

(Thomas W. Long)                     Director                            2/13/01
-------------------
(Thomas W. Long)

(Donald L. Miller)                   Director                            2/13/01
--------------------
(Donald L. Miller)

                                       32

<PAGE>




(Thomas L. Miller)                   Director                            2/13/01
-------------------
(Thomas L. Miller)

(Earl L. Mummert)                    Director                            2/13/01
-------------------
(Earl L. Mummert)

(Wayne H. Mummert)                   Director                            2/13/01
-------------------
(Wayne H. Mummert)

(Susan K. Nenstiel)                  Director                            2/13/01
-------------------
(Susan K. Nenstiel)

(Robert W. Rissinger)                Director                            2/13/01
---------------------
(Robert W. Rissinger)

(Allen Shaffer)                      Director                            2/13/01
--------------------
(Allen Shaffer)

(John W. Taylor, Jr.)                Director                            2/13/01
---------------------
(John W. Taylor, Jr.)

(James A. Ulsh)                      Director                            2/13/01
---------------------
(James A. Ulsh)



                                       33

<PAGE>



Report of Independent Accountants

Board of Directors and Shareholders
Community Banks, Inc.


     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related consolidated  statements of income, changes in stockholders' equity, and
cash flows present fairly, in all material  respects,  the financial position of
Community Banks,  Inc.  (Corporation)  and its subsidiaries at December 31, 2000
and 1999,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  2000,  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.  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  provide  a
reasonable basis for our opinion.



PRICEWATERHOUSECOOPERS, L.L.P.


Harrisburg, Pennsylvania
January 18, 2001



<PAGE>



Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 2000 and 1999
(dollars in thousands except per share data)
<TABLE>
<S>                                                         <C>                     <C>
                                                                   2000                  1999
                                                             -----------------------------------
ASSETS

Cash and due from banks..............................      $     38,147             $  29,094
Interest-bearing time deposits in other banks........             2,275                 1,789
Investment securities, available for sale (market value)        342,855               312,075
Federal funds sold...................................               ---                 2,050
Loans................................................           696,499               596,301
Less:    Unearned income.............................            (3,984)               (6,986)
         Allowance for loan losses...................            (8,471)               (7,456)
                                                           ------------          ------------
         Net loans...................................           684,044               581,859
Premises and equipment, net..........................            18,217                15,385
Goodwill.............................................               183                   424
Other real estate owned..............................               393                   405
Loans held for sale..................................             2,719                 4,004
Accrued interest receivable and other assets.........            32,539                24,739
                                                           ------------          ------------
     Total assets....................................        $1,121,372              $971,824
                                                               ========               =======
LIABILITIES

Deposits:
     Demand (Non-interest bearing)...................       $   144,795             $  55,330
     Savings.........................................           200,033               266,464
     Time............................................           362,796               329,221
     Time in denominations of $100 or more...........            71,622                42,421
                                                          -------------           -----------
     Total deposits..................................           779,246               693,436
Short-term borrowings................................            21,593                 3,338
Long-term debt.......................................           224,934               197,000
Accrued interest payable and other liabilities.......             8,456                 6,969
                                                         --------------          ------------
     Total liabilities...............................         1,034,229               900,743
                                                            -----------            ----------

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; 7,340,000 and 6,976,000 shares
     issued, respectively............................            36,701                34,878
Surplus..............................................            29,155                24,259
Retained earnings....................................            28,145                26,379
Accumulated other comprehensive loss, net
     of tax benefit of  $499 and $5,841,
     respectively....................................              (926)              (10,847)
Less: Treasury stock of 300,000 and 175,000
     shares at cost, respectively....................            (5,932)               (3,588)
                                                         --------------           -----------
     Total stockholders' equity......................            87,143                71,081
                                                          -------------            ----------
     Total liabilities and stockholders' equity......        $1,121,372              $971,824
                                                               ========               =======

<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>


<PAGE>



Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2000, 1999,
and 1998 (dollars in thousands except per share data)
<TABLE>
<S>                                                          <C>                <C>            <C>
                                                               2000            1999          1998
                                                            ----------------------------------------

Interest income:
     Interest and fees on loans......................         $56,807        $46,405        $41,306
     Interest and dividends on investment securities:
         Taxable.....................................          17,968         14,844         11,325
         Tax-exempt..................................           4,417          4,709          3,795
     Other interest income...........................              57             78             80
     Fed funds interest..............................             329            228            494
                                                          -----------     ----------     ----------
         Total interest income.......................          79,578         66,264         57,000
                                                             --------        -------       --------

Interest expense:
     Interest on deposits:
         Savings.....................................           5,310          5,575          5,479
         Time........................................          20,270         15,501         13,459
         Time in denominations of $100 or more.......           3,572          1,914          1,580
     Interest on short-term borrowings and
         long-term debt..............................          11,280          7,670          4,975
     Fed funds purchased and repo interest...........           1,288          1,553          1,394
                                                            ---------      ---------      ---------
         Total interest expense......................          41,720         32,213         26,887
                                                             --------        -------       --------
         Net interest income.........................          37,858         34,051         30,113
Provision for loan losses............................           2,308          1,298          1,464
                                                            ---------      ---------      ---------
         Net interest income after provision for
           loan losses...............................          35,550         32,753         28,649
                                                             --------        -------       --------

Other income:
     Income from fiduciary related activities........             527            458            302
     Service charges on deposit accounts.............           2,518          2,077          1,584
     Other service charges, commissions and fees.....           1,502            984            731
     Investment security gains.......................             469            251            575
     Insurance premiums income.......................           1,201            710            661
     Gains on loan sales.............................             400            607            634
     Other income....................................             746            581            473
                                                           ----------     ----------     ----------
         Total other income..........................           7,363          5,668          4,960
                                                            ---------      ---------      ---------

Other expenses:
     Salaries and employee benefits..................          13,899         12,436         10,380
     Net occupancy expense...........................           3,864          3,377          3,202
     Operating expenses of insurance subsidiary......             586            497            472
     Other operating expense.........................           7,425          6,627          5,971
                                                            ---------      ---------      ---------
         Total other expenses........................          25,774         22,937         20,025
                                                             --------       --------       --------
         Income before income taxes..................          17,139         15,484         13,584
Provision for income taxes...........................           4,288          3,681          3,534
                                                            ---------      ---------      ---------
         Net income..................................         $12,851        $11,803        $10,050
                                                               ======         ======         ======

Basic earnings per share.......................... 1]       $    1.82      $    1.65      $    1.40
                                                               ======         ======         ======

Diluted earnings per share.........................1]       $    1.79      $    1.62      $    1.36
                                                               ======         ======         ======

<FN>
1] Per share data for all periods has been restated to reflect stock dividends
and splits. The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>

<PAGE>

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

For the Years Ended December 31, 2000, 1999, and 1998 (dollars in thousands
except per share data)
<TABLE>
<S>                                             <C>         <C>         <C>         <C>         <C>              <C>

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

Balance, December 31, 1997...................   $22,028    $28,645    $21,219     $  3,237    $(1,116)      $74,013
     Comprehensive income:
         Net income..........................                          10,050                                10,050
         Change in unrealized gain (loss) on
         securities, net of tax of $(231) and
         reclassification adjustment of $575.                                         (448)                    (448)
                                                                                                             ------
         Total comprehensive income..........                                                                 9,602
Cash dividends ($.56 per share)..............                          (4,103)                               (4,103)
3 for 2 stock split  (2,205,000 shares)......    11,024    (11,024)
Net increase in treasury stock (40,000 shares)                                                   (966)         (966)
Issuance of additional shares (21,000 shares).                 105        368         (143)                     330
                                                 ------     ------     ------       ------     ------        ------

Balance, December 31, 1998...................    33,157     17,989     27,023        2,789     (2,082)       78,876
     Comprehensive income:
         Net income..........................                          11,803                                11,803
         Change in unrealized gain (loss) on
         securities, net of tax of $(7,278) and
         reclassification adjustment of $251  .                                    (13,636)                 (13,636)
                                                                                                             ------
         Total comprehensive loss............                                                                (1,833)
Cash dividends ($.60 per share)..............                          (4,343)                               (4,343)
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       (408)                    379           266
                                                 ------     ------     ------       ------     ------        ------

Balance, December 31, 1999..................     34,878     24,259     26,379      (10,847)    (3,588)       71,081
     Comprehensive income:
         Net income..........................                          12,851                                12,851
         Change in unrealized gain (loss) on
         securities, net of tax of $5,342  and
         reclassification adjustment of $469  .                                      9,921                    9,921
                                                                                                             ------
         Total comprehensive income..........                                                                22,772
Cash dividends ($.64 per share)..............                          (4,600)                               (4,600)
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       (133)                                  234
                                                 ------     ------     ------       ------     ------        ------

Balance, December 31, 2000. . . . . . . . .     $36,701    $29,155    $28,145       $ (926)   $(5,932)      $87,143
                                                 ======     ======     ======       ======     ======        ======

<FN>
Per share data for all periods has been restated to reflect stock dividends and
splits. The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>


<PAGE>



Community Banks, Inc and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000,
1999, and 1998 (in thousands)
<TABLE>
<S>                                                                     <C>              <C>              <C>

                                                                           2000             1999             1998
                                                                       ----------------------------------------------

Operating Activities:
     Net income...............................................        $   12,851          $11,803           $10,050
     Adjustments to reconcile net income to net
         cash provided by operating activities:...............
         Provision for loan losses............................             2,308            1,298             1,464
         Depreciation and amortization........................             3,284            1,706             1,656
         Amortization of goodwill.............................               241              241               241
         Investment security gains............................              (469)            (251)             (575)
         Loans originated for sale............................           (23,440)         (33,285)          (38,348)
         Proceeds from sales of loans.........................            25,125           33,207            38,304
         Gains on loan sales..................................              (400)            (607)             (634)
         Change in other assets, net..........................           (12,575)          (1,587)           (3,769)
         Increase in accrued interest payable and other
           liabilities, net...................................             1,487              423               340
                                                                     -----------     ------------       -----------
              Net cash provided by operating activities.......             8,412           12,948             8,729
                                                                     -----------        ---------        ----------

Investing Activities:
     Net (increase)decrease in interest-bearing time
       deposits in other banks................................              (486)            (531)            1,148
     Proceeds from sales of investment securities.............            28,343           38,136            25,310
     Proceeds from maturities of investment securities........             9,540           26,984            80,425
     Purchases of investment securities.......................           (54,486)        (105,316)         (179,097)
     Net increase in total loans..............................          (105,048)         (88,430)          (59,991)
     Net increase in premises and equipment...................            (4,561)          (2,888)           (1,896)
                                                                     -----------       ----------        ----------
              Net cash used in investing activities...........          (126,698)        (132,045)         (134,101)
                                                                       ---------         --------          --------

Financing Activities:
     Net increase in total deposits...........................            85,810           97,531            46,150
     Net increase (decrease) in short-term borrowings.........            18,255           (4,572)           (2,630)
     Proceeds from issuance of long-term debt.................           146,934           40,000            88,720
     Repayment of long-term debt..............................          (119,000)          (4,000)           (5,000)
     Cash dividends...........................................            (4,600)          (4,343)           (4,103)
     Purchases of treasury stock..............................            (2,344)          (1,885)             (966)
     Proceeds from issuance of common stock...................               234              266               330
                                                                    ------------      -----------       -----------
              Net cash provided by financing activities.......           125,289          122,997           122,501
                                                                       ---------         --------          --------
              Increase (decrease) in cash and cash equivalents             7,003            3,900            (2,871)

Cash and cash equivalents at beginning of year................            31,144           27,244            30,115
                                                                      ----------        ---------        ----------
Cash and cash equivalents at end of year......................         $  38,147         $ 31,144          $ 27,244
                                                                         =======           ======            ======

<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>



<PAGE>



Community Banks, Inc. and Subsidiaries
NOTES TO 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, N.A. (CBNA),  Peoples State
Bank (PSB),  Community Banks  Investments,  Inc. (CBII) and Community Banks Life
Insurance Company (CBLIC). All significant  intercompany  transactions have been
eliminated.  The  Corporation  operates  through its main office in Millersburg,
Pennsylvania,   and  through  35  branch  banking   offices  located  in  Adams,
Cumberland,  Dauphin,  Luzerne,  Northumberland,  Schuylkill,  Snyder,  and York
Counties in Pennsylvania.  Community Banks,  Inc.'s primary source of revenue is
derived  from  loans  to   customers,   who  are   predominantly   middle-income
individuals.

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

   The more significant accounting policies of the Corporation are:

                             Investment Securities:

     The   Corporation   classifies   debt  and  equity   securities  as  either
"held-to-maturity,"  "available-for-sale,"  or "trading."  Investments for which
management  has the intent,  and the  Corporation  has the  ability,  to hold to
maturity are carried at the lower of cost or market adjusted for amortization of
premium and accretion of discount.  Amortization  and  accretion are  calculated
principally on the interest method. Securities bought and held primarily for the
purpose  of  selling  them in the near  term are  classified  as  "trading"  and
reported  at fair value.  Changes in  unrealized  gains and losses on  "trading"
securities are recognized in the Consolidated  Statements of Income. At December
31, 2000 and 1999, there were no securities identified as "held-to- maturity" or
"trading."  All  other   securities   are  classified  as   "available-for-sale"
securities  and reported at fair value.  Changes in unrealized  gains and losses
for "available-for-sale"  securities, net of applicable taxes, are recorded as a
component of stockholders'  equity.  Quoted market values,  when available,  are
used to  determine  the fair  value of  "available-for-sale".  If quoted  market
prices are not available,  then fair values are estimated using quoted prices of
instruments with similiar characteristics.

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

                           Allowance for Loan Losses:

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

     The allowance for loan losses is evaluated on a 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 more 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


<PAGE>



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 loans's obtainable market
price, or the fair value of the collateral if the loan is collateral dependent.

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

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

                             Premises and Equipment:

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

                                    Goodwill:

     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. Periodically, the Corporation re-evaluates goodwill and other intangibles
based on  undiscounted  operating  cash  flows  whenever  significant  events or
changes occur which might impair recovery of recorded asset costs.

                                  Pension Plan:

     The Corporation has a noncontributory defined benefit pension plan covering
substantially all CBNA employees.  Pension costs are funded currently subject to
the full funding  limitation  imposed under federal income tax regulations.  The
defined  benefit pension plan was amended during 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 $814,000 in 2000,  $645,000 in 1999,
and $212,000 in 1998.

                                  Income Taxes:

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


<PAGE>



                            Interest Income on Loans:

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

                            Other Real Estate Owned:

     Real estate  acquired  through  foreclosure  is carried at the lower of the
recorded amount of the loan for which the foreclosed  property previously served
as  collateral or the current  appraised  value of the property at transfer date
less estimated  selling cost.  Prior to foreclosure,  the recorded amount of the
loan is written down, if necessary, to the appraised value of the real estate to
be acquired by charging the allowance for loan losses.  During 2000,  1999,  and
1998 transfers from loans to real estate acquired  through  foreclosure  totaled
$555,000, $581,000, and $980,000, respectively.

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

                            Statement of Cash Flows:

     Cash and cash  equivalents  included  cash and due from  banks and  federal
funds sold. The Corporation  made cash payments of $4,585,000,  $3,805,000,  and
$4,436,000, and $41,031,000,  $31,786,000,  and $26,011,000 for income taxes and
interest, respectively, in 2000, 1999, and 1998.

                               Segment Reporting:

     Statement of Financial  Accounting  Standards No. 131,  "Disclosures  about
Segments of an Enterprise and Related Information" ("SFAS 131") became effective
in 1998.  This  statement  requires  that  public  business  enterprises  report
financial and descriptive  information about its reportable  operating segments.
Based on the guidance by the statement,  the  Corporation  has determined  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.


<PAGE>



                              Comprehensive Income:

     The Corporation reports  comprehensive  income in accordance with Statement
of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive  Income."
Components of comprehensive  income, as detailed in the Consolidated  Statements
of  Changes  in  Stockholders'  Equity,  are  net of tax.  Comprehensive  income
includes  a  reclassification  adjustment  for  net  realized  investment  gains
included in net income of $469,000,  $251,000,  and $575,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.

                        Recent Accounting Pronouncements:

     The Financial  Accounting  Standards  Board  ("FASB")  issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,  a replacement
of FASB Statement No. 125" in September of 2000.  This  Statement  replaces FASB
Statement No. 125,  "Accounting for Transfers and Servicing of Financial  Assets
and Extinguishments of Liabilities." It revises the standards for accounting for
securitizations  and other  transfers of  financial  assets and  collateral  and
requires  certain  disclosures,  but it  carries  over most of  Statement  125's
provisions  without  reconsideration.   This  Statement  is  not  effective  for
transfers  until  after March 31,  2001,  however  the  disclosure  requirements
relating to securitization  transactions and collateral are effective for fiscal
years ending after December 31, 2000.  Management has reviewed the Statement and
has  determined  that the  Statement  will have no  impact on the  Corporation's
financial  condition or results of operations and that no additional  disclosure
is required.

     In March of 2000,  the FASB issued FASB  Interpretation  Number ("FIN") 44,
"Accounting  for  Certain  Transactions   Involving  Stock  Compensation  --  an
Interpretation  of APB 25". The FIN  clarifies  the  application  of  Accounting
Practice  Bulletin ("APB") 25 for only certain issues,  and does not address any
issues  related to the  application  of the fair value  method in SFAS 123.  The
Interpretation clarifies (a) the definition of employee for purposes of applying
APB  25,  (b)  the  criteria  for  determining  whether  a plan  qualifies  as a
non-compensatory  plan, (c) the accounting  consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. This FIN
was effective  for the third  quarter of 2000 and had no material  effect on the
Corporation's financial condition or results of operations.

     In December 1999,  the SEC issued Staff  Accounting  Bulletin  ("SAB") 101,
"Revenue Recognition in Financial  Statements",  which, as amended, is effective
for  calendar  year-end  registrants  for  their  December  31,  2000  financial
statements.  This SAB  summarizes  certain  of the  staff's  views  in  applying
generally  accepted  accounting  principles to revenue  recognition in financial
statements.  The Corporation has implemented SAB 101 for their December 31, 2000
financial  statements,  with no  material  impact on the  Corporation's  revenue
recognition policies and procedures.

          Use of Estimates in the Preparation of Financial Statements:

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


<PAGE>



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

     The amortized cost and fair value of investment  securities at December 31,
2000 and 1999 are as follows:

<TABLE>
<S>                                            <C>        <C>         <C>         <C>     <C>        <C>         <C>         <C>
                                                              2000                                         1999
                                            ----------------------------------------------------------------------------------------
                                                             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        $129,200   $   170    $ (3,260)  $126,110  $132,661  $   336   $(9,078)   $123,919
Mortgage-backed U.S. government agencies.          59,827       311        (441)    59,697    61,788       40    (2,867)     58,961
Obligations of states and political subdivisions   95,376     2,266      (1,027)    96,615    84,778      214    (6,139)     78,853
Corporate securities.....................          38,447     1,126        (930)    38,643    31,739      333      (196)     31,876
Equity securities........................          21,430       744        (384)    21,790    17,797    1,015      (346)     18,466
                                                 --------   -------    ---------  --------  --------  -------   --------   --------

       Total.............................        $344,280    $4,617    $ (6,042)  $342,855  $328,763   $1,938  $(18,626)   $312,075
                                                  =======     =====      ======    =======   =======    =====    ======     =======

<FN>
     The amortized cost and fair value of all investment  securities at December
31, 2000 by contractual  maturity,  are shown below.  Expected  maturities  will
differ from contractual  maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties.
</FN>
</TABLE>


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

Due in one year or less........................    $   16,206           $   15,950
Due after one year through five years..........        23,642               23,799
Due after five years through ten years.........        70,251               69,819
Due after ten years............................       152,924              151,800
                                                   ----------          -------------
                                                      263,023              261,368
Mortgage-backed securities.....................        59,827               59,697
Equity securities..............................        21,430               21,790
                                                   -----------         -------------
                                                    $ 344,280             $342,855
                                                      =======              =======

</TABLE>


     Proceeds from sales of investments  in debt  securities  were  $27,565,000,
$37,628,000  and  $24,279,000  in 2000,  1999,  and  1998,  respectively.  Gross
investment security 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.  Gross gains and losses of $592,000 and
$17,000, respectively were recognized in 1998.

     At December 31, 2000 and 1999,  investment securities with carrying amounts
of approximately  $234,493,000 and $154,984,000,  respectively,  were pledged to
collateralize public deposits and for other purposes as provided by law.

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


<PAGE>



4.   Loans:
     -----

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

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

Commercial, financial and agricultural..............   $124,239         $100,970
Real-estate-construction............................     20,230           14,670
Real-estate-mortgage................................    434,315          362,297
Personal installment................................    107,554          109,841
Other...............................................     10,161            8,523
                                                     ----------      -----------
                                                       $696,499         $596,301
                                                        =======          =======

</TABLE>

     Loans held for resale amounted to $2,719,000 and $4,004,000 at December 31,
2000 and 1999, respectively.  These loans are primarily fixed-rate mortgages and
education loans.



<PAGE>



5.   Allowance for Loan Losses:

     Changes in the allowance for loan losses are as follows:
<TABLE>
<S>                                                             <C>            <C>               <C>

                                                                             December 31
                                                              ---------------------------------------------------
                                                                  2000           1999           1998
                                                              ---------------------------------------------------
                                                                            (in thousands)


Balance, January 1....................................          $7,456          $6,954         $6,270
Provision for loan losses.............................           2,308           1,298          1,464
Loan charge-offs......................................          (1,684)         (1,232)        (1,258)
Recoveries    ........................................             391             436            478
                                                              --------        --------       --------
Balance, December 31..................................          $8,471          $7,456         $6,954
                                                                 =====           =====          =====
</TABLE>

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


                                                          NONPERFORMING LOANS (a)
                                                           AND OTHER REAL ESTATE


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


Loans past due 90 days or more and still accruing interest:
     Commercial, financial and agricultural...........           $   8           $ 146
     Mortgages. . . . ................................             495             147
     Personal installment.............................              98              73
     Other............................................              11              12
                                                             ---------       ---------
                                                                   612             378
                                                              --------        --------

Restructured Loans                                                 205             254
                                                              --------        --------

Loans on which accrual of interest has been discontinued:
     Commercial, financial and agricultural...........           1,364             435
     Mortgages........................................           3,375           3,079
     Other............................................             356             222
                                                              --------        --------
                                                                 5,095           3,736
                                                               -------         -------
Other real estate.....................................             393             405
                                                              --------        --------
     Total............................................          $6,305          $4,773
                                                                 =====           =====

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

<PAGE>


Impaired Loans
--------------

     At December 31, 2000 and 1999, the recorded  investments in loans for which
impairment has been recognized totaled $2,877,000 and $1,886,000,  respectively,
none of which related to loans  requiring a valuation  allowance.  For the years
ended December 31, 2000 and 1999, the average  recorded  investments in impaired
loans approximated $2,630,000 and $1,814,000,  respectively. Interest recognized
on impaired  loans on the cash basis for the years ending  December 31, 2000 and
1999 was not significant.




<PAGE>



6.   Premises and Equipment:
     -----------------------
     Premises and equipment are comprised of the following:
<TABLE>
<S>                                                                     <C>          <C>
                                                                            December 31
                                                                      -------------------------
                                                                         2000           1999
                                                                      -------------------------
                                                                          (in thousands)

Banking premises.................................................     $19,576         $16,885
Furniture, fixtures, and equipment...............................      14,514          12,510
Leasehold improvements...........................................         438             439
                                                                     --------         -------
                                                                       34,528          29,834
Less accumulated depreciation and amortization..................      (16,311)        (14,449)
                                                                      -------        --------
                                                                      $18,217         $15,385
                                                                       ======          ======
</TABLE>

     Depreciation  and  amortization  expense charged to operations  amounted to
approximately  $1,881,000,  $1,706,000,  and $1,656,000 in 2000, 1999, and 1998,
respectively.

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

     Short-term borrowings consist of the following:
<TABLE>
<S>                                                                   <C>           <C>
                                                                            December 31
                                                                      -------------------------
                                                                          2000         1999
                                                                      -------------------------
                                                                          (in thousands)

Securities sold under agreements to repurchase,
5.41% and 4.41% in 2000 and 1999, respectively...................    $  1,886          $1,328
Federal funds purchased, 6.64% in 2000...........................      18,200             ---
Treasury tax and loan note option account,
5.41% and 4.54% in 2000 and 1999, respectively...................       1,507           2,010
                                                                     --------         -------
                                                                      $21,593          $3,338
                                                                       ======           =====
</TABLE>

     Interest   incurred  on  Federal  funds  purchased  and  other   short-term
borrowings  amounted to  $560,000,  $386,000,  and  $298,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.

     At December 31, 2000,  long-term  debt consists of long-term  advances from
the FHLB of Pittsburgh totaling  $213,000,000 and repurchase agreements totaling
$11,934,000.  The long-term  advances were issued under variable and fixed rates
and are due to mature  from  2002 to 2010.  Monthly  payments  of  interest  are
required to be paid to the Federal Home Loan Bank at rates ranging from 4.71% to
6.66% for variable advances, with principal due at maturity.  Quarterly payments
of interest  are  required to be paid on the  repurchase  agreements  at a fixed
rate,  presently  5.57%,  with principal due at maturity.  Interest on long-term
debt amounted to  $12,008,000,  $8,837,000,  and  $6,071,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.

     Maturities on long-term debt at December 31, 2000 are as follows:
<TABLE>
<S>                                           <C>
     2001.............................         $    11,934,000
     2002.............................         $    10,000,000
     2003.............................         $     5,000,000
     2004.............................         $           ---
     2005.............................         $           ---
     Subsequent to 2005...............         $   198,000,000

</TABLE>

<PAGE>




8.   Pension Plan:

     The following table sets forth the pension plan's funded status and pension
cost at and for the years ended December 31, 2000, 1999, and 1998.
<TABLE>
<S>                                                                                     <C>             <C>             <C>
                                                                                          2000             1999              1998
                                                                                      ----------------------------------------------
                                                                                                    (in thousands)
Changes in benefit obligation:
Projected benefit obligation at beginning of year.................................       $5,079           $5,934            $4,461
Service cost......................................................................          109              130               244
Interest cost.....................................................................          349              300               310
Distributions.....................................................................         (170)            (171)             (128)
Change due to change in assumptions...............................................          ---             (369)              299
Change due to plan amendment......................................................          ---           (1,235)              215
Experience loss...................................................................           53              490               533
                                                                                      ---------         --------          --------
Projected benefit obligation at end of year.......................................       $5,420           $5,079            $5,934
                                                                                          =====            =====             =====
Change in plan assets:
Fair value of plan assets at beginning of year....................................       $5,198           $5,070            $4,546
Employer contributions............................................................          ---              ---               355
Actual return on assets...........................................................          366              299               297
Distributions.....................................................................         (170)            (171)            (128)
                                                                                       --------         --------           ------
Fair value of plan assets at end of year, primarily listed stocks,
     corporate, and US bonds......................................................       $5,394           $5,198            $5,070
                                                                                          =====            =====             =====
Funded status at end of year......................................................     $    (26)         $   119           $  (864)
Unrecognized net transition asset.................................................          (13)             (21)              (29)
Unrecognized prior service cost...................................................         (887)            (997)              128
Unrecognized net loss.............................................................        1,836            1,820             1,679
                                                                                        -------          -------           -------
End of year prepaid pension cost..................................................     $    910          $   921           $   914
                                                                                          =====            =====             =====

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

Components of net periodic benefit cost:
Service cost......................................................................      $   109          $   130           $   244
Interest cost.....................................................................          349              300               310
Actual return on plan assets......................................................         (366)            (299)             (297)
Amortization of unrecognized net transition (asset) or obligation.................           (8)              (8)               (8)
Amortization of unrecognized prior service cost...................................         (110)            (110)               (8)
Amortization of unrecognized net (gain) or loss...................................          130              119                48
Asset gain or (loss) deferred.....................................................          (93)            (139)             (119)
                                                                                      ---------         --------          --------
Net periodic pension cost (benefit) for the year..................................     $     11        $      (7)          $   170
                                                                                          =====            =====             =====
</TABLE>


<PAGE>



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

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

                                             For the Year Ended 2000        For the Year Ended 1999        For the Year Ended 1998
                                             -----------------------        -----------------------        -----------------------
                                                              Per-Share                     Per-Share                      Per-Share
                                             Income   Shares     Amount     Income   Shares    Amount     Income    Shares    Amount
                                             ------   ------     ------     ------   ------    ------     ------    ------    ------
                                                                   (in thousands except for per share data)


Basic EPS:

Income available to common
     stockholders.....................     $12,851     7,076     $1.82     $11,803    7,175    $1.65     $10,050     7,202    $1.40
                                            ======                ====      ======              ====      ======               ====
Effect of Dilutive Securities:

Incentive stock options
     outstanding......................                   105                            130                            166
                                                      ------                        -------                        -------

Diluted EPS:

Income available to common
     stockholders and assumed
     conversion.......................     $12,851     7,181     $1.79     $11,803    7,305    $1.62     $10,050     7,368    $1.36
                                            ======                ====      ======              ====      ======               ====
</TABLE>


<PAGE>



10.   Income Taxes:
      ------------
<TABLE>
<S>                                                                            <C>           <C>           <C>
     The provision for income taxes consists of the following:


                                                                                 2000           1999           1998
                                                                              ------------------------------------------
                                                                                            (in thousands)

         Current...................................................             $4,873         $3,866          $4,004
         Deferred..................................................               (585)          (185)           (470)
                                                                              --------       --------        --------
                                                                                $4,288         $3,681          $3,534
                                                                                 =====          =====           =====

</TABLE>

     The components of the net deferred tax asset (liability) as of December 31,
2000, 1999, and 1998 were as follows:
<TABLE>
<S>                                                                          <C>               <C>              <C>
                                                                                2000           1999            1998
                                                                             ------------------------------------------
                                                                                        (in thousands)

Deferred tax assets:
     Loan loss provision...........................................             $2,608         $1,881          $1,531
     Non-accrual loan interest income..............................                255            357             363
     Unrealized loss on marketable equity securities...............                499          5,841             ---
     Miscellaneous.................................................                107            119             121
     Deferred compensation.........................................                393            198             296
                                                                              --------       --------        --------
         Total deferred tax assets.................................             $3,862         $8,396          $2,311
                                                                                ------         ------          ------

Deferred tax liabilities:
     Depreciation..................................................            $   536        $   532         $   560
     Accretion of discount.........................................                336            226             176
     Pension expense...............................................                319            322             285
     Unrealized gain on marketable equity securities...............                ---            ---           1,437
     Miscellaneous.................................................                112            ---             ---
                                                                              --------     ----------      ----------
         Total deferred tax liability..............................              1,303          1,080           2,458
                                                                               -------        -------         -------
         Net deferred asset (liability)............................             $2,559         $7,316         $  (147)
                                                                                 =====          =====           =====



                                                                                 2000           1999           1998
                                                                             -----------------------------------------
                                                                                         (in thousands)

Computed "expected" tax provision..................................             $5,999         $5,419          $4,615
Effect of tax-exempt municipal bond and loan
     interest, net of interest expense disallowance................             (1,484)        (1,571)         (1,230)
Goodwill amortization..............................................                 84             94              92
Nondeductible expense related to acquisition.......................                ---            ---              49
Other, net.........................................................               (133)          (163)             61
Officer life insurance, net........................................               (178)           (98)            (53)
                                                                              --------      ---------       ---------
Total provision for income taxes...................................             $4,288         $3,681          $3,534
                                                                                 =====          =====           =====

</TABLE>


<PAGE>



11. Stock-Based Compensation:
    ------------------------

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

     As of December 31, 2000, shares totaling  1,011,232 were authorized but not
awarded under the Plan. The stock options  generally vest from one to five years
from the date of grant,  and  expire no later  than ten years  after the date of
grant. The changes in outstanding options are as follows:
<TABLE>
<S>                                                                <C>                 <C>


                                                                                            Weighted
                                                                                             Average
                                                                      Shares Under       Exercise Price
                                                                         Option             Per Share
         ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997                                                423,054               $13.99
Issued                                                                   119,926                24.02
Exercised                                                                (28,374)               10.82
Forfeited                                                                 (1,914)               20.00
------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998                                                512,692               $17.07
Issued                                                                    88,000                22.50
Exercised                                                                (37,185)                9.96
Forfeited                                                                    ---
------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999                                                563,507               $17.71
Issued                                                                   114,500                19.23
Exercised                                                                (34,753)               10.60
Forfeited                                                                 (2,627)               23.74
------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000                                                640,627               $17.61
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>


<PAGE>



Exercise  prices for options  outstanding  as of December 31, 2000,  ranged from
$6.10 to $24.87.  The following table provides certain  information with respect
to stock options outstanding at December 31, 2000:
<TABLE>
<S>                                                                     <C>                 <C>                  <C>
                                                                                              Weighted          Weighted
                                                                                               Average           Average
                                                                         Shares               Exercise         Remaining
                                                                          Under                Price           Contractual
Range of exercise prices per share                                       Option              Per Share        Life in Years
------------------------------------------------------------------------------------------------------------------------------------
Under $9.00                                                               40,575               $ 8.02              3.17
$9.01-$12.00                                                              89,751               $10.78              4.90
$12.01-$16.00                                                            123,520               $14.02              4.60
$16.01-$20.00                                                            114,500               $19.22              9.83
$20.01-$22.00                                                            177,465               $21.48              8.45
$22.01-$24.87                                                             94,816               $23.64              7.01
------------------------------------------------------------------------------------------------------------------------------------
                                                                         640,627               $17.61              6.91
------------------------------------------------------------------------------------------------------------------------------------

     The following  table  provides  certain  information  with respect to stock
options exercisable at December 31, 2000:

                                                                                              Weighted          Weighted
                                                                                               Average           Average
                                                                                              Exercise         Remaining
                                                                        Shares                 Price           Contractual
Range of exercise prices per share                                   Exercisable             Per Share        Life in Years
------------------------------------------------------------------------------------------------------------------------------------
Under $9.00                                                               40,575              $  8.02              3.17
$9.01-$12.00                                                              83,721               $10.75              4.82
$12.01-$16.00                                                            118,469               $14.02              4.54
$20.01-$22.00                                                             70,826               $21.49              8.36
$22.01-$24.87                                                             84.650               $23.50              8.36
------------------------------------------------------------------------------------------------------------------------------------
                                                                         398,241               $16.07              5.66
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>


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 2000, 1999, and 1998 were $3.63,  $5.45,
and $5.05,  respectively,  and were  estimated  using the  Black-Scholes  option
valuation model with the following weighted average  assumptions for 2000, 1999,
and 1998,  respectively:  dividend yield of 3.3%, 2.9%, and 2.5%;  volatility of
21%,  23%,  and 23%;  risk free  interest  rates of 5.6%,  6.1%,  and 4.8%;  and
expected life in years of 4.9, 5.5, and 6.0.

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:
<TABLE>
<S>                                                          <C>               <C>             <C>
                                                                  2000            1999            1998
                                                                  ----            ----            ----
Net income                                                   ($259,000)       ($195,000)     ($267,000)
Earnings per share:
Basic                                                            ($.04)           ($.03)         ($.04)
Diluted                                                          ($.03)           ($.02)         ($.02)


</TABLE>

<PAGE>

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

     Certain directors and their business  affiliates (defined as the beneficial
ownership  of at least a 10  percent  interest),  executive  officers  and their
families are indebted to Community  Banks,  N.A. and Peoples  State Bank. In the
opinion of management,  such loans are consistent  with sound banking  practices
and are within applicable regulatory lending limitations.

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


                                                                     2000        1999          1998
                                                                ------------------------------------
                                                                           (in thousands)

              Balance beginning of period.....................    $ 8,479       $6,548       $6,367
              Additions.......................................        213        5,255        2,003
              Amounts collected...............................       (250)      (3,324)      (1,822)
                                                                  --------     -------      -------
              Balance end of period...........................     $8,442       $8,479       $6,548
                                                                    =====        =====        =====

</TABLE>


<PAGE>



13.   Condensed Financial Information of Community Banks, Inc.  (Parent Only):
      ------------------------------------------------------------------------
<TABLE>
<S>                                                                          <C>           <C>

                                                                                2000         1999
                                                                            ---------------------------
                                                                                  ( in thousands)
Condensed Balance Sheets:
           Cash and investments............................................  $     106   $       50
           Investment in Community Banks, N.A. ............................     50,674       42,799
           Investment in Peoples State Bank................................     33,653       25,620
           Investment in nonbank subsidiaries..............................      2,223        2,064
           Other assets....................................................        487          754
                                                                            ----------   ----------
           Total assets....................................................    $87,143      $71,287
                                                                                ======       ======
           Other liabilities...............................................$       ---    $     206
           Stockholders' equity............................................     87,143       71,081
                                                                              --------     --------
           Total liabilities and stockholders' equity......................    $87,143      $71,287
                                                                                ======       ======

</TABLE>
<TABLE>
<S>                                                                             <C>         <C>         <C>
                                                                                 2000        1999         1998
                                                                              ----------------------------------
                                                                                          (in thousands)
Condensed Statements of Income:
     Dividends from:
           Community Banks, N.A. ..........................................   $  6,372     $  5,415     $  5,279
           Peoples State Bank..............................................        928          ---          285
           Nonbank subsidiaries............................................        ---        1,854          ---
     Other income (expense)................................................       (595)        (491)        (546)
                                                                             ---------    ---------    ---------
Income before equity in undistributed earnings of subsidiaries.............      6,705        6,778        5,018
                                                                             ---------    ---------    ---------
Equity in undistributed earnings of:
     Community Banks, N.A..................................................      1,282        1,901        1,483
     Peoples State Bank....................................................      4,472        4,685        3,118
     Nonbank subsidiaries.................................................         392       (1.561)         431
                                                                             ---------    ---------    ---------
                                                                                 6,146        5,025        5,032
                                                                             ---------    ---------    ---------
Net income.................................................................    $12,851      $11,803      $10,050
                                                                                ======       ======       ======
Condensed Statements of Cash Flows:
Operating activities:
     Net income............................................................    $12,851      $11,803     $ 10,050
         Adjustments to reconcile net cash provided by
            operating activities:
         Undistributed earnings of:
              Community Banks, N.A.........................................     (1,282)      (1,901)      (1,483)
              Peoples State Bank...........................................     (4,472)      (4,685)      (3,118)
              Nonbank subsidiaries.........................................       (392)       1,561         (431)
         Other, net........................................................         61           84         (266)
                                                                             ---------    ---------    ---------
              Net cash provided by operating activities....................      6,766        6,862        4,752
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................................        564          266          330
     Purchase of Treasury Stock............................................     (2,674)      (1,885)        (966)
     Dividends paid........................................................     (4,600)      (4,343)      (4,103)
                                                                             ---------    ---------    ---------
              Net cash used by financing activities........................     (6,710)      (5,962)      (4,739)
                                                                             ---------    ---------    ---------
              Net change in cash and cash equivalents......................         56         (100)          13
     Cash and cash equivalents at beginning of year........................         50          150          137
                                                                             ---------    ---------    ---------
     Cash and cash equivalents at end of year..............................  $     106    $      50    $     150
                                                                                ======       ======       ======
</TABLE>


<PAGE>



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

     CBNA and PSB are subject to legal limitations as to the amount of dividends
that can be paid to its shareholder (the  Corporation).  The approval of certain
banking  regulatory  authorities  is  required  if the  total  of all  dividends
declared by the bank exceeds  limits as defined by the  regulatory  authorities.
CBNA and PSB could  declare  dividends  in 2001 without  regulatory  approval of
$12,340,000  plus an additional  amount equal to the banks' retained net profits
in 2001 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, 2000 and 1999.



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

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

     Financial instruments with off-balance sheet risk at December 31, 2000, are
as follows:

<TABLE>
<S>                                                                           <C>
                                                                              Contract or Notional Amount
                                                                                    (in thousands)

     Financial instruments whose contract amounts represent credit risk:
         Commitments to originate loans..................................          $    90,602
         Unused lines of credit.........................................           $    32,561
         Standby letters of credit.................................... . .         $     9,847
         Unadvanced portions of construction loans.......................          $       ---

</TABLE>

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

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





<PAGE>



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

     The following is a summary of the quarterly  results of operations  for the
years ended December 31, 2000 and 1999:
<TABLE>
<S>                                         <C>         <C>        <C>       <C>        <C>       <C>      <C>         <C>

                                                                        Three Months Ended
                                           ----------------------------------------------------------------------------------------
                                                                 2000                                       1999
                                           ----------------------------------------------------------------------------------------
                                           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                            $18,267    $19,345     $20,649    $21,317   $15,479   $16,188    $16,764    $17,833
Interest expense                             9,244      9,922      11,114     11,440     7,523     7,839      8,116      8,735
                                           -------    -------    --------    -------   -------   -------   --------    -------
Net interest income                          9,023      9,423       9,535      9,877     7,956     8,349      8,648      9,098
Provision for loan losses                      316        500         613        879       276       291        220        511
                                           -------    -------    --------    -------   -------   -------   --------    -------
Net interest income after provision for
     loan losses                             8,707      8,923       8,922      8,998     7,680     8,058      8,428      8,587
Other income                                 1,486      1,662       1,801      1,545     1,029     1,229      1,336      1,216
Investment security gains  (losses)            168         50         140        111       153       (29)         3        124
Gains on mortgage sales                         65         93          90        152       276       138         94         99
Other expenses                               6,318      6,465       6,602      6,389     5,592     5,542      5,885      5,918
                                           -------    -------    --------    -------   -------   -------   --------    -------
Income before income taxes                   4,108      4,263       4,351      4,417     3,546     3,854      3,976      4,108
Income taxes                                 1,007      1,091       1,108      1,082       864       935        869      1,013
                                           -------    -------    --------    -------   -------   -------   --------    -------
Net income                                 $ 3,101   $  3,172    $  3,243    $ 3,335   $ 2,682   $ 2,919   $  3,107    $ 3,095
                                           =======    =======    ========    =======   =======   =======    =======    =======

Basic earnings per share                   $   .44    $   .45    $   .46     $    .47  $   .37   $   .41   $    .44    $   .43
Diluted earnings per share                 $   .43    $   .44    $   .45     $    .47  $   .36   $   .40   $    .43    $   .43
Dividends per share                        $   .15    $   .16    $   .16     $    .17  $   .14   $   .15   $    .15    $   .15

</TABLE>

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





<PAGE>



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

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

Cash and due from banks, interest-bearing time deposits, and federal funds sold:

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

Investment securities:

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

Loans:

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

Deposit liabilities:

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

Short-term borrowings:

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

Long-term borrowings:

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

Off-balance-sheet instruments:

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

     The  following  table  summarizes  the  carrying  values and fair values of
financial instruments at December 31, 2000 and 1999:
<TABLE>
<S>                                                                   <C>         <C>         <C>             <C>
                                                                                        December 31,
                                                                  -------------------------------------------------------
                                                                               2000                     1999
                                                                  -------------------------------------------------------
                                                                                   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                 $  40,422      $  40,422     $ 32,933     $ 32,933
              Investment securities                                  342,855        342,855      312,075      312,075
              Loans, net of unearned income                          692,515        675,879      589,315      577,458
              Less:    Allowance for loan losses                      (8,471)           ---       (7,456)         ---
                                                                    --------      ---------    ---------     --------
                     Net loans                                       684,044        675,879      581,859      577,458
              Loans held for sale                                      2,719          2,719        4,004        4,004
                                                                    --------      ---------    ---------     --------
                 Total                                            $1,070,040     $1,061,875     $930,871     $926,470
                                                                   =========      =========     ========     ========
              Financial liabilities:
              Deposits                                            $  779,246     $  776,428     $693,436     $691,186
              Short-term borrowings                                   21,593         21,593        3,338        3,338
              Long-term debt                                         224,934        224,895      197,000      193,769
                                                                   ---------      ---------     --------     --------
                 Total                                            $1,025,773     $1,022,916     $893,774     $888,293
                                                                   =========      =========      =======      =======

</TABLE>

<PAGE>



18.  Subsequent Event-Acquisition:
     ----------------------------

     On November 7, 2000 Community Banks, Inc.  (Community)  signed a definitive
agreement to acquire The Glen Rock State Bank (Glen Rock), a  Pennsylvania  bank
located in York County, with $188 million in assets and $140 million in deposits
at  December  31,  2000.  Community  will  acquire  Glen Rock for  approximately
1,205,000  shares of its common stock based on an exchange  ratio of .900 shares
of  Community  common  stock  for each  share of Glen  Rock  common  stock.  The
acquisition  requires  shareholder and regulatory approval prior to consummation
and is not  expected  to close  until  late in the first  quarter  of 2001.  The
acquisition  will  be  accounted  for  under  pooling-of-  interests  method  of
accounting,  accordingly upon consummation the financial statements of Community
will be restated to include the consolidated accounts of Glen Rock.

     A  summary  of  unaudited  pro forma  combined  financial  information  for
Community and Glen Rock follows:
<TABLE>
<S>                                             <C>           <C>             <C>           <C>            <C>          <C>
Year Ended December 31                             2000                                   1999                      1998
----------------------                             ---------------------------------------------------------------------------------
                                                                     (dollars in thousands except per share data)



                                               Community       Glen Rock     Community      Glen Rock      Community     Glen Rock
                                              As Reported      Combined     As Reported      Combined      As Reported   Combined
                                              -----------     ----------    -----------      --------      -----------   --------
Net interest income........................     $37,858         $43,817        $34,051        $40,105       $30,113       $36,039
Provision for loan losses and lease losses.       2,308           2,863          1,298          1,588         1,464         2,054
Other income...............................       7,363           8,092          5,668          6,574         4,960         5,574
Other expenses.............................      25,774          30,417         22,937         27,544        20,025        24,446
                                               --------        --------       --------       --------      --------      --------
Income before taxes........................      17,139          18,629         15,484         17,547        13,584        15,113
Taxes......................................       4,288           4,699          3,681          4,257         3,534         3,882
                                              ---------       ---------      ---------      ---------     ---------     ---------
Net income.................................     $12,851         $13,930        $11,803        $13,290       $10,050       $11,231
                                                 ======          ======         ======         ======        ======        ======

Basic earnings per share...................   $    1.82       $    1.69      $    1.65      $    1.59     $    1.40     $    1.34
Diluted earnings per share.................   $    1.79       $    1.66      $    1.62      $    1.56     $    1.36     $    1.31
                                                 ======          ======         ======         ======        ======         =====


</TABLE>

<PAGE>