SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

   QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT

                                     OF 1934


                    For the Quarter Ended September 30, 2001

                                   No. 0-15786
                                   -----------
                            (Commission File Number)

                              COMMUNITY BANKS, INC.
                              --------------------
             (Exact Name of Registrant as Specified in its Charter)


     PENNSYLVANIA                                                    23-2251762
------------------------                                            -----------
(State of Incorporation)                                (IRS Employer ID Number)
------------------------

150 Market Street, Millersburg, PA                                      17061
----------------------------------------                            ------------
(Address of Principal Executive Offices)                             (Zip Code)

                                 (717) 692-4781
                                ---------------
                         (Registrant's Telephone Number)


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

                                          YES     X             NO
                                         ------------         -------------

              Number of shares outstanding as of September 30, 2001

CAPITAL STOCK-COMMON                                                8,871,000
--------------------                                             --------------
(Title of Class)                                            (Outstanding Shares)


<PAGE>


                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                   INDEX 10-Q

PART I

Financial Information.........................................................1

Consolidated Interim Balance Sheets...........................................2

Consolidated Interim Statements of Income.....................................3

Consolidated Interim Statements of Changes in Stockholders' Equity............4

Consolidated Interim Statements of Cash Flows.................................5

Notes to Consolidated Interim Financial Statements.........................6-10

Management's Discussion and Analysis of Financial
   Condition and Results of Operation.....................................11-17



PART II

Other Information and Signatures.............................................18




<PAGE>


                         PART I - FINANCIAL INFORMATION

                     COMMUNITY BANKS, INC. and SUBSIDIARIES


The  following  financial  information  sets forth the  operations  of Community
Banks,  Inc. and  Subsidiaries  (CTY) for the three month and nine month periods
ending September 30, 2001 and 2000.

In the opinion of management,  the following interim Consolidated Balance Sheets
and related Consolidated  Statements of Income, Changes in Stockholders' Equity,
and Cash Flows reflect all adjustments  (consisting of normal recurring  accrual
adjustments)  necessary to present fairly the financial  position and results of
operations for such periods.

                                       1
<PAGE>

                     COMMUNITY BANKS, INC. AND SUBSIDIARIES
                      Consolidated Interim Balance Sheets
                                  (Unaudited)
                  (Dollars in thousands except per share data)
<TABLE>
<S>                                                                         <C>                      <C>
                                                                            September 30,              December 31,
                                                                                2001                      2000
                                                                           -------------             -------------
ASSETS

Cash and due from banks.....................................                $     31,739              $     42,166
Interest-bearing time deposits in other banks...............                       2,128                     2,568
Investment securities, available for sale
   (fair value).............................................                     482,956                   389,819
Federal funds sold..........................................                      18,255                     6,280
Loans.......................................................                     855,897                   818,858
Less: Unearned income.......................................                      (2,848)                   (3,984)
          Allowance for loan losses.........................                     (11,789)                  (10,328)
                                                                           -------------             -------------
          Net loans.........................................                     841,260                   804,546
Premises and equipment, net.................................                      22,334                    21,587
Intangible assets...........................................                         991                     1,059
Other real estate owned.....................................                         534                       416
Loans held for sale.........................................                       3,718                     2,719
Accrued interest receivable and other assets................                      42,279                    37,553
                                                                           -------------             -------------
     Total assets...........................................                  $1,446,194                $1,308,713
                                                                           =============             =============
LIABILITIES

Deposits:
   Demand (non-interest bearing)............................                 $   158,029               $   155,796
   Savings..................................................                     309,556                   257,178
   Time.....................................................                     464,222                   426,573
   Time in denominations of $100 or more....................                      81,224                    79,694
                                                                           -------------             -------------
   Total deposits..........................................                    1,013,031                   919,241
Short-term borrowings.......................................                       8,303                    36,093
Long-term debt..............................................                     296,750                   239,613
Accrued interest payable and other liabilities..............                      13,092                     9,788
                                                                           -------------             -------------
   Total liabilities........................................                   1,331,176                 1,204,735
                                                                           -------------             -------------

STOCKHOLDERS' EQUITY

Preferred stock, no par value; 500,000 shares
   authorized; no shares issued and outstanding.............                         ---                       ---
Common stock-$5.00 par value; 20,000,000
   shares authorized; 8,969,000 and 8,545,000
   shares issued in 2001 and 2000, respectively.............                      44,845                    42,726
Surplus.....................................................                      35,906                    29,155
Retained earnings...........................................                      33,872                    38,723
Accumulated other comprehensive income (loss),
   net of tax (benefit) of $1,204 and $(374),
     respectively...........................................                       2,236                      (694)
Less: Treasury stock of 98,000 and 300,000
   shares at cost, respectively.............................                      (1,841)                   (5,932)
                                                                           -------------             -------------
   Total stockholders' equity...............................                     115,018                   103,978
                                                                           -------------             -------------

  Total liabilities and stockholders' equity................                  $1,446,194                $1,308,713
                                                                           =============             =============

</TABLE>

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

                                       2

<PAGE>


                     COMMUNITY BANKS, INC. AND SUBSIDIARIES
                   Consolidated Interim Statements of Income
                                  (Unaudited)
                  (Dollars in thousands except per share data)
<TABLE>
<S>                                                                     <C>           <C>                   <C>             <C>
                                                                            Three Months Ended                 Nine Months Ended
                                                                               September 30,                     September 30,
                                                                       --------------------------           ------------------------
                                                                           2001            2000                 2001           2000
                                                                       --------------------------           ------------------------
Interest income:

Interest and fees on loans........................................       $17,520         $17,376              $52,900        $48,730
Interest and dividends on investment securities:
   Taxable........................................................         4,884           5,344               14,644         15,470
   Exempt from federal income tax.................................         1,862           1,176                5,060          3,420
Federal funds interest...........................................            261              94                  771            435
Other interest income.............................................            40              14                   91             46
                                                                        --------        --------             --------       --------
      Total interest income.......................................        24,567          24,004               73,466         68,101
                                                                        --------        --------             --------       --------

Interest expense:
Interest on deposits:
   Savings........................................................         1,786           1,509                5,501          5,177
   Time...........................................................         6,204           6,472               19,173         17,454
   Time in denominations of $100 or more..........................         1,057           1,154                3,109          2,684
Interest on short-term borrowings and long-term debt..............         3,900           3,598               11,422          9,577
Federal funds purchased and repo interest.........................           201             326                  624            897
                                                                        --------        --------             --------       --------
   Total interest expense........................................         13,148          13,059               39,829         35,789
                                                                        --------        --------             --------       --------
   Net interest income............................................        11,419          10,945               33,637         32,312
Provision for loan losses.........................................         1,306             658                3,750          1,544
                                                                        --------        --------             --------       --------
   Net interest income after provision for loan losses...........         10,113          10,287               29,887         30,768
                                                                        --------        --------             --------       --------
Other income:
   Investment management and trust services.......................           147             144                  430            444
   Service charges on deposit accounts............................           861             698                2,450          2,014
   Other service charges, commissions and fees....................           452             517                1,442          1,410
   Investment security gains......................................         1,018             140                1,256            358
   Insurance premium income and commissions.......................           408             405                1,051            965
   Gains on loan sales............................................           326              92                  867            250
   Other income...................................................           457             264                1,064            794
                                                                        --------        --------             --------       --------
      Total other income..........................................         3,669           2,260                8,560          6,235
                                                                        --------        --------             --------       --------
Other expenses:...................................................
   Salaries and employee benefits.................................         4,497           4,164               13,729         12,236
   Net occupancy expense..........................................         1,259           1,196                3,994          3,499
   Operating expense of insurance subsidiary......................           178             155                  515            413
   Merger and restructuring related expenses......................          (115)             --                1,683             --
   Other operating expense........................................         2,468           2,230                7,150          6,644
                                                                        --------        --------             --------       --------
      Total other expense.........................................         8,287           7,745               27,071         22,792
                                                                        --------        --------             --------       --------
      Income before income taxes..................................         5,495           4,802               11,376         14,211
Provision for income taxes........................................         1,176           1,215                2,218          3,597
                                                                        --------        --------             --------       --------

      Net income..................................................      $  4,319         $ 3,587             $  9,158        $10,614
                                                                        ========        ========             ========       ========
Earnings per share:
   Basic..........................................................    $      .49       $     .41            $    1.04       $   1.22
   Diluted........................................................    $      .48       $     .41            $    1.03       $   1.20
Dividends paid per share..........................................    $      .17       $     .15            $     .49       $    .44

</TABLE>

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

                                       3

<PAGE>

                     COMMUNITY BANKS, INC. AND SUBSIDIARIES
       Consolidated Interim Statements of Changes in Stockholders' Equity
                  (Dollars in thousands except per share data)
<TABLE>
<S>                                        <C>          <C>          <C>              <C>              <C>              <C>
                                                                  Nine Month Periods Ended September 30
                                                                                     Accumulated
                                                                                        Other
                                             Common                  Retained       Comprehensive       Treasury          Total
                                              Stock       Surplus    Earnings          Income             Stock          Equity
                                           ----------------------------------------------------------------------------------------

Balance, January 1, 2000.................   $40,903       $24,259    $36,432          $(11,697)         $ (3,588)      $  86,309
   Comprehensive income:
      Net income.........................                             10,614                                              10,614
      Change in unrealized gain (loss)
      on securities, net of tax of $1,382
        and reclassification adjustment
         of $358 ........................                                                2,566                             2,566
                                                                                                                       ---------
     Total comprehensive income..........                                                                                 13,180
Cash dividends ($.44 per share)..........                             (3,845)                                             (3,845)
5% stock dividend (348,000 shares).......     1,740         4,612     (6,352)
Net increase in treasury stock
   (127,000 shares)......................                                                                 (2,374)         (2,374)
Issuance of additional shares
   (15,000 shares).......................        77           236        (81)                                                232
                                            -------       -------    -------         ---------          --------       ---------
Balance, September 30, 2000..............   $42,720       $29,107    $36,768         $  (9,131)         $ (5,962)      $  93,502
                                            =======       =======    =======         =========          ========       =========

Balance, January 1, 2001.................   $42,726       $29,155    $38,723         $    (694)         $ (5,932)      $ 103,978
   Comprehensive income:
     Net income..........................                              9,158                                               9,158
    Change in unrealized gain (loss)
    on securities, net of tax of $1,578
     and reclassification adjustment
      of $1,256..........................                                                2,930                             2,930
                                                                                                                       ---------
     Total comprehensive income..........                                                                                 12,088
Cash dividends ($.49 per share)..........                             (4,376)                                             (4,376)
5% stock dividend (426,000 shares).......     2,130         6,773     (8,903)
Issuance of additional shares
   (202,000 net shares of treasury
     stock reissued and 2,000 shares
     of common stock cancelled) .........       (11)          (22)      (730)                              4,091           3,328
                                            -------       -------    -------         ---------          --------       ---------

Balance, September 30, 2001..............   $44,845       $35,906    $33,872          $  2,236          $ (1,841)       $115,018
                                            =======       =======    =======         =========          ========       =========
</TABLE>


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

                                        4
<PAGE>


                     COMMUNITY BANKS, INC. AND SUBSIDIARIES
                 Consolidated Interim Statements of Cash Flows
                                  (Unaudited)
                             (Dollars in thousands)
<TABLE>
<S>                                                                                     <C>                     <C>
                                                                                                Nine Months Ended
                                                                                                  September 30,

                                                                                           2001                      2000
                                                                                      --------------------------------------
Operating Activities:
   Net income.....................................................                      $  9,158                   $ 10,614
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for loan losses....................................                         3,750                      1,544
     Depreciation and amortization................................                         3,410                      2,541
     Net decrease in intangible assets............................                            68                        181
     Investment security gains....................................                        (1,256)                      (358)
     Loans originated for sale....................................                       (54,665)                   (14,912)
     Proceeds from sales of loans.................................                        54,533                     14,969
     Gains on loan sales..........................................                          (867)                      (250)
     Change in other assets, net..................................                        (4,822)                    (6,141)
     Increase in accrued interest payable and other
      liabilities, net............................................                         2,100                      1,076
                                                                                       ---------                  ---------
     Net cash provided by operating activities....................                        11,409                      9,264
                                                                                       ---------                  ---------

Investing Activities:
   Net decrease in interest-bearing time
    deposits in other banks.......................................                           440                        673
   Proceeds from sales of investment securities...................                        59,142                      7,512
   Proceeds from maturities of investment securities..............                        84,744                      8,142
   Purchases of investment securities.............................                      (232,918)                   (44,417)
   Net increase in total loans....................................                       (40,860)                  (101,603)
   Net increase in premises and equipment.........................                        (2,498)                    (4,271)
                                                                                       ---------                  ---------
      Net cash used by investing activities.......................                      (131,950)                  (133,964)
                                                                                       ---------                  ---------

Financing Activities:
   Net increase in total deposits.................................                        93,790                    100,778
   Net decrease in short-term borrowings..........................                       (27,790)                      (629)
   Proceeds from issuance of long-term debt.......................                        57,831                    142,360
   Repayment of long-term debt....................................                          (694)                  (109,000)
   Cash dividends.................................................                        (4,376)                    (3,845)
   Purchases of treasury stock....................................                            --                     (2,374)
   Proceeds from issuance of common stock.........................                         3,328                        232
                                                                                       ---------                  ---------
      Net cash provided by financing activities...................                       122,089                    127,522
                                                                                       ---------                  ---------

     Increase in cash and cash equivalents........................                         1,548                      2,822

   Cash and cash equivalents at beginning of period...............                        48,446                     37,117
                                                                                       ---------                  ---------
   Cash and cash equivalents at end of period.....................                     $  49,994                   $ 39,939
                                                                                       =========                  =========
</TABLE>

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

                                       5
<PAGE>

                     COMMUNITY BANKS, INC. AND SUBSIDIARIES
               Notes to Consolidated Interim Financial Statements
                                  (Unaudited)
                             (Dollars in thousands)


1.  Accounting Policies

     These   financial   statements   have  been  prepared  in  accordance  with
instructions  for Form 10-Q and therefore do not include certain  information or
footnotes  necessary for the  presentation  of financial  condition,  results of
operations,  stockholders'  equity, and cash flows in conformity with accounting
principles  generally accepted in the United States of America.  However, in the
opinion  of  management,  the  consolidated  financial  statements  reflect  all
adjustments  (which consist of normal recurring  accruals)  necessary for a fair
presentation of the results for the unaudited periods.

     The  accounting  policies of Community  Banks,  Inc. and  subsidiaries,  as
applied in the consolidated  interim financial  statements presented herein, are
substantially  the same as those  followed on an annual  basis as  presented  on
pages 10 and 11 of the 2000 Annual Report to shareholders.



   Other Events

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

<TABLE>
<S>                                                             <C>                     <C>                  <C>
                                                                            Quarter Ended September 30, 2000
                                                                            ---------------------------------
                                                                      (dollars in thousands expect per share data)

                                                                   CTY                        GR                Combined
                                                               ----------------------------------------------------------

Interest income........................................         $20,649                    $3,355               $24,004
Interest expense.......................................          11,114                     1,945                13,059
                                                               ----------------------------------------------------------
Net interest income....................................           9,535                     1,410                10,945
Loan loss provision....................................             613                        45                   658
Other income...........................................           2,031                       229                 2,260
Other expense..........................................           6,602                     1,143                 7,745
                                                               ----------------------------------------------------------
Income before taxes....................................           4,351                       451                 4,802
Taxes..................................................           1,108                       107                 1,215
                                                               ----------------------------------------------------------

Net income.............................................        $  3,243                   $   344              $  3,587
                                                               =========================================================

Earnings per common share:

Basic                                                          $    .44                   $   .26              $    .41
Diluted                                                        $    .43                   $   .26              $    .41

</TABLE>

Per share data has been adjusted to reflect a five percent  stock  dividend paid
April 30, 2001.


                                       6
<PAGE>


Consolidated Interim Statements of Income

     Included  in the  Consolidated  Interim  Statements  of Income for the nine
months ended  September 30, 2001 are merger and  restructuring  related  charges
totaling $1.7 million. The following summarizes the components of the merger and
restructuring  expenses  charged to  operations  during  2001 and the  remaining
accrual  balance at September  30,  2001. A portion of the original  accrual was
subsequently  reversed  due in part to  changes  in  personnel  obligations  and
availability of alternative positions.

<TABLE>
<S>                                                             <C>             <C>               <C>               <C>
                                                                                                                   Remaining
                                                                Original         Incurred          Accrual           Accrual
                                                                 Accrual          to-Date         Reversal        at 9/30/01
                                                                 -------         --------         --------        ----------

     Merger costs:
         Employee severance benefits                            $   508          $   374            $  (99)            $ 35
         Legal and professional fees                                287              252               (35)              --
         Conversion costs                                           220              175               (45)              --
         Asset disposal                                             107              107                --               --
         Printing costs                                              63               58                (5)              --
         Other                                                      174              142               (32)              --
     Restructuring costs:
         Employee severance benefits
               (merger related)                                     540              540                --               --
                                                                 ------           ------            ------           ------
                                                                 $1,899           $1,648             $(216)            $ 35
                                                                 ======           ======            ======           ======
</TABLE>

                                       7

<PAGE>


2.  Investment Securities

     The amortized  cost and estimated  fair values of investment  securities at
September 30, 2001 and December 31, 2000 were as follows:
<TABLE>
<S>                                                                                     <C>                     <C>

                                                                                                   September 30,
                                                                                                       2001
                                                                                                                   Estimated
                                                                                        Amortized                     Fair
                                                                                           Cost                      Value
                                                                                      -------------              -------------
U.S. Treasury securities and obligations of
   U.S. government corporations and
   agencies..............................................................               $  81,257                 $  81,561
Mortgage-backed U.S. government agencies.................................                  98,152                    99,515
Obligations of states and political subdivisions.........................                 157,233                   160,078
Corporate securities.....................................................                  89,936                    88,510
Equity securities........................................................                  52,938                    53,292
                                                                                       ----------                ----------

     Total...............................................................                $479,516                  $482,956
                                                                                       ==========                ==========

</TABLE>


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

                                                                                                   December 31,
                                                                                                       2000
                                                                                                                   Estimated
                                                                                        Amortized                     Fair
                                                                                           Cost                      Value
                                                                                      -------------              -------------
U.S. Treasury securities and obligations of
   U.S. government corporations and
   agencies..............................................................                $147,422                  $144,410
Mortgage-backed U.S. government agencies.................................                  74,685                    74,689
Obligations of states and political subdivisions.........................                 102,741                   104,173
Corporate securities.....................................................                  42,350                    42,498
Equity securities........................................................                  23,689                    24,049
                                                                                       ----------                ----------

     Total...............................................................                $390,887                  $389,819
                                                                                       ==========                ==========

</TABLE>

                                       8
<PAGE>

3.  Allowance for loan losses
    -------------------------

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

                                                                 Nine Months Ended         Year Ended            Nine Months Ended
                                                                    September 30,          December 31,            September 30,
                                                                        2001                  2000                      2000
                                                                 -----------------         ------------          -----------------
Balance, January 1...................................                  $10,328               $  8,976                  $8,976
Provision for loan losses............................                    3,750                  2,863                   1,544
Loan charge-offs.....................................                   (2,664)                (1,925)                   (984)
Recoveries...........................................                      375                    414                     336
                                                                      --------               --------                --------
Balance, September 30, 2001, December 31,
 2000, and September 30, 2000........................                  $11,789                $10,328                  $9,872
                                                                      ========               ========                ========
</TABLE>


                  NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
<TABLE>
<S>                                                                  <C>                    <C>                       <C>
                                                                    September 30,          December 31,            September 30,
                                                                        2001                  2000                      2000
                                                                 -----------------         ------------          -----------------
Loans past due 90 days or more and still
 accruing interest:
     Commercial, financial and agricultural....................      $     563              $      8                 $   328
     Mortgages................................................             113                   495                     241
     Personal installment......................................             29                    98                     250
     Other.....................................................              3                    11                      --
                                                                     ---------              --------                 -------
                                                                           708                   612                     819
                                                                     ---------              --------                 -------
Loans renegotiated with borrowers..............................             --                   205                     207
                                                                     ---------              --------                 -------
Loans on which accrual of interest has been
 discontinued:
     Commercial, financial and agricultural....................          3,347                 2,042                   2,780
     Mortgages.................................................          6,860                 3,445                   3,624
     Other.....................................................            463                   356                     358
                                                                     ---------              --------                 -------
                                                                        10,670                 5,843                   6,762
                                                                     ---------              --------                 -------

Other real estate..............................................            534                   416                     578
                                                                     ---------              --------                 -------
     Total.....................................................        $11,912                $7,076                  $8,366
                                                                     =========              ========                 =======

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

Impaired Loans

     At September  30, 2001 and December 31, 2000,  the recorded  investment  in
loans  for  which  impairment  has  been  recognized   totaled   $8,377,000  and
$2,877,000,  respectively,  none of which related to loans requiring a valuation
allowance.  For the nine months ended  September 30, 2001, the average  recorded
investment in impaired loans  approximated  $6,884,000.  The average balance for
2000 approximated $2,630,000.  Interest recognized on impaired loans on the cash
basis for the nine month  periods  ending  September  30,  2001 and 2000 was not
significant.


                                       9

<PAGE>

4.  Statement of Cash Flows

     Cash and cash equivalents include cash and due from banks and federal funds
sold.   The  company  made  cash  payments  of  $1,697,000  and  $3,645,000  and
$39,625,000  and $35,386,000  for income taxes and interest,  respectively,  for
each of the nine month periods ended September 30, 2001 and 2000.

     Excluded  from the  consolidated  statements  of cash flows for the periods
ended September 30, 2001 and 2000 was the effect of certain non-cash activities.
The company  acquired  real estate  through  foreclosure  totaling  $396,000 and
$465,000,  respectively.  The company  also  recorded a decrease in deferred tax
assets of $374,000 and an increase in deferred tax  liabilities of $1,204,000 in
2001. A decrease in deferred tax assets of  $1,382,000  was  recognized in 2000.
These are variations  related to the effects of changes in net  unrealized  gain
(loss) on investment securities available for sale.

5.  Earnings Per Share:
    -------------------

     The  following  table  sets  forth the  calculations  of Basic and  Diluted
Earnings Per Share for the periods indicated:
<TABLE>
<S>                                                                <C>          <C>     <C>             <C>      <C>       <C>
                                                                                    Three Months Ended September 30,
                                                                    ----------------------------------------------------------------
                                                                                2001                               2000
                                                                    ----------------------------------------------------------------
                                                                                        Per-Share                          Per-Share
                                                                    Income     Shares     Amount        Income    Shares     Amount
                                                                    ----------------------------------------------------------------
(In thousands except per share data) Basic EPS:
Income available to common stockholders.......................      $4,319      8,837      $.49         $3,587     8,674      $.41
Effect of Dilutive Securities: ...............................       =====                  ===          =====                 ===
Incentive stock options outstanding...........................                    168                                123
                                                                               ------                              -----
Diluted EPS:
Income available to common stockholders &
   assumed conversion.........................................      $4,319      9,005      $.48         $3,587     8,797      $.41
                                                                     =====                  ===          =====                 ===

</TABLE>

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

                                                                                     Nine Months Ended September 30,
                                                                    ----------------------------------------------------------------
                                                                                2001                               2000
                                                                    ----------------------------------------------------------------
                                                                                        Per-Share                          Per-Share
                                                                    Income     Shares     Amount        Income    Shares     Amount
                                                                    ----------------------------------------------------------------
(In thousands except per share data) Basic EPS:
Income available to common stockholders.......................      $9,158      8,773     $1.04        $10,614      8,709     $1.22
Effect of Dilutive Securities: ...............................       =====                 ====          =====                 ====
Incentive stock options outstanding...........................                    148                                 111
                                                                               ------                              ------
Diluted EPS:
Income available to common stockholders &
   assumed conversion.........................................      $9,158      8,921     $1.03        $10,614      8,820     $1.20
                                                                     =====                  ===          =====                 ===
</TABLE>

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


                                       10

<PAGE>


                     Community Banks, Inc. and Subsidiaries
    Management's Discussion of Financial Condition and Results of Operations
      Average Balances, Effective Interest Differential and Interest Yields

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

Income and Rates on a Tax Equivalent Basis (b) for the Three Months Ended September 30, 2001, 2000, and 1999 (dollars in thousands)

                                            September  30,                  September 30,                  September 30,
                              ----------------------------------------------------------------------------------------------------
                                                2001                            2000                           1999
                              ----------------------------------------------------------------------------------------------------
                                            Average                           Average                           Average
                                           Interest     Rates                 Interest    Rates                 Interest     Rates
                                Average     Income/     Earned/    Average    Income/     Earned/    Average    Income/     Earned/
                               Balance(c)  Expense(a)   Paid (a)   Balance(c) Expense(a)  Paid (a)   Balance(c) Expense(a)  Paid(a)
                              ----------------------------------------------------------------------------------------------------
Assets:
 Cash and due from banks....  $   40,113                          $   33,814                        $   27,274
                              ----------                          ----------                        ----------
 Earning Assets:
  Interest-bearing deposits
   in other banks...........       3,341   $    40       4.75%         1,138  $    14      4.89%         2,407   $   28      4.62%
                              ----------                          ----------                        ----------
  Investment securities:
   Taxable..................     303,443     4,884       6.39        298,343    5,344      7.13        268,986    5,035      7.43
   Tax-exempt (b)...........     147,390     2,865       7.71         89,704    1,809      8.02         91,751    1,875      8.11
                              ----------                          ----------                        ----------
  Total investment
   securities...............     450,833                             388,047                           360,737
                              ----------                          ----------                        ----------
  Federal funds sold........      27,302       261       3.79          5,926       94      6.31          4,615       72      6.19
                              ----------                          ----------                        ----------
  Loans, net of unearned
   income (b)...............     844,898    17,620       8.27        782,793   17,440      8.86        671,380   13,511      7.98
                              ----------   -------       ----     ----------  -------      -----    ----------  -------      -----
  Total earning assets......   1,326,374   $25,670       7.68      1,177,904  $24,701      8.34      1,039,139  $20,521      7.83
                              ----------   -------       ----     ----------  -------      -----    ----------  -------      -----
  Allowance for loan losses      (12,108)                             (9,573)                           (8,961)
  Premises, equipment, and
   other assets.............      65,783                              67,266                            45,919
                              ----------                          ----------                        ----------
   Total assets.............  $1,420,162                          $1,269,411                        $1,103,371
                              ==========                          ==========                        ==========
Liabilities:
 Demand deposits............    152,331                               73,004                            65,241
                              ----------                          ----------                        ----------
 Interest-bearing liabilities:
  Savings deposits..........     308,318     1,786       2.30        336,965    1,509      1.78        302,794    1,730      2.27
                              ----------                          ----------                        ----------
  Time deposits:
   $100 or greater..........      80,087                              78,762                            44,142
   Other....................     466,621                             424,477                           397,473
                              ----------                          ----------                        ----------
  Total time deposits.......     546,708     7,261       5.27        503,239    7,626      6.03        441,615    5,337      4.79
                              ----------                          ----------                        ----------
  Total time and savings
   deposits.................     855,026                             840,204                           744,409
  Short-term borrowings.....       5,620        33       2.33         12,540      171      5.42          8,006       85      4.21
  Long-term debt............     282,172     4,068       5.72        241,861    3,753      6.17        185,950    2,515      5.37
                              ----------   -------       ----     ----------  -------      -----    ----------  -------      -----
   Total interest-bearing
    liabilities.............   1,142,818   $13,148       4.56      1,094,605  $13,059      4.75        938,365  $ 9,667      4.09
                              ----------   -------       ----     ----------  -------      -----    ----------  -------      -----
   Accrued interest, taxes and
    other liabilities.......      12,166                               9,342                             9,319
                              ----------                          ----------                        ----------
    Total liabilities.......   1,307,315                           1,176,951                         1,012,925
   Stockholders' equity.....     112,847                              92,460                            90,446
                              ----------                          ----------                        ----------
    Total liabilities and
     stockholders' equity     $1,420,162                          $1,269,411                        $1,103,371
                              ==========                          ==========                        ==========
Interest income to earning
   assets...................                             7.68%                             8.34%                             7.83%
Interest expense to earning
   assets...................                             3.93                              4.41                              3.69
                                                         ----                              -----                             -----

      Effective interest....
       differential.........               $12,522       3.75%                $11,642      3.93%                $10,854      4.14%
                                           =======       ====                 =======      =====                =======      =====

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

</TABLE>

All periods reflect the combined data of Community Banks, Inc. and The Glen Rock
State Bank.

                                       11


<PAGE>


Management's Discussion, Continued

     This  discussion  represents  management's  analysis  of  the  consolidated
financial   condition  and  results  of  operations  of  Community  Banks,  Inc.
(Corporation)  and its four  wholly-owned  subsidiaries:  Community Banks,  N.A.
(CBNA); Peoples State Bank (PSB); Community Banks Investments,  Inc. (CBII); and
Community Banks Life Insurance Co. (CBLIC).

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

     On June 27, 2001, the Corporation  purchased The Sentinel  Agency,  Inc., a
title insurance agency located in Harrisburg,  Pennsylvania. The acquisition was
accounted for under the purchase method of accounting for business  combinations
and became a subsidiary of PSB.

RESULTS OF OPERATIONS

Net Interest Income:

     The most  significant  source of operating  revenue is net interest income.
Net interest  income is the income which  remains  after  deducting the interest
expense  applicable to funds  required to support  earning assets from the total
income generated by earning assets. The ability to manage net interest income in
varied economic environments is critical to the success of the Corporation.  Net
interest  income  increased  $1,325,000  or 4.1% during the first nine months of
2001  compared to the first nine  months of 2000.  Net  interest  income for the
third quarter of 2001 was $474,000 or 4.3% greater than the same period of 2000.
The table on page 11 presents average balances and taxable  equivalent  interest
income and interest  expense for the three month  periods  ending  September 30,
2001, 2000, and 1999. Net interest income on a tax equivalent basis  (identified
as effective interest differential on page 11) increased $880,000 or 7.6% in the
third quarter of 2001 compared to the same period of 2000.  Net interest  margin
for the third  quarter of 2001 was 3.75%  compared to 3.93% in the third quarter
of 2000 and 4.14% in the  third  quarter  of 1999.  Interest  income to  earning
assets  decreased  from  8.34% in 2000 to 7.68% in  2001.  Interest  expense  to
earning assets decreased from 4.41% to 3.93% during the same periods.

     Total interest income on a tax equivalent basis increased  $969,000 or 3.9%
in the third quarter of 2001,  compared to an increase of $4,180,000 or 20.4% in
the third quarter of 2000.  Interest and fees on loans on a tax equivalent basis
increased  $180,000 or 1.0% in the third  quarter of 2001.  As  indicated by the
table,  the  increase  was  primarily  volume  related  as total  average  loans
increased  $62,105,000  or  7.9%.  The  increase  of  $596,000  or  8.3%  in tax
equivalent  interest and dividends on investment  securities  was also primarily
volume related.  The average balances of total investment  securities  increased
$62,786,000  or 16.2%  while  the  average  balances  of tax  exempt  securities
increased  $57,686,000  or 64.3% in  2001.  Interest  and fees on loans on a tax
equivalent  basis  increased  $3,929,000  or 29.1% in the third quarter of 2000.
Much of this  increase  was volume  related and caused by an increase in average
balances of $111,413,000 or 16.6%.  The increase in the third quarter of 2000 of
$243,000  or  3.5%  in tax  equivalent  interest  and  dividends  on  investment
securities  was  also  volume  related.   The  average  balances  of  investment
securities increased $27,310,000 or 7.6% in 2000.

     Total interest  expense  increased  $89,000 or 0.7% in the third quarter of
2001,  and  $3,392,000  or 35.1% in the third  quarter of 2000.  A rate  related
increase  of $277,000 or 18.4%  occurred  in savings  interest  expense in 2001.
Significantly  impacting  the modest  increase in interest  expense in the third
quarter of 2001 was a rate related  decline in the cost of total time  deposits.
The 2001  increase  in  interest  expense  was also  impacted  by an increase of
$177,000 or 4.5% in borrowed funds interest  expense.  This increase in borrowed
funds interest expense was primarily volume driven as average balances increased
$33,391,000  or 13.1% in  comparison to the third quarter of 2000. A significant
factor  affecting the increase in the third quarter of 2000 was a volume related
increase of $2,289,000 or 42.9% in total time deposit interest expense. A volume
and rate driven  increase of $1,324,000 or 50.9% in borrowed funds interest also
affected total interest expense in 2000.


                                       12

<PAGE>

Provision for Loan Losses:

     The provision for loan losses charged to income in the first nine months of
2001 was $3,750,000 compared to $1,544,000 in the first nine months of 2000. The
provision  for loan  losses  charged to income in the third  quarter of 2001 was
$648,000  greater  than the  charge  in the  third  quarter  of  2000.  Net loan
charge-offs  were  $2,289,000  for the first  nine  months of 2001  compared  to
$648,000 for the comparable period of 2000. Net loan charge-offs as a percentage
of average net loans  approximated .28% and .09% during the first nine months of
2001 and 2000,  respectively.  Affecting  the increase in the provision for loan
losses in 2001 was an  increase  in total  nonperforming  loans  and other  real
estate of $3,545,000 or 42.4%.  A portion of the provision  charged to income in
2001 was associated with the growth of 10.5% in average net loans.


Other Income and Other Expenses:

     Other income  exclusive of security gains increased  $1,427,000 or 24.3% in
the first nine months of 2001 compared to the same period of 2000.  Other income
exclusive of security gains increased  $531,000 or 25.0% in the third quarter of
2001 in comparison to the same period of 2000. The increases in 2001 of $436,000
or 21.6% in service charges on deposit accounts  resulted from increased deposit
account  balances  and  related  ancillary  services  and  management's  renewed
emphasis on these functions. Gains and losses on debt securities result from the
Corporation's investment portfolio and balance sheet management strategies while
equity security gains and losses generally relate to holdings of other financial
institutions.  Investment  security gains of $1,018,000  recognized in the third
quarter of 2001 included $756,000  associated with equity  securities  primarily
held by a non-bank subsidiary,  Community Banks Investments, Inc. The balance of
the gains related to the restructuring of investment  security portfolios at the
two subsidiary banks.  Most of the investment  security gains recognized in 2000
were associated with equity securities of financial  institutions.  Increases in
insurance  premium  income of $86,000 or 8.9%  through  the first nine months of
2001 are a reflection  of consumer  loan demand and  additional  credit life and
accident and health insurance  premiums  realized at CBLIC.  Gains on loan sales
increased  dramatically  in the third  quarter of 2001 as a result of  increased
demand for fixed-rate  real estate loans.  The fair value of loans held for sale
approximated  their carrying values at September 30, 2001 and 2000. The increase
in other  income in 2001 of $270,000 or 34.0% was  impacted by  increases in the
cash surrender value of life insurance.

     The  increase  in other  expenses  during the first nine  months of 2001 of
$4,279,000  or 18.8% was  significantly  impacted  by merger  and  restructuring
related  expenses  associated  with the acquisition of The Glen Rock State Bank.
Increases in salaries and employee benefits of $1,493,000 or 12.2% and occupancy
expense of $495,000 or 14.1% were  affected by the openings in 2000 of three new
banking offices,  the GR merger,  and the hiring of new personnel.  The table on
page 7 provides  additional  detail associated with the merger and restructuring
related expenses  recognized during the first quarter of 2001. Accrual reversals
of $101,000 and $115,000 associated with the merger and restructuring costs were
recognized  during the second and third  quarters  of 2001.  Most of this amount
related  to  changes  in  GR  personnel   obligations,   savings  of  legal  and
professional fees, and other associated costs. Other operating expense increased
$506,000 or 7.6% in 2001  compared  to the first nine months of 2000.  Affecting
these changes were the increases in banking facilities and additional  marketing
and business development initiatives.

Provision for Income Taxes:

     An  increase  in the  relationship  of  tax-free  income to pre-tax  income
resulted in a significant reduction in the Corporation's  effective tax rate for
the first nine months of 2001.  Effective tax rates approximated 19.5% and 25.3%
for the first nine months of 2001 and 2000, respectively.

Net Income:

     The previously  described factors contributed to a decline in net income of
$1.5 million or 13.7% for the nine months ended  September  30, 2001 compared to
the first nine months of 2000.  Net income for the three months ended  September
30, 2001 increased $732,000 or 20.4% over the same period of 2000.


                                       13

<PAGE>

Management's Discussion, Continued

FINANCIAL CONDITION

     The  Corporation's   financial  condition  can  be  examined  in  terms  of
developing trends in its sources and uses of funds.  These trends are the result
of both external  environmental  factors,  such as changing economic conditions,
regulatory changes and competition,  and internal  environmental factors such as
management's  evaluation  as to the  best  use of  funds  under  these  changing
conditions.
<TABLE>
<S>                                                                     <C>                     <C>                     <C>
                                                                                                Increase (Decrease)
                                                                             Balance                Since
                                                                      September 30, 2001       December 31, 2000
                                                                      ------------------       -----------------
                                                                                  (dollars in thousands)

                                                                                                     Amount                 %
                                                                                                     ------                 -
Funding Sources:

Deposits and borrowed funds:

Non-interest bearing...........................................          $    158,029             $    2,233                1.4%
Interest-bearing...............................................               855,002                 91,557               12.0
                                                                         ------------             ----------             ------
   Total deposits..............................................             1,013,031                 93,790               10.2

Borrowed funds.................................................               305,053                 29,347               10.6
Other liabilities..............................................                13,092                  3,304               33.8
Shareholders' equity...........................................               115,018                 11,040               10.6
                                                                         ------------             ----------             ------
   Total sources...............................................            $1,446,194               $137,481               10.5%
                                                                         ============             ==========             ======

Funding uses:

Interest-earning assets:

Short-term investments.........................................          $     20,383              $  11,535              130.4%
Investment securities..........................................               482,956                 93,137               23.9
Loans, net of unearned income..................................               856,767                 39,174                4.8
                                                                         ------------             ----------             ------

   Total interest-earning assets...............................             1,360,106                143,846               11.8

Cash and due from banks........................................                31,739                (10,427)             (24.7)
Other assets...................................................                54,349                  4,062                8.1
                                                                         ------------             ----------             ------

   Total uses..................................................            $1,446,194               $137,481               10.5%
                                                                         ============             ==========             ======
</TABLE>

                                       14

<PAGE>


Management's Discussion, Continued

Balance Sheet Data:

     Balance sheet growth continued in 2001 with assets at September 30 reaching
$1.4  billion,  an increase of $137.5  million or 10.5% over  year-end  2000. As
indicated by the table on page 14,  deposits  were the primary  funding  source,
while investments represented most of the use of funds.

     As indicated by the table on page 11, average  earning assets for the third
quarter of 2001 were $148.5 million or 12.6% greater than average earning assets
for the third  quarter of 2000.  Most of this  change  related to  increases  in
average total  investment  securities  and average net loans of $62.8 million or
16.2%  and  $62.1  million  or 7.9 %,  respectively.  Average  interest  bearing
liabilities increased $48.2 million or 4.4%. Average non-interest bearing demand
deposits  increased  $79.3  million or 108.7% for these  same  periods.  Average
earning  assets  approximated  93.4%  and  92.8% of total  assets  for the third
quarters of 2001 and 2000,  respectively.  Changes in the composition of earning
assets reflect  management's  attempt to respond to fluctuating  loan demand and
corresponding policies relating to liquidity and asset/liability management.

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

     At  September  30,  2001  and  December  31,  2000,  management  classified
investment  securities with amortized costs and fair values of $479,516,000  and
$482,956,000 and $390,887,000 and $389,819,000,  respectively,  as available for
sale.  Obligations of states and political subdivisions and corporate securities
experienced  the largest  increases in balances  from year-end 2000 to September
30, 2001.  Affecting the changes in unrealized gains and losses was a decline in
interest rates in 2001. No securities were considered held for trading  purposes
at September 30, 2001 and December 31, 2000.

     The net unrealized  gain on investments  available for sale, net of tax, at
September 30, 2001 was $2,236,000. At December 31, 2000, the net unrealized loss
on investments  available for sale, net of tax was $694,000.  These amounts were
accordingly reflected in shareholders' equity.

     Net loans increased $36,714,000 or 4.6% from December 31, 2000 to September
30, 2001.  During this period  commercial loans increased  $13,820,000 or 10.2%,
personal loans  increased  $8,324,000 or 7.5% , and loans secured by real estate
increased $11,089,000 or 2.0%.

     The allowance for loan losses  increased  $1,461,000 or 14.1% from year-end
2000 to September 30, 2001. Total non-performing loans approximated  $11,378,000
and  $6,660,000,  as of September 30, 2001 and December 31, 2000,  respectively.
Contributing to the increase in non-performing  loans in 2001 was an increase of
$1,860,000 in  non-performing  commercial loans and an increase of $3,033,000 in
non-performing  mortgage loans. The ratio of nonaccrual loans, other real estate
owned,  restructured loans, and accruing loans contractually past due 90 days or
more to  total  assets  approximated  .82% and .54% at  September  30,  2001 and
December 31, 2000,  respectively.  The allowance for loan losses to loans net of
unearned income  approximated 1.38% and 1.27% at September 30, 2001 and December
31, 2000, respectively.

     The  balance of loans  held for sale at  September  30,  2001  reflects  an
increase in demand for fixed rate mortgage loans.  Accrued  interest  receivable
and other assets were  affected by an  increases in earning  assets and accounts
receivable associated with loan sales.

     Total  deposits  increased  $93,790,000  or 10.2% from December 31, 2000 to
September 30, 2001.  Contributing to this increase were increases of $52,378,000
or 20.4% in savings  deposits  and  $39,179,000  or 7.7% in time  deposits.  New
deposit products affected the increase in savings deposits.


                                       15

<PAGE>
Management's Discussion, Continued

     A significant  portion of short-term  borrowings was converted to long-term
debt during the first  quarter of 2001.  At September  30, 2001  long-term  debt
totaling  $296,750,000  included  borrowings  from the Federal Home Loan Bank of
Pittsburgh of $280,476,000 and repurchase  agreements totaling  $16,274,000 at a
weighted average interest rate of 5.68%.

     The increase of $3,304,000 or 33.8% in accrued  interest  payable and other
liabilities  during the first nine months of 2001 was affected by an increase in
interest-bearing deposits and liabilities associated with the acquisition of The
Sentinel Agency.

Stockholders' Equity:

     Total stockholders' equity increased $11,040,000 or 10.6% from December 31,
2000 to September  30, 2001. A portion of this increase can be attributed to the
change in the net unrealized gain (loss) on investment  securities available for
sale, net of taxes.  Accumulated other comprehensive  income (loss) reflected in
stockholder's  equity changed from  $(694,000) at year-end 2000 to $2,236,000 at
September  30, 2001.  Much of this change was a function of declines in interest
rates  and  corresponding  increases  in fair  values  of debt  securities.  The
Corporation  reissued  approximately  62,000 shares of treasury stock during the
third  quarter of 2001.  At September  30, 2001 and  December 31, 2000  treasury
shares totaled 98,000 and 300,000, respectively.

Liquidity:

     The Corporation must maintain  adequate liquid assets to meet the cash flow
requirements of its customers.  Effective liquidity  management ensures that the
Corporation  has the  ability  to meet the cash  needs of  customers,  provide a
cushion for unforseen  obligations,  and take advantage of market opportunities.
The  primary  functions  of  asset/liability  management  are the  assurance  of
adequate   liquidity  and   maintenance  of  an  appropriate   balance   between
interest-sensitive earning assets and interest-bearing liabilities. A continuous
review of net liquid assets is conducted to assure appropriate cash flow to meet
needs and obligations in a timely manner.

     Loan demand which is typically the Corporation's most significant investing
activity is primarily  funded through  deposit  growth.  Generally,  any deposit
growth  not  used  in  funding   loan   demand  is   invested   in   short-term,
interest-bearing   deposits  or  longer  term   investments.   These  short-term
investments  as well as the  investment  portfolio  securities  are a source  of
liquidity to fund loan demand.

     For the nine months ended September 30, 2001, financing activities provided
cash of  $122,089,000.  Deposit  growth and  long-term  debt  accounted  for the
largest  portion of this funding source.  Net cash used in investing  activities
totaled  $131,950,000.  The primary  use of funds in 2001 was a net  increase in
investment securities of $89,032,000.

Forward Outlook:

     Forward-looking   statements  are  incorporated  in  this  document.  These
statements which may relate to market risks,  growth strategies,  asset quality,
income growth, organizational structure, and other financial matters are subject
to various uncertainties. Accordingly, actual results may differ materially from
estimates incorporated in such statements.

Effects on Inflation:

     All business  enterprises are affected by the constantly  changing economic
environment.  Changes  in the  economy,  however  affect  the  banking  industry
differently than other industries. A bank's assets and liabilities are primarily
monetary in nature and values are  established  without  regard to future  price
changes.

     Financial institutions,  unlike industrial corporations are not required to
provide for large capital  expenditures  in the form of premises,  equipment and
inventory.  Interest  rate changes and the actions of the Federal  Reserve Board
have a greater impact on a bank's  operations  than do the effects of inflation.
Although occasional deviations may occur, it is management's policy to generally
attempt   to   maintain   rate-sensitive   assets   at  a  level   approximating
rate-sensitive  liabilities.  Based on a one-year  parameter,  this relationship
approximated 1.10% as of September 30, 2001.

                                       16
<PAGE>


Management's Discussion, Continued

     Due to its  asset  sensitive  posture,  management,  anticipates  that  any
decline in interest rates could  negatively  impact earnings of the Corporation.
Conversely,  management may be able to increase rates on certain  earning assets
more  rapidly  than  those  of  interest-bearing  liabilities  if a  significant
increase in interest  rates would  occur.  This may result in an increase in the
net interest margin of the Corporation.


Recent Accounting Pronouncements:

     On  July  20,  2001,  the  Financial   Accounting  Standards  Board  issued
Statements  of  Financial   Accounting  Standards  No.141  (FAS  141),  Business
Combinations, and No.142 (FAS 142), Goodwill and Other Intangibles Assets.

     FAS 141  supercedes  Accounting  Principles  Board  Opinion No.16 (APB 16),
Business  Combinations.  The most  significant  changes made by FAS 141 are: (1)
requiring  that the  purchase  method  of  accounting  be used for all  business
combinations  initiated after June 30, 2001, (2) establishing  specific criteria
for the  recognition of intangible  assets  separately  from  goodwill,  and (3)
requiring  unallocated  negative  goodwill to be written off  immediately  as an
extraordinary gain.  Management has reviewed FAS 141 and has determined that the
statement  has no  effect  on its  current  financial  position  or  results  of
operations.

     FAS 142 supercedes APB 17, Intangible Assets.  FAS 142 primarily  addresses
the  accounting  for  goodwill  and  intangible   assets   subsequent  to  their
acquisition.  The most significant changes made by FAS 142 are: (1) goodwill and
indefinite  lived  intangible  assets will no longer be amortized,  (2) goodwill
will be tested for impairment at least annually at the reporting unit level, (3)
intangible  assets  deemed  to have  an  indefinite  life  will  be  tested  for
impairment  at least  annually,  and (4) the  amortization  period of intangible
assets  with  finite  lives  will no  longer  be  limited  to forty  years.  The
provisions  of FAS 142  will be  effective  for  fiscal  years  beginning  after
December 15, 2001. Management believes that the adoption of FAS 142 will have no
material  impact  on  the  Corporation's   financial  condition  or  results  of
operations.

                                       17
<PAGE>


                     COMMUNITY BANKS, INC. and SUBSIDIARIES

                   PART II - OTHER INFORMATION AND SIGNATURES


Item 6.  Exhibits and Reports on Form 8-K/A1
         -----------------------------------

     (a) Exhibits - none

     (b) Registrant  filed the following  reports on Form 8-K during the quarter
ending September 30, 2001.

     Report Dated June 30, 2001
     --------------------------
     Registrant announced its earnings for the period ending June 30, 2001.



                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
     Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                              COMMUNITY BANKS, INC.
                                  (Registrant)

Date   November 9, 2001                               /S/ Eddie L. Dunklebarger
    ----------------------                            -------------------------
                                                        Eddie L. Dunklebarger
                                                        Chairman and President
                                                       (Chief Executive Officer)

Date   November 9, 2001                               /S/ Terry L. Burrows
    ----------------------                            -------------------------
                                                        Terry L. Burrows
                                                        Executive Vice President
                                                       (Chief Financial Officer)

                                       18