UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

             [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2002
                                       or
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                         Commission file number 0-15786
                                                -------

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

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

  750 East Park Drive, Harrisburg, PA                      17111
----------------------------------------           ----------------------
(Address of principal executive offices)                (Zip Code)

       Registrant's telephone number, including area code: (717) 920-1698
                                                           --------------

        Securities registered pursuant to Section 12 (b) of the Act: None


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

                      Common Stock, par value $5 per share
                      ------------------------------------

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,  and (2) has been subject to such filing  requirements
for the past 90 days.     Yes X     No
                            -----     -----

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 the Form 10-K or any amendments to this
Form 10-K. [X]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).  Yes   X    No
                                        -----     ----

Aggregate market value of the Common Stock, $5 par value, held by non-affiliates
of the registrant, computed by reference to the closing price as of the close of
business on June 30, 2002: $241,849,611.

Number of shares of the Common Stock, $5 par value, outstanding as of the close
of business on March 1, 2003: 9,128,222 shares.

<PAGE>


Documents Incorporated by Reference:


Portions of the Proxy  Statement for the 2003 Annual Meeting of  Shareholders of
Community Banks, Inc., incorporated by reference into Part III.

Item 15 contains portions of the Annual Report to Stockholders for the Fiscal
Year Ended December 31, 2002, incorporated by reference into Parts I, II, and
III.





                                       2
<PAGE>



                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                    FORM 10-K
                                      INDEX

PART I                                                                    PAGE #

Item 1       Business                                                        4-7

Item 2       Properties                                                        8

Item 3       Legal Proceedings                                                 9

Item 4       Submission of Matters to a Vote of Security Holders               9

             Appendix A                                                     9-19

PART II

Item 5       Market for Registrant's Common Equity and Related
             Stockholder Matters                                              20

Item 6       Selected Financial Data                                          20

Item 7       Management's Discussion and Analysis of Financial
             Condition and Results of Operation                               20

Item 7A      Quantitative and Qualitative Disclosures About Market Risk    21-23

Item 8       Financial Statements and Supplementary Data                      23

Item 9       Changes in and Disagreements With Accountants on
             Accounting and Financial Disclosure                              24

PART III

Item 10      Directors and Executive Officers of the Registrant               25

Item 11      Executive Compensation                                           25

Item 12      Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters                       25

Item 13      Certain Relationships and Related Transactions                   25

Item 14      Controls and Procedures                                          25

PART IV

Item 15      Exhibits, Financial Statement Schedules, and Reports
             on Form 8-K                                                   26-27

SIGNATURES                                                                 28-31



                                       3
<PAGE>


                                     PART I
  Item 1.  Business:
  -----------------

     Community  Banks,  Inc. (the  "Corporation"  or "Community") is a financial
holding   company  whose  banking   subsidiary  is  Community  Banks  and  whose
non-banking subsidiaries are Community Bank Investments,  Inc. (CBII), Community
Banks Life  Insurance  Company,  Inc.  (CBLIC),  and CMTY  Capital  Trust I. The
subsidiaries  of Community  Banks are UDNB  Investments,  Inc.;  PSB Realty Co.,
Inc.; The Sentinel  Agency,  LLC;  Community Banks Insurance  Services,  LLC; CB
Services, LLC; and CB Financial Services, LLC.

     On January 1, 2002,  Community  consolidated  the  charters  of its banking
subsidiaries under the name Community Banks,  pursuant to regulatory  approvals.
Prior to that time,  Community's  separate  banking  organizations  operated  as
Peoples State Bank (PSB), a state  chartered bank with offices  throughout  York
and Adams Counties; and Community Banks, N.A. (CBNA), a federally chartered bank
headquartered  in  Dauphin  County  with  offices in  central  and  northeastern
Pennsylvania.   The   consolidation   was  designed  to  facilitate  a  regional
operational  focus that would ease  regulatory  burdens while, at the same time,
continuing a philosophy of local decision-making.

     Community  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 in  Pennsylvania  and  Carroll  County in  Maryland.  Community
currently has 44 offices.  There are almost 640 offices of commercial  banks and
savings  and loan  associations  within  its market  area with  which  Community
competes.  Deposits  of  Community  represent  approximately  5.3% of the  total
deposits in the market area.  Community has 3 offices in Adams County, 2 offices
in Cumberland  County, 9 offices in Dauphin County, 3 offices in Luzerne County,
2 offices in Northumberland  County, 8 offices in Schuylkill County, 1 office in
Snyder  County,  and 15 offices  in York  County,  Pennsylvania  and 1 office in
Carroll County, Maryland.

     Like  other  depository  institutions,  Community  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.

     Over  the  years,   Community  has  formed  a  number  of  special  purpose
subsidiaries.  During  December 2002,  Community  formed CMTY Capital Trust I to
execute a pooled trust preferred issuance of $15 million. During 1986, Community
formed CBLIC to provide credit life insurance to its consumer credit  borrowers.
Total premiums earned were $862,000 for the year ended December 31, 2002. During
1985,  Community formed CBII to make investments  primarily in equity securities
of other banks. Total assets of CBII at December 31, 2002 were $5,742,000.

     Community and its subsidiaries  have  approximately  550 full and part-time
employees and considers its employee relations to be satisfactory.

  Supervision and Regulation of Community
  ---------------------------------------

     The banking industry is subject to extensive state and federal  regulation.
Proposals  to change laws and  regulations  governing  the banking  industry are
frequently  raised in  Congress,  in state  legislatures,  and in  various  bank
regulatory agencies. The likelihood and timing that any such changes may have on
Community  are  difficult to determine  with any  certainty.  Changes in laws or
regulations, or changes in the interpretation of laws or regulations, may have a
material impact on the business, operations and earnings of Community.


                                       4
<PAGE>


     Community Banks, Inc. is registered as a financial holding company with the
Federal   Reserve   Board   in   accordance   with  the   requirements   of  the
Gramm-Leach-Bliley  Act  (the  "GLB  Act").  The  GLB  Act  enables  broad-scale
consolidation among banks, securities forms and insurance companies for eligible
bank  holding  companies  that have  elected  and  maintain  "financial  holding
company"  status.  Financial  holding  companies can offer virtually any type of
financial service, including banking,  securities underwriting,  insurance (both
agency and underwriting)  and merchant  banking.  If a bank holding company does
not become a financial  holding company,  it will be limited to those activities
previously  determined  by the Federal  Reserve Board to be  permissible;  i.e.,
"closely  related to banking"  under the  standard set forth in the Bank Holding
Company  Act.  In order to become a  financial  holding  company,  all of a bank
holding  company's bank  subsidiaries  must be well capitalized and well managed
and have a rating under the Community  Reinvestment  Act (the "CRA") of at least
"satisfactory."

     Community  is subject to  regulation  by the  Federal  Reserve  Board.  The
Federal Reserve Board requires  regular reports from Community and is authorized
to make regular examinations of Community and its subsidiaries. Community's bank
subsidiary is subject to supervision and regulation,  and is examined regularly,
by the Federal Reserve Board and the state banking  departments in the states in
which  it  operates.  Community  and its  direct  non-banking  subsidiaries  are
affiliates,  within the meaning of the GLB Act, of Community's  subsidiary  bank
and its subsidiaries.  As a result, the subsidiary bank and its subsidiaries are
subject to  restrictions on loans or extensions of credit to, purchase of assets
from, investments in, and transactions with Community and its direct non-banking
subsidiaries  and on certain  other  transactions  with them or involving  their
securities.

  Capital Adequacy
  ----------------

     The Federal  Reserve  Board and the FDIC have  adopted  risk-based  capital
adequacy  guidelines  for  financial  holding  companies  and banks  under their
supervision.  Under these guidelines,  "Tier 1 capital" and "Total capital" as a
percentage of risk-weighted  assets and certain  off-balance  sheet  instruments
must be at least 4% and 8%,  respectively.  The  regulators  have also imposed a
leverage standard, which focuses on the institution's ratio of Tier 1 capital to
average  total  assets,  adjusted  for  goodwill  and certain  other  items,  to
supplement  their risk-based  ratios.  This minimum leverage ratio was set at 3%
and would  apply only to those  banking  organizations  receiving  a  regulatory
composite 1 rating.  Most banking  organizations  will be required to maintain a
leverage ratio ranging from 1 to 2 percentage points above minimum standard.

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

     Quantitative  measures established by regulation to ensure capital adequacy
requires  Community  Banks to maintain  minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the  regulations) to
risk-weighted  assets (as defined) and of Tier 1 capital (as defined) to average
assets  (as  defined).  Management  believes,  as of  December  31,  2002,  that
Community  Banks has met all  capital  adequacy  requirements  to which they are
subject.


                                       5
<PAGE>




The following table summarizes Community's capital adequacy position:
<TABLE>
<CAPTION>

At December 31, 2002
------------------------------------------------------------------------------------------------------------
                                  Tier 1 Capital               Total Risk-Based Capital       Leverage
                                    Ratio (A)                         Ratio(B)                Ratio (C)
------------------------------------------------------------------------------------------------------------

<S>                                    <C>                               <C>                    <C>
Required Minimum                       4.0%                              8.0%                   4.0%
Well Capitalized                       6.0                              10.0                    5.0
Community Banks, Inc.                 11.2                              12.3                    8.2
</TABLE>

(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.


Other Information
-----------------

     Community's internet address is  www.communitybanks.com.  Annual Reports on
Form 10-K,  Quarterly  Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments  to those  reports  filed or furnished  pursuant to Section  13(a) or
15(d) of the Exchange Act, are available through  Community's website as soon as
reasonably practicable after filing such material with, or furnishing it to, the
Securities and Exchange Commission. Copies of such reports are also available at
no charge.


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

The following is hereby incorporated by reference:

    Pages 28, 42, and 43 of the Community Banks, Inc. Annual Report to
stockholders for the year ended December 31, 2002 contain the following
information concerning:

          Financial   Highlights,    Average   Balances,    Effective   Interest
          Differential,  and Interest  Yields for the three years ended December
          31, 2002.

          Rate/Volume Analysis for the two years ended December 31, 2002.


     Appendix A attached to Part I contains information concerning:

          Return on Equity  and Assets for the five  years  ended  December  31,
          2002.

          Amortized Cost and Estimated Market Values of Investment Securities as
          of December 31, 2002, 2001, and 2000.

                                       6
<PAGE>


          Maturity  Distribution  of  Securities as of December 31, 2002 (Market
          Value).

          Loan Account  Composition as of December 31, 2002,  2001,  2000, 1999,
          and 1998.

          Maturities   and   Sensitivity   to  Changes  in  Interest  Rates  for
          Commercial, Financial, and Agricultural Loans as of December 31, 2002.

          Risk Elements as of December 31, 2002, 2001, 2000, 1999, and 1998.

          Loan Loss Experience for the five years ended December 31, 2002.

          Loans Charged Off and Recovered for the five years ended  December 31,
          2002.

          Allowance for Loan Losses as of December 31, 2002,  2001,  2000, 1999,
          and 1998.

          Maturity  Distribution  of Time  Deposits over $100,000 as of December
          31, 2002.

          Maturity Distribution of all Time Deposits as of December 31, 2002.

          Interest Rate Sensitivity as of December 31, 2002.






                                       7
<PAGE>



Item 2.  Properties:

     The Corporation  owns no real property except through its subsidiary  bank.
Community Banks owns the following  buildings:  150 Market Street,  Millersburg,
Dauphin County, Pennsylvania; 13-23 South Market Street, Elizabethville, Dauphin
County,  Pennsylvania;  3679 Peters  Mountain  Road,  Halifax,  Dauphin  County,
Pennsylvania;  906 North River Road, Halifax, Dauphin County, Pennsylvania;  800
Peters Mountain Road,  Dauphin,  Dauphin County,  Pennsylvania;  Main and Market
Streets, Lykens, Dauphin County, Pennsylvania;  29 East Main Street, Tower City,
Porter Township,  Schuylkill County, Pennsylvania; 29 East Main Street, Tremont,
Schuylkill County,  Pennsylvania;  2 North Second Street, St. Clair,  Schuylkill
County,  Pennsylvania;  Port  Carbon  Highway,  St.  Clair,  Schuylkill  County,
Pennsylvania;  300 East Independence Street,  Shamokin,  Northumberland  County,
Pennsylvania; 1251 Centre Turnpike, 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;   9-11  N.   Centre   Street,   Pottsville,   Schuylkill   County,
Pennsylvania;  One Westside Drive,  Shamokin Dam,  Snyder County,  Pennsylvania;
2796 Old Post Road, Linglestown,  Dauphin County,  Pennsylvania;  5060 Jonestown
Road, Lower Paxton,  Dauphin County,  Pennsylvania;  201 St. John's Church Road,
Camp  Hill,  Hampden  Township,  Cumberland  County,  Pennsylvania;  100 E. King
Street, East Berlin, Adams County, Pennsylvania; 3421 Carlisle Road, Dover, York
County,  Pennsylvania;  29  N.  Washington  Street,  Gettysburg,  Adams  County,
Pennsylvania;  57-59 Main Street, Glen Rock, York County,  Pennsylvania;  234 N.
Main Street,  Loganville,  York County,  Pennsylvania;  16576  Susquehanna Trail
South, New Freedom, York County, Pennsylvania;  Corner of Noss Road & Route 616,
York New Salem, York County,  Pennsylvania;  3093 Cape Horn Road, Red Lion, York
County, Pennsylvania; 55 Wetzel Drive, Hanover, York County, Pennsylvania;  2685
South  Queen St.,  York,  York  County,  Pennsylvania;  and 4501  Hanover  Pike,
Manchester, Carroll County, Maryland.

     In addition to the offices  above,  Community  Banks leases offices at Main
Street,  Pillow, Dauphin County,  Pennsylvania,  pursuant to a lease which, with
renewal  options,  will extend to the year 2008; 600 Carlisle  Street,  Hanover,
York County, Pennsylvania, pursuant to a lease which, with renewal options, will
extend  to  the  year  2006;  and  509  Greenbriar   Road,  York,  York  County,
Pennsylvania,  pursuant to a lease which,  with renewal options,  will extend to
the year  2029.  Also,  the Bank  leases  offices at 390 E. Penn  Drive,  Enola,
Cumberland   County,   Pennsylvania;   Route  93,  Conyngham,   Luzerne  County,
Pennsylvania;  77 Airport Road,  Hazleton,  Luzerne County,  Pennsylvania;  6700
Derry Street, Rutherford,  Dauphin County, Pennsylvania; 16 N. George St., York,
York County, Pennsylvania; 2146 North Second Street, Harrisburg, Dauphin County,
Pennsylvania; and 750 East Park Drive, Harrisburg, Dauphin County, Pennsylvania.

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

     From time to time, the subsidiary  bank also acquires 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.



                                       8
<PAGE>



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 2002.









APPENDIX A
----------
<TABLE>
<CAPTION>

                           RETURN ON EQUITY AND ASSETS
        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, 2000, 1999, AND 1998
        -----------------------------------------------------------------

                                            2002              2001             2000              1999             1998
                                            ----              ----             ----              ----             ----

<S>                                        <C>               <C>              <C>               <C>              <C>
Return on average equity                   15.46%            12.21%           15.08%            14.40%           12.22%

Return on average assets                    1.17%              .97%            1.12%             1.22%            1.21%

Average equity to average assets            7.55%             7.96%            7.45%             8.44%            9.88%

Dividend payout ratio                      36.07%            43.25%           37.48%            36.70%           40.09%
</TABLE>





                                       9
<PAGE>



APPENDIX A
----------
Continued


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

                      At December 31, 2002, 2001, and 2000
                      ------------------------------------
<TABLE>
<CAPTION>


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

                                                                 Estimated                   Estimated                    Estimated
                                                   Amortized        Fair        Amortized       Fair         Amortized       Fair
                                                      Cost         Value          Cost         Value           Cost          Value
                                                   -------------------------------------------------------------------------------

<S>                                                <C>          <C>            <C>          <C>             <C>          <C>
Mortgage-backed U.S. government agencies           $ 206,450    $ 210,825      $  74,403    $  74,370       $  74,685    $  74,689
U.S. Government corporations and agencies            130,947      134,334        144,640      142,544         147,422      144,410
Obligations of states and political sub-
   divisions                                         172,391      177,135        172,223      169,993         102,741      104,173
Corporate securities                                  95,022       93,094         99,561       98,405          42,350       42,498
Equity  securities                                    50,610       52,413         57,846       58,589          23,689       24,049
                                                   ---------    ---------      ---------    ---------       ---------    ---------
   Total                                           $ 655,420    $ 667,801      $ 548,673    $ 543,901       $ 390,887    $ 389,819
                                                   =========    =========      =========    =========       =========    =========
</TABLE>

<TABLE>
<CAPTION>

                     COMMUNITY BANKS, INC. AND SUBSIDIARIES
                MATURITY DISTRIBUTION OF SECURITIES (Fair Value)
                             (dollars in thousands)
                             as of December 31, 2002
                             -----------------------


                                                             One          Five                                             Weighted
                                             Within        Through      Through       After                      Average    Average
                                            One Year      Five Years   Ten Years    Ten Years     Total         Maturity   Yield (a)
                                            ----------------------------------------------------------------------------------------

<S>                                         <C>           <C>          <C>          <C>          <C>           <C>    <C>      <C>
U.S. Government agencies                    $   9,675     $  44,159    $ 149,204    $ 142,121    $ 345,159     11yr.  7mos.    4.80%
Obligations of states and political
   subdivisions                                   544           729        6,060      169,802      177,135     17yr.  6mos.    7.09%
Other                                           4,036        15,386       25,396      100,689      145,507     12yr. 11mos.    4.99%
                                            ----------    ---------    ---------    ---------    ---------

      Total                                 $  14,255     $  60,274    $ 180,660    $ 412,612    $ 667,801     14yr.  2mos.    5.45%
                                            =========     =========    =========    =========    =========

Percentage of total                             2.13%         9.03%       27.05%       61.79%       100.0%
                                                ====          ====        =====        =====        =====

Weighted average yield (a)                      2.85%         4.94%        5.22%        5.71%        5.45%
                                                ====          ====         ====         ====         ====
</TABLE>

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

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



                                       10
<PAGE>





APPENDIX A
----------
Continued





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


<TABLE>
<CAPTION>


                                                2002              2001               2000               1999               1998
                                       --------------------------------------------------------------------------------------------
                                          Amount    Percent   Amount  Percent   Amount   Percent   Amount  Percent   Amount  Percent
                                          ------    -------   ------  -------   ------   -------   ------  -------   ------  -------
<S>                                     <C>          <C>     <C>       <C>     <C>        <C>     <C>        <C>     <C>       <C>
Commercial, financial and agricultural  $ 122,608    13.6%   $158,223  18.4%   $135,612   16.6%   $107,419   15.0%   $105,416  16.7%
Real-estate-construction                   15,693     1.7      21,225   2.5      22,403    2.7      17,003    2.4      17,643   2.8
Real estate-mortgage                      657,655    72.6     554,354  64.5     540,639   66.0     464,680   65.0     390,152  62.0
Personal-installment                       93,175    10.3     107,893  12.6     109,976   13.4     117,317   16.4     104,388  16.6
Other                                      16,252     1.8      17,209   2.0      10,228    1.3       8,583    1.2      12,169   1.9
                                        ---------   ------   -------- -----    --------  -----    --------  -----    -------- -----
                                          905,383   100.0%    858,904 100.0%    818,858  100.0%    715,002  100.0%    629,768 100.0%
                                        ---------   =====    -------- =====    --------  =====    --------  =====    -------- =====

Less:
   Unearned discount                         (815)             (1,626)           (3,984)            (6,986)           (10,018)
   Reserve for loan losses                (12,343)            (12,132)          (10,328)            (8,976)            (8,608)
                                        ---------            --------          --------           --------           --------
                                        $ 892,225            $845,146          $804,546           $699,040           $611,142
                                        =========            ========          ========           ========           ========
</TABLE>





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






                                       11
<PAGE>




APPENDIX A
----------
Continued



                MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
                RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL
                       AND REAL-ESTATE CONSTRUCTION LOANS
                             (dollars in thousands)
                             as of December 31, 2002
                             -----------------------

<TABLE>
<CAPTION>

                                                                       Maturity Distribution
                                                                       ---------------------

                                                   One Year          One to          Over Five
                                                    Or Less        Five Years          Years            Total
                                                    -------        ----------          -----            -----
<S>                                              <C>               <C>              <C>              <C>
Commercial, financial and                        $    99,292       $   89,308       $   106,906      $  295,506
   agricultural                                        2,312               56               247           2,615
Real estate-construction                         -----------       ----------       -----------      ----------
                                                 $   101,604       $   89,364       $   107,153      $  298,121
                                                 ===========       ==========       ===========      ==========
</TABLE>
<TABLE>
<CAPTION>

                                                               Interest Sensitivity
                                                               --------------------

                                                   Variable           Fixed            Total
                                                   --------           -----            -----
<S>                                              <C>               <C>              <C>
Due in one year or less                          $    75,120       $   26,484       $   101,604
Due after one year                                   124,896           71,621           196,517
                                                 -----------       ----------       -----------
                                                 $   200,016       $   98,105       $   298,121
                                                 ===========       ==========       ===========

</TABLE>


                                       12
<PAGE>



APPENDIX A
----------
Continued

<TABLE>
<CAPTION>

                                RISK ELEMENTS (a)
                             (dollars in thousands)
                                as of December 31
                                -----------------

                                                      2002             2001              2000             1999             1998
                                                      ----             ----              ----             ----             ----
Loans on which accrual of interest has
been discontinued:
<S>                                                <C>               <C>               <C>              <C>              <C>
     Commercial, financial and agricultural        $     757         $  3,783          $  2,042         $  2,231         $  3,037
     Mortgages                                         8,250            6,952             3,445            3,203            2,419
     Other                                               386              355               356              222              282
                                                   ---------         --------          --------         --------         --------

                                                       9,393           11,090             5,843            5,656            5,738
                                                   ---------         --------          --------         --------         --------

Loans renegotiated with borrowers                        ---              ---               205              254              248
                                                   ---------         --------          --------         --------         --------

Total non-accrual loans                                9,393           11,090             6,048            5,910            5,986

Other real estate owned                                1,183              631               416              615              853
                                                   ---------         --------          --------         --------         --------

Total non-performing assets                           10,576           11,721             6,464            6,525            6,839
Loans past due 90 days or more:
   Commercial, financial and agricultural                ---            1,002                 8              146               47
   Mortgages                                             913              405               495              147              353
   Personal installment                                   26              239                98               73               36
   Other                                                  22               13                11               12                7
                                                   ---------         --------          --------         --------         --------
                                                         961            1,659               612              378              443
                                                   ---------         --------          --------         --------         --------
Total                                              $  11,537         $ 13,380          $  7,076         $  6,903         $  7,282
                                                   =========         ========          ========         ========         ========
</TABLE>

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

     The  approximate  amount  that would have been  accrued on those  loans for
which interest was discontinued in 2002 was $250,000. Interest income from these
loans would have approximated $605,000 in 2001.

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




                                       13
<PAGE>





APPENDIX A
----------
Continued

<TABLE>
<CAPTION>

                              LOAN LOSS EXPERIENCE
                             (dollars in thousands)
        For the years ended December 31, 2002, 2001, 2000, 1999, and 1998
        -----------------------------------------------------------------

                                                         2002               2001             2000             1999          1998
                                                         ----               ----             ----             ----          ----
<S>                                                    <C>                <C>              <C>             <C>            <C>
Loans at year-end, net of unearned income              $904,568           $857,278         $814,874        $708,016       $619,750
                                                       ========           ========         ========        ========       ========
Average loans balance (a)                              $886,808           $838,178         $768,204        $665,422       $579,926
                                                       ========           ========         ========        ========       ========
Balance, allowance for loan losses,
          January 1                                    $ 12,132           $ 10,328         $  8,976        $  8,608       $  8,535

Net charge-offs (b)                                      (3,139)            (3,276)          (1,511)         (1,220)        (1,981)
Provision for loan losses,                                3,350              5,080            2,863           1,588          2,054
                                                       --------           --------         --------        --------       --------

Balance, allowance for loan losses,
          December 31                                  $ 12,343           $ 12,132         $ 10,328        $  8,976       $  8,608
                                                       ========           ========         ========        ========       ========

Net charge-offs to loans at year end                       .35%               .38%             .19%            .17%           .32%
Net charge-offs to average loans (a)                       .35%               .39%             .20%            .18%           .34%

Balance of allowance for loan losses
          to loans at year end                            1.36%              1.42%            1.27%           1.27%          1.39%
</TABLE>

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

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


     The  allowance  for loan  losses  is  based  upon  management's  continuing
evaluation  of  the  loan  portfolio.  A  review  as to  loan  quality,  current
macro-economic  conditions  and  delinquency  status is  performed at least on a
quarterly basis. The provision for loan losses is adjusted  quarterly based upon
current  review.  The table on page 16 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.



                                       14
<PAGE>



APPENDIX A
----------
Continued


     The  amount  of the  allowance  assigned  to  each  component  of the  loan
portfolio  is derived  from a  combination  of factors.  Estimation  methods and
assumptions used in the process are reviewed periodically by both management and
a committee of the board of directors.  The methodology  used by the Corporation
in estimating the allowance has not changed during 2002.

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

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

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

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

     To ensure  adequacy  to a higher  degree of  confidence,  a portion  of the
allowance for loan losses is considered unallocated.  The unallocated portion of
the allowance is intended to provide for probable  losses that are not otherwise
identifiable.   The  inherent   unallocated   allowance  includes   management's
subjective  determination  of  amounts  necessary  for such  things as  economic
uncertainties  and the possible use of imprecise  estimates in  determining  the
allocated  portion of the allowance.  The unallocated  portion of the allowance,
when added to these  allocated  amounts,  brings the total to the amount  deemed
prudent and reasonable by management at that time. This  unallocated  portion is
available  to absorb  losses  sustained  anywhere  within  the loan  portfolios.
Management  believes that the allowance for loan losses at December 31, 2002 was
adequate to absorb probable credit losses in the portfolio as of that date.

     The  provision  for loan  losses  totaled  $3,350,000  for the  year  ended
December  31,  2002,  compared  to  $5,080,000,   $2,863,000,   $1,588,000,  and
$2,054,000  for the  years  ended  December  31,  2001,  2000,  1999,  and 1998,
respectively.  The  relationship  of the  allowance  for loan losses to loans at
year-end  approximated  1.36% compared to ratios ranging from 1.27% to 1.42% for
the previous  four years.  In reviewing  the adequacy of the  allowance for loan
losses, management considered the relationship of non-accrual loans and accruing
loans  contractually past due 90 days or more to total assets. This relationship
approximated  .62%,  .84%,  .51%,  .55%, and .63% at year-end 2002,  2001, 2000,
1999, and 1998, respectively.


                                       15
<PAGE>



APPENDIX A
----------
Continued


<TABLE>
<CAPTION>
                         LOANS CHARGED OFF AND RECOVERED
                             (dollars in thousands)
        For the years ended December 31, 2002, 2001, 2000, 1999, and 1998
        -----------------------------------------------------------------

                                                         2002               2001             2000            1999           1998
                                                         ----               ----             ----            ----           ----

Loans charged off:
<S>                                                    <C>                <C>              <C>             <C>            <C>
   Commercial, financial and agricultural              $  1,355           $  2,275         $    303        $    489       $  1,304
   Real estate-mortgage                                   1,997                484              521             190            248
   Personal installment                                      86                108              215             903            833
   Other                                                    742                909              886              81             77
                                                       --------           --------         --------        --------       --------
Total                                                     4,180              3,776            1,925           1,663          2,462
                                                       --------           --------         --------        --------       --------
Loans recovered:
   Commercial, financial and agricultural                   507                120               23             140             53
   Real estate-mortgage                                     153                108               83              43            104
   Personal installment                                     363                254              298             243            299
   Other                                                     18                 18               10              17             25
                                                       --------           --------         --------        --------       --------
Total                                                     1,041                500              414             443            481
                                                       --------           --------         --------        --------       --------
    Net charge-offs                                    $  3,139           $  3,276         $  1,511        $  1,220       $  1,981
                                                       ========           ========         ========        ========       ========
</TABLE>

<TABLE>
<CAPTION>


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

                                                         2002               2001             2000            1999           1998
                                                         ----               ----             ----            ----           ----

Loans:
<S>                                                    <C>                <C>              <C>             <C>            <C>
    Commercial, financial and agricultural             $  6,305           $  9,285         $  5,268        $  3,030       $  3,008
    Real estate-construction                                ---                 10               14               9              7
    Real estate-mortgage                                  1,936                965            1,593           1,509          1,726
    Installment                                           1,767              1,030            1,748           1,575          1,566
    Unallocated                                           2,335                842            1,705           2,853          2,301
                                                       --------           --------         --------        --------       --------
Balance                                                $ 12,343           $ 12,132         $ 10,328        $  8,976       $  8,608
                                                       ========           ========         ========        ========       ========
</TABLE>


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




                                       16
<PAGE>






APPENDIX A
----------
Continued



                          MATURITY DISTRIBUTION OF TIME
                          DEPOSITS OF $100,000 OR MORE
                             (dollars in thousands)
                             as of December 31, 2002
                             -----------------------


         Remaining to Maturity:
         Less than three months                     $  20,776
         Three months to six months                    13,636
         Six months to twelve months                   32,339
         More than twelve months                       45,296
                                                    ---------
                                                    $ 112,047
                                                    =========







                          MATURITY DISTRIBUTION OF ALL
                                  TIME DEPOSITS
                             (dollars in thousands)
                             as of December 31, 2002
                             -----------------------


         Remaining Maturity:
         One year or less                           $ 312,177
         After one year through two years             160,595
         After two years through three years           63,556
         After three years through four years          17,451
         After four years through five years           60,055
         After five years                               5,204
                                                    ---------
                                                    $ 619,038
                                                    =========





                                       17
<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  negative  GAP between the  Corporation's  interest-earning  assets and
interest-bearing  liabilities maturing or repricing within one year approximated
5% of total assets at December 31, 2002.

     Significant  maturity/repricing  assumptions  (based on internal  analysis)
include the presentation of all savings, Money Market, and NOW accounts as being
100% interest rate  sensitive.  Equity  securities  are reflected in the longest
time interval.  Assumed pay downs on  mortgage-backed  securities and loans have
also been included in all time intervals.

     The following  table sets forth the scheduled  repricing or maturity of the
Corporation's   interest-earning  assets  and  interest-bearing  liabilities  at
December 31, 2002.



                                       18
<PAGE>



APPENDIX A
----------
Continued

<TABLE>
<CAPTION>


Interest Rate Sensitivity
------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002                            1-90             90-180          180-365            1 year
Dollars in thousands                            days              days             days             or more           Total
------------------------------------------------------------------------------------------------------------------------------

Assets
<S>                                           <C>               <C>             <C>                <C>              <C>
Interest-bearing deposits in
   other banks                                $     951               ---              ---               ---        $      951
Investment securities                           110,487         $  40,220       $   67,684         $ 449,410           667,801
Loans, net of unearned income*                  299,987            70,423           87,846           446,312           904,568
Loans held for sale                                  96                96              192             2,565             2,949
------------------------------------------------------------------------------------------------------------------------------
Total                                         $ 411,521         $ 110,739       $  155,722         $ 898,287        $1,576,269
------------------------------------------------------------------------------------------------------------------------------
Liabilities
Savings                                       $ 345,598         $     ---       $      ---         $     ---        $  345,598
Time                                             81,818            60,044          107,129           258,000           506,991
Time in denominations of
   $100,000 or more                              20,776            13,636           32,339            45,296           112,047
Short-term borrowings                            69,125               ---              ---               ---            69,125
Long-term debt                                      840               840            6,680           312,173           320,533
Subordinated debentures                          15,000               ---              ---               ---            15,000
------------------------------------------------------------------------------------------------------------------------------
Total                                         $ 533,157         $  74,520       $  146,148         $ 615,469        $1,369,294
------------------------------------------------------------------------------------------------------------------------------


Interest Sensitivity Gap
Periodic                                      $(121,636)        $  36,219       $    9,574         $ 282,818
Cumulative                                                        (85,417)         (75,843)          206,975
Cumulative gap as a percentage
   of earning assets                               (8)%              (5)%             (5)%               13%

*Does not include non-accrual loans.
</TABLE>



Forward-Looking Statements:
--------------------------

     Incorporated  by reference is the  information  appearing under the heading
"Forward-Looking Statements" on page 40 of the Annual Report to Stockholders for
the year ended December 31, 2002 (hereafter referred to as the "Annual Report").


                                       19
<PAGE>



                                     PART II


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

     Incorporated  by reference is the  information  appearing under the heading
"Market  for the  Corporation's  Common  Stock and  Related  Securities  Holders
Matters" on page 41 of the Annual Report.

     On December 19, 2002, the Corporation,  through its subsidiary CMTY Capital
Trust I, issued and sold to TPref  Funding III,  Ltd.,  15,000  trust  preferred
securities for an aggregate offering price of $15 million.  The trust securities
were exempt from  registration  under the private offering  exemption in Section
4(2) of the  Securities  Act of 1933. The proceeds of the sale were used by CMTY
for general corporate  purposes.

<TABLE>
<CAPTION>
                      Equity Compensation Plan Information


Plan Category                 Number of securities          Weighted average              Number of securities
                              to be issued upon             exercise price of             remaining available
                              exercise of                   outstanding options,          for future issuance
                              outstanding options,          warrants and rights           under equity
                              warrants and rights                                         compensation plans
                                                                                          (excluding securities
                                                                                          reflected in column
                                                                                          (a))
                              (a)                           (b)                           (c)

<S>                           <C>                           <C>                           <C>
Equity compensation
plans approved by
security holders              786,397                       $19.74                        882,669

Equity compensation
plans not approved
by security holders           -0-                           -0-                           -0-
Total                         786,397                       $19.74                        882,669
</TABLE>


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

     Incorporated  by reference is the  information  appearing under the heading
"Financial Highlights" on page 28 of the Annual Report.

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

     Incorporated by reference is the  information  appearing under the headings
"Rate/Volume Analysis";  "Average Balances,  Effective Interest Differential and
Interest  Yields";  and  "Management's  Discussion  of Financial  Condition  and
Results of Operations' on pages 29 through 41 of the Annual Report.


                                       20
<PAGE>

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
--------  ----------------------------------------------------------

     Community  Banks,  Inc. has only virtually no involvement  with  derivative
financial  instruments  and  does  not use  them  for  trading  purposes.  These
derivatives  are  embedded  in their host  contract  and are not  required to be
bifurcated.  The business of the  Corporation and the composition of its balance
sheet consists of  investments  in  interest-earning  assets  (primarily  loans,
mortgage-backed  securities  and  investment  securities),  which are  primarily
funded by interest-bearing liabilities (deposits and borrowings). Such financial
instruments  have varying levels of  sensitivity  to changes in market  interest
rates resulting in market risk. Other than loans,  which are originated and held
for sale, all of the financial instruments of the Corporation are for other than
trading purposes.

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

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

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

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

Embedded Options
----------------

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



                                       21
<PAGE>

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

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

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


Interest Rate Sensitivity Measurement
-------------------------------------

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

     The  following  table  reflects  the  estimated  present  value of  assets,
liabilities and equity using the model for Community Banks,  Inc. as of December
31, 2002 at current interest rates and hypothetically, higher and lower interest
rates of one and two percent.


                                       22
<PAGE>

<TABLE>
<CAPTION>

                                                                                         Base
                                                        -2%             -1%          Present Value         +1%             +2%
                                                    ------------------------------------------------------------------------------

                   Assets                                                       (dollars in thousands)
<S>                                                 <C>             <C>               <C>              <C>              <C>
Cash, interest-bearing time deposits,
    and federal funds sold.......................   $   37,088      $   37,088        $   37,088       $   37,088       $   37,088
Investment securities............................      678,878         661,164           643,451          625,737          608,023
Loans, net of unearned income....................      934,143         923,134           911,547          900,261          888,475
Loans held for sale..............................       11,325          11,228            11,134           11,046           10,961
Other assets.....................................       71,301          71,301            71,301           71,301           71,301
                                                    ----------      ----------        ----------       ----------       ----------

     Total assets................................   $1,732,735      $1,703,915        $1,674,521       $1,645,433       $1,615,848
                                                    ==========      ==========        ==========       ==========       ==========

               Liabilities
Deposits.........................................   $1,161,271      $1,153,431        $1,144,891       $1,136,570       $1,128,461
Short-term borrowings............................       67,234          67,234            67,234           67,234           67,234
Long-term debt...................................      404,473         371,429           344,236          321,562          302,401
Subordinated debentures                                 15,000          15,000            15,000           15,000           15,000
Other liabilities................................       15,056          15,056            15,056           15,056           15,056
                                                    ----------      ----------        ----------       ----------       ----------

     Total liabilities...........................    1,663,034       1,622,150         1,586,417        1,555,422        1,528,152
                                                    ----------      ----------        ----------       ----------       ----------

     Total stockholders' equity..................       69,701          81,765            88,104           90,011           87,696
                                                    ----------      ----------        ----------       ----------       ----------
     Total liabilities and stockholders'
        equity...................................   $1,732,735      $1,703,915        $1,674,521       $1,645,433       $1,615,848
                                                    ==========      ==========        ==========       ==========       ==========

</TABLE>

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

Critical Accounting Policies

     The Corporation has established various accounting policies that govern the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  its  financial  statements.  The  significant
accounting  policies of the  Corporation  are  described in the footnotes to the
consolidated   financial   statements.   Certain  accounting   policies  involve
significant  judgments and assumptions by management that have a material impact
on the carrying value of certain assets and  liabilities;  management  considers
such accounting policies to be critical accounting  policies.  The judgments and
assumptions  used by management  are based on historical  experiences  and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions  made by management,  actual results
could differ from these  judgments  and  estimates,  which could have a material
impact on the  carrying  values of assets  and  liabilities  and the  results of
operations of the Corporation.  The Corporation  believes that the allowance for
loan  losses,  which is discussed in the section  titled  "Determination  of the
Allowance for Loan Losses"  (incorporated  by reference on page 37 of the Annual
Report)  requires  the most  significant  judgments  and  estimates  used in the
preparation of its consolidated financial statements.  See "Footnote 2 - Summary
of Significant  Accounting Policies"  (incorporated by reference on pages 10 and
11 of the  Annual  Report)  for a  detailed  description  of  the  Corporation's
estimation process and methodology related to the allowance for loan losses.


                                       23
<PAGE>

     The consolidated financial statements,  together with the report thereon of
PricewaterhouseCoopers LLP dated January 24, 2003, are incorporated by reference
to pages 6 through 27 of the Annual Report.



Item 9.  Changes in and Disagreements With Accountants on Accounting and
-------  ----------------------------------------------------------------
         Financial Disclosure:
         ----------------------

         None.



                                       24
<PAGE>

                                    PART III

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

     Incorporated by reference to the  Corporation's  definitive Proxy Statement
for its 2003 Annual  Meeting of  Shareholders,  which will be filed on or before
April 30, 2003.

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

     Incorporated by reference to the  Corporation's  definitive Proxy Statement
for its 2003 Annual  Meeting of  Shareholders,  which will be filed on or before
April 30, 2003.

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

     Incorporated by reference to the  Corporation's  definitive Proxy Statement
for its 2003 Annual  Meeting of  Shareholders,  which will be filed on or before
April 30, 2003.

Item 13.  Certain Relationships and Related Transactions:
--------  -----------------------------------------------

     Incorporated by reference to the  Corporation's  definitive Proxy Statement
for its 2003 Annual  Meeting of  Shareholders,  which will be filed on or before
April 30, 2003.

Item 14.  Controls and Procedures:
-------   ------------------------

     Under  the  supervision  and  with  the   participation  of  the  Company's
management,  including its Chief Executive Officer and Chief Financial  Officer,
the Company has evaluated the  effectiveness  of the design and operation of its
disclosure  controls and  procedures  within 90 days prior to the filing date of
this annual report. Based upon this evaluation,  the Chief Executive Officer and
Chief Financial  Officer have concluded that the Company's  disclosure  controls
and  procedures  are adequate and effective to ensure that material  information
relating to the Company and its consolidated  subsidiaries is made known to them
by others within those  entities,  particularly  during the period in which this
annual report was prepared.  There were no significant  changes in the Company's
internal  controls or in other  factors  that could  significantly  affect these
controls subsequent to the date of their evaluation.



                                       25
<PAGE>





PART IV

Item 15.  Exhibits, Financial Statements Schedules and Reports on Form 8-K:
--------  -----------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                     Reference (page)
                                                                                     ----------------
(a) (1)    Consolidated Financial Statements                                    Form         Annual Report to
                                                                                10-K            Shareholders
                                                                                ----            ------------
<S>                                                                             <C>               <C>
           Report of Independent Accountants                                    ---                  27

           Balance Sheets as of December 31, 2002
             and 2001                                                           ---                   6

           Statements of Income for each of the three years
             ended December 31, 2002                                            ---                   7

           Statements of Changes in Stockholders' Equity for each of the
             three years ended December 31, 2002.                               ---                   8

           Statements of Cash Flows for each of the three years ended
             December 31, 2002                                                  ---                   9


           Notes to Financial Statements                                        ---               10-26
</TABLE>

(a) (2)      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.

(a) (3)    Exhibits

             (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, page 4.)

(b)       The registrant filed the following reports on Form 8-K during the
          fourth calendar quarter of the year ending December 31, 2002:

          Report Dated October 18, 2002
          -----------------------------
          Registrant announced its earnings for the period ended
          September 30, 2002.

          Report Dated October 30, 2002
          -----------------------------
          Registrant released information pursuant to Regulation FD with respect
          to presentation materials, which were made available to the investment
          community by Community Banks, Inc.

          Report Dated November 5, 2002
          -----------------------------
          Registrant announced a stock repurchase agreement.




                                       26
<PAGE>


          Report Dated December 17, 2002
          ------------------------------
          Registrant  announced an Agreement and Plan of Reorganization  between
          Community Banks, Inc. and the Abstracting Company of York County.


(c)   Exhibits

         (3)(i) Articles of Incorporation - Incorporated by reference to
                Exhibit 3.1, attached to Community's registration on Form 8-A,
                filed on May 13, 2002
         (3)(ii)By-Laws
         (4)    Instruments defining the rights of the holders of trust
                capital securities and sold by the Corporation are not
                attached, as the amount of such securities is less than 10%
                of the consolidated assets of the Corporation and its
                subsidiaries, and the securities have not been registered.
                The Corporation agrees to provide copies of such instruments
                to the SEC upon request.
         (10)   Material Contracts
         10.1  2000 Directors'  Stock Option Plan,  incorporated by reference to
               Exhibit 4 to Community's  registration  on Form S-8, filed on May
               17, 2000
         10.2  1998  Long-Term  Incentive  Plan,  incorporated  by  reference to
               Exhibit 4 to Community's  registration on Form S-8, filed on June
               18, 1998
         10.3  Form of Stock Option Agreement - Directors Stock Option Plan
         10.4  Form of Stock Option Agreement - Long-Term Incentive Plan
         10.5  Employment   Agreement of  Eddie  L. Dunklebarger
         10.6  Employment Agreement of Donald F. Holt
         10.7  Employment Agreement, and amendment thereto, of Robert W. Lawley
         10.8  Employment Agreement, and amendment thereto, of Anthony N. Leo
         10.9  Employment  Agreement,  and  amendment  thereto,  of  Jeffrey  M.
               Seibert
         10.10 Salary  Continuation  Agreement,  and amendment thereto, of Eddie
               L. Dunklebarger
         10.11 Salary Continuation  Agreement,  and amendment thereto, of Robert
                W. Lawley
         10.12 Salary Continuation Agreement,  and amendment thereto, of Anthony
               N. Leo
         10.13 Salary Continuation Agreement,  and amendment thereto, of Jeffrey
               M. Seibert
         10.14 Rights  Agreement  between  Community  Banks,  Inc. and Community
               Banks,  dated  February  28, 2002,  incorporated  by reference to
               Exhibit  1 to  Community's  registration  on Form  8-A,  filed on
               February 27, 2002
         10.15 Community Banks, Inc. 401(k) Plan
         23.1  Consent of Independent Accountants - PricewaterhouseCoopers LLP
         23.2  Consent of Independent Accountants - Beard Miller Company LLP
         99.1  Certification of Chief Executive Officer pursuant to Section
               906 of the Sarbanes-Oxley Act of 2002.
         99.2  Certification of Chief Financial Officer pursuant to Section 906
               of the Sarbanes-Oxley Act of 2002.
         99.3  Independent Auditor's Report - Beard Miller Company LLP





                                       27
<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: /S/ (Eddie L. Dunklebarger)
                          -----------------------------
                                 (Eddie L. Dunklebarger)
                  Chairman of the Board, President and Director


Date: 3/28/03

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


 /S/     (Donald F. Holt)              Ex. Vice President and            3/28/03
----------------------------------     Chief Financial Officer
         (Donald F. Holt)

 /S/     (Ronald E. Boyer)             Director                          2/11/03
----------------------------------
         (Ronald E. Boyer)

 /S/     (Samuel E. Cooper)            Director                          2/11/03
----------------------------------
         (Samuel E. Cooper)

 /S/     (Kenneth L. Deibler)          Director                          2/11/03
----------------------------------
         (Kenneth L. Deibler)

                                       Director
----------------------------------
         (Peter DeSoto)

 /S/     (Thomas W. Long)              Director                          2/11/03
----------------------------------
         (Thomas W. Long)

 /S/     (Donald L. Miller)            Director                          2/11/03
----------------------------------
         (Donald L. Miller)





                                       28
<PAGE>











 /S/     (Thomas L. Miller)            Director                          2/11/03
----------------------------------
         (Thomas L. Miller)

 /S/     (Earl L. Mummert)             Director                          2/11/03
----------------------------------
         (Earl L. Mummert)

                                       Director
----------------------------------
         (Wayne H. Mummert)

 /S/     (Scott J. Newkam)             Director                          2/11/03
----------------------------------
         (Scott J. Newkam)


 /S/     (Robert W. Rissinger)         Director                          2/11/03
----------------------------------
         (Robert W. Rissinger)

 /S/     (Allen Shaffer)               Director                          2/11/03
----------------------------------
         (Allen Shaffer)

 /S/     (John W. Taylor, Jr.)         Director                          2/11/03
----------------------------------
         (John W. Taylor, Jr.)

 /S/     (James A. Ulsh)               Director                          2/11/03
----------------------------------
         (James A. Ulsh)







                                       29
<PAGE>





                                  CERTIFICATION

I, Eddie L. Dunklebarger, certify that:

1. I have reviewed this annual report on Form 10-K of Community Banks, Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a) designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     annual report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
     employees  who  have  a  significant  role  in  the  registrant's  internal
     controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date  3/28/03                                        /s/ Eddie L. Dunklebarger
    ----------------------------                     ---------------------------
                                                         Eddie L. Dunklebarger
                                                        Chairman and President
                                                       (Chief Executive Officer)






                                       30
<PAGE>




                                  CERTIFICATION

I, Donald F. Holt, certify that:

1. I have reviewed this annual report on Form 10-K of Community Banks, Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a) designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     annual report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
     employees  who  have  a  significant  role  in  the  registrant's  internal
     controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date  3/28/03                                          /s/ Donald F. Holt
    ----------------------------                       -------------------------
                                                           Donald F. Holt
                                                       Executive Vice President
                                                       (Chief Financial Officer)








                                       31