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 June 30, 1998
                                         
                                         
                                   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 June 30, 1998.
                                         
      CAPITAL STOCK-COMMON                                    6,561,017      
       (Title of Class)                                 (Outstanding Shares)
   
   
   
   
   
   
     
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                   Index 10-Q
                                        
     
     Part I
     
     Financial Information.............................................1
     
     Consolidated Balance Sheets.......................................2
     
     Consolidated Statements of Income.................................3
     
     Consolidated Statements of Changes in Stockholders' Equity........4
     
     Consolidated Statements of Cash Flows.............................5
     
     Notes to Consolidated Financial Statements........................6-9
     
     Management's Discussion and Analysis of Financial
        Condition and Results of Operation............................10-14
     
     
     
     Part II
     
     Other information and Signatures..................................15
     
     
     
     
     
     
     
     
     
     
     
                         PART I - FINANCIAL INFORMATION
                                        
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                        
     The following financial information sets forth the operations of
     Community Banks, Inc. and Subsidiaries for the three month and six
     month periods ending June 30, 1998 and 1997.
     
     
     In the opinion of management, the following Consolidated Balance
     Sheets and related Consolidated Statements of Income 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-
     
     




   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED BALANCE SHEETS
   (unaudited)
   (dollars in thousands except per share data)
   
                                              
                                                June 30,          December 31,
                                                  1998                1997    
                                               
                                   
   ASSETS                     
   
   Cash and due from banks...................     $ 19,847         $ 28,015
   Interest-bearing time deposits in other 
      banks..................................        1,479            2,406
   Investment securities, available for sale
      (market value).........................      235,154          219,284
   Fed funds sold............................        4,475            2,100
   Loans.....................................      470,285          456,460
   Less:  Unearned income....................      (11,374)         (12,429)
          Allowance for loan losses..........       (6,495)          (6,270)
          Net loans..........................      452,416          437,761 
   Premises and equipment, net...............       14,396           13,963
   Goodwill..................................          786              906
   Other real estate owned...................          745              866
   Loans held for sale.......................        2,667            2,641
   Accrued interest receivable and other         
      assets.................................       13,506           11,520
    
      Total assets...........................     $745,471         $719,462 
                                                  ========         ========
   
   LIABILITIES
   
   Deposits:
      Demand.................................     $ 43,329         $ 44,181
      Savings................................      241,353          226,377
      Time...................................      243,848          248,998
      Time in denominations of $100,000 or
       more..................................       25,055           30,199  
      Total deposits.........................      553,585          549,755
   Short-term borrowings.....................          670           10,540 
   Long-term debt............................      105,407           77,280
   Accrued interest payable and other 
      liabilities............................        8,975            7,874
      
      Total liabilities......................      668,637          645,449
   
   
   STOCKHOLDERS' EQUITY
   
   Preferred stock, no par value; 500,000
      shares authorized; no shares issued
      and outstanding........................        ---              ---
   Common stock-$5.00 par value; 20,000,000
      shares authorized; 6,627,000 and
      4,405,000 shares issued in 1998 and
      1997, respectively.....................       33,134           22,026
   Surplus...................................       17,942           28,647
   Retained earnings.........................       23,928           21,219
   Other accumulated comprehensive income,
    net of tax of $1,518,000 and $1,668,000,
     respectively............................        2,946            3,237  
   Less:  Treasury stock of 66,000 and 
      44,000 shares at cost..................       (1,116)          (1,116) 
      Total stockholders' equity.............       76,834           74,013 
      Total liabilities and stockholders'
       equity................................     $745,471         $719,462
                                                  ========         ========
   
   
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
                                    
   All periods reflect the combined data of Community Banks, Inc. and the
   Peoples State Bank.
                                     -2-
   
<TABLE>

   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF INCOME
   (unaudited)
   (dollars in thousands except per share data)
<CAPTION>
   
   
                                                        Three Months Ended        Six Months Ended
                                                             June 30,                 June 30,       
                                                          1998       1997         1998        1997 
<S>                                                    <C>         <C>          <C>         <C> 
  Interest income:
   Interest and fees on loans.................         $10,118     $ 9,369      $20,029     $18,566
   Interest and dividends on investment 
    securities:
       Taxable................................           2,554       2,737        5,186       5,420
       Exempt from federal income tax.........             890         589        1,651       1,019  
   Fed funds interest.........................             117          71          241         148
   Other interest income......................              23          22           51          41 
        Total interest income.................          13,702      12,788       27,158      25,194   
   
   Interest expense:
   Interest on deposits:  
        Savings...............................           1,354       1,394        2,704       2,777
        Time..................................           3,273       3,368        6,550       6,636
        Time in denominations of $100,000 or
         more.................................             411         386          854         777
   Interest on short-term borrowings and
    long-term debt............................             946         555        1,775       1,113
   Fed funds purchased and repo interest......             346         238          682         439
        Total interest expense................           6,330       5,941       12,565      11,742
        Net interest income...................           7,372       6,847       14,593      13,452
   Provision for loan losses..................             231         290          424         680
        Net interest income after provision 
         for loan losses......................           7,141       6,557       14,169      12,772 
   Other income:
        Trust department income...............              81          73          158         144
        Service charges on deposit accounts...             398         324          729         623
        Other service charges, commissions
         and fees.............................             193         154          365         296
        Investment security gains ............              73         104          343         477
        Income on insurance premiums..........             146         142          277         286
        Gains on mortgage sales...............             142          62          284         102
        Other income..........................              95          55          229         178
             Total other income...............           1,128         914        2,385       2,106
   
   Other expenses:
        Salaries and employee benefits........           2,529       2,325        5,041       4,562  
        Net occupancy expense.................             787         724        1,562       1,447
        Operating expense of insurance
          subsidiary..........................             137          91          256         221
        Other operating expense...............           1,432       1,448        2,958       2,753
             Total other expense..............           4,885       4,588        9,817       8,983
             Income before income taxes.......           3,384       2,883        6,737       5,895
   Provision for income taxes.................             920         831        1,896       1,740
   
             Net income.......................         $ 2,464     $ 2,052      $ 4,841     $ 4,155      
                                                       =======     =======      =======     =======
   Earnings per share: 
      Basic...................................         $   .38     $   .31      $   .74     $   .64
      Diluted.................................         $   .37     $   .31      $   .72     $   .62
   Dividends paid per share...................         $   .16     $   .12      $   .30     $   .23
   
   Per share data has been adjusted to reflect stock dividends and splits.
   
   
   The accompanying notes are an integral part of the consolidated financial 
   statements.
                                      
   All periods reflect the combined data of Community Banks, Inc. and The 
   Peoples State Bank.
   
                                         -3-      
</TABLE>


<TABLE>
   
   Community Banks, Inc. and Subsidiaries
   Consolidated Statements of Changes in Stockholders' Equity
   (Dollars in thousands except per share data)
   
<CAPTION>
   
    
                                                            Six Month Periods Ended June 30
                                                                                
                                                                                 Accumulated
                                                                                    Other
                                            Common                   Retained    Comprehensive   Treasury    Total
                                            Stock      Surplus       Earnings       Income        Stock      Equity
   
 <S>                                       <C>         <C>            <C>          <C>          <C>         <C>      
   Balance, January 1, 1997..............  $20,954     $21,624        $21,756      $   166      $  (421)    $64,079 
      Comprehensive income:
         Net income......................                               4,155                                 4,155
         Change in unrealized gain (loss)
          on securities, net of tax of
           $64,000.......................                                              125                      125
          Total comprehensive income.....                                                                     4,280
   Cash dividends........................                              (1,518)                               (1,518)
   5% stock dividend.....................      723       3,905         (4,628)
   Purchase of treasury stock............                                                          (695)       (695)     
   Issuance of additional shares.........      233       2,108            (61)                                2,280
   
   Balance, June 30, 1997................  $21,910     $27,637        $19,704      $   291     $ (1,116)    $68,426          
                                           =======     =======        =======      =======      =======     =======  
   
   Balance, January 1, 1998..............  $22,026     $28,647        $21,219      $ 3,237      $(1,116)    $74,013  
      Comprehensive income:
         Net income......................                               4,841                                 4,841
         Change in unrealized gain (loss)
          on securities, net of tax of
           ($150,000)....................                                             (291)                    (291)
          Total comprehensive income.....                                                                     4,550  
   Cash dividends........................                              (2,012)                               (2,012)
   3 for 2 stock split...................   11,024     (11,024)
   Issuance of additional shares.........       84         319           (120)                                  283
   
   Balance, June 30, 1998................  $33,134     $17,942        $23,928      $ 2,946      $(1,116)    $76,834
                                           =======     =======        =======      =======      =======     =======  
   
   
   
   
   Per share data for all periods has been restated to reflect stock dividends and splits.
   
   
   The accompanying notes are an integral part of the consolidated financial statements.
   
   
   All periods reflect the combined data of Community Banks, Inc. and The Peoples State Bank.
   
   
   
   
   
   
   
   
   
   
                                                      -4-
   
</TABLE>
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF CASH FLOWS
   (unaudited)
   (dollars in thousands)
                                                           Six Months Ended
                                                                June 30,    
                                                            1998       1997   
   
   
   Operating Activities:
      Net income......................................   $ 4,841      $ 4,155 
      Adjustments to reconcile net income to net
       cash provided by operating activities:
         Provision for loan losses....................       424          680
         Provision for depreciation and amortization..       787          740
         Amortization of goodwill.....................       120          120
         Investment security gains....................      (343)        (477)
         Loans originated for sale....................   (15,253)      (6,125) 
         Proceeds from sale of loans..................    15,511        4,971
         Gains on mortgage sales......................      (284)        (102)
         Increase in other assets.....................    (1,239)        (330)
         Increase (decrease) in accrued interest payable 
          and other liabilities.......................     1,251         (137) 
           Net cash provided by operating activities..     5,815        3,495  
   
   Investing Activities:
      Net decrease (increase) in interest-bearing time                    
       deposits in other banks........................       927          (47)
      Proceeds from sales of investment           
       securities.....................................     1,647       29,981
      Proceeds from maturities of investment 
       securities.....................................    48,914       12,923
      Purchases of investment securities..............   (66,529)     (58,539) 
      Net increase in total loans.....................   (15,705)     (11,336)
      Purchases of premises and equipment.............    (1,220)      (1,540)
           Net cash used by investing activities......   (31,966)     (28,558)
   
   Financing Activities:
      Net increase in total deposits..................     3,830       24,912  
      Net decrease in short-term borrowings...........    (9,870)      (5,944)
      Proceeds from issuance of long-term debt........    31,138       19,995
      Repayment of long-term debt.....................    (3,011)      (5,005)
      Cash dividends..................................    (2,012)      (1,518)
      Purchases of treasury stock.....................       ---         (695)
      Proceeds from issuance of common stock..........       283        2,280   
           Net cash provided by financing 
            activities................................    20,358       34,025
       
           Decrease in cash and cash equivalents......    (5,793)       8,962
                     
            
   Cash and cash equivalents at beginning of period...    30,115       23,699
   Cash and cash equivalents at end of period.........   $24,322      $32,661 
                                                         =======      =======
   
   
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
   
   
   All periods reflect the combined data of Community Banks, Inc. and The
   Peoples State Bank.  
   
                                      -5-      
   
   
   
   
   
   
                                           
   Community Banks, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (unaudited)
   (dollars in thousands)
                                          
   
   1.  Accounting Policies
             The information contained in this report is unaudited and is
   subject to future adjustments. However, in the opinion of management, the
   information reflects all adjustments necessary for a fair statement of
   results for the three month and six month periods ended June 30, 1998 and
   1997.
   
             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 page 9 of the 1997 Annual Report to shareholders.  
   
             Statement of Financial Accounting Standards (SFAS) 133, "Accounting
   for Derivative Instruments and Hedging Activities" establishes standards for
   recording derivative financial instruments on the balance sheet at their fair
   value. This Statement requires changes in the fair value of derivatives be
   recorded each period in current earnings or other comprehensive income,
   depending on whether a derivative is designated as part of a hedge
   transaction and, if it is, the type of hedge transaction. Management
   anticipates that the adoption of SFAS 133 will not have a significant effect
   on the Corporation's financial condition or results of operations.
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                   -6-
   
   
   
   
   
   
   2.  Investment Securities
            The amortized cost and estimated market values of investment
   securities at June 30, 1998 and December 31, 1997, were as follows:
   
                                                          June 30,
                                                           1998   
                                                           
                                                                                
                                                                  Estimated
                                                Amortized           Fair
                                                  Cost              Value  
   
   U.S. Treasury securities and obligations
    of U.S. government corporations and
     agencies...............................    $ 62,435          $ 62,716
   Mortgage-backed U.S. government 
    agencies................................      84,344            84,849
   Obligations of states and political
    subdivisions............................      75,073            76,668
   Corporate securities.....................       1,064             1,083  
   Equity securities........................       7,774             9,838 
         Total..............................    $230,690          $235,154 
                                                ========          ======== 
   
                                                       December 31,
                                                           1997    
                                                                          
   U.S. Treasury securities and obligations 
    of U.S. government corporations and
     agencies...............................    $ 66,940          $ 67,389
   Mortgage-backed U.S. government 
    agencies................................      84,568            85,137
   Obligations of states and political
    subdivisions............................      55,248            56,633
   Corporate securities.....................       1,244             1,278   
   Equity securities........................       6,379             8,847
         Total..............................    $214,379          $219,284
                                                ========          ======== 
                                        
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                       -7-           
   
                                       





                                      

<TABLE>
   
   
   
   
   3.  Allowance for loan losses
            Changes in the allowance for loan losses are as follows:
<CAPTION>
   
                                           Six months ended    Year Ended     Six Months ended
                                                June 30,       December 31,       June 30,
                                                1998               1997             1997      
    
 <S>                                          <C>                  <C>            <C>    
   Balance, January 1..................       $6,270               $5,561         $5,561
   Provision for loan losses...........          424                1,317            680
   Loan charge-offs....................         (498)              (1,466)          (750)
   Recoveries..........................          299                  858            404
   
   Balance, June 30, 1998, December 
    31, 1997, and June 30, 1997........       $6,495               $6,270         $5,895
                                              ======               ======         ======
   
                           NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
   
                                               June 30,          December 31,       June 30,
                                                1998                 1997            1997    
   
   Loans past due 90 days or more
    and still accruing interest:
      Commercial, financial and 
       agricultural...................           $117               $   53          $ 72
      Mortgages.......................            455                  405           528
      Personal installment............            289                   72           268
      Other...........................             12                   21             9
                                                  873                  551           877
   
   Loans renogotiated with borrowers..            245                NONE          NONE  
   Loans on which accrual of interest
    has been discontinued:
      Commercial, financial and
       agricultural....................         1,133                  926           860 
      Mortgages........................         2,510                3,388         3,776
      Other............................           342                  300           294
                                                3,985                4,614         4,930
    
   Other real estate...................           745                  866         1,143
      Total............................        $5,848               $6,031        $6,950
                                               ======               ======        ======
   
   (a)  The determination to discontinue the accrual of interest on nonperforming loans is made
   on the individual case basis. Such factors as the character and size of the loan, quality of
   the collateral and the historical creditworthiness of the borrower and/or guarantors are
   considered by management in assessing the collectibility of such amounts.  
   
   Impaired Loans
        At June 30, 1998 and December 31, 1997 the Corporation recorded no investment in
   impaired loans or related valuation allowance. For the six month periods ended June 30, 1998
   and 1997 the average balance of impaired loans was negligible. In addition, the Corporation
   recognized no interest on impaired loans on the cash basis for the six month periods ended
   June 30, 1998 and 1997.
   
   
   
   
   
   
                                           -8-
   
</TABLE>
   
   
   
   
   
   
   
   
   
   
   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 $2,660,000 and
   $1,532,000 and $12,627,000 and $11,053,000 for income taxes and interest,
   respectively, for each of the six month periods ended June 30, 1998 and
   1997.
   
            Excluded from the consolidated statements of cash flows for the
   periods ended June 30, 1998 and 1997 was the effect of certain non-cash
   activities. The company acquired real estate through foreclosure totalling
   $626,000 and $598,000, respectively. The company also recorded a decrease in
   deferred tax liabilities of $150,000 in 1998. A decrease in deferred tax
   assets of $49,000 and an increase in deferred tax liabilities of $16,000
   were recognized in 1997. These variations related to the effects of changes
   in the net unrealized gain (loss) on investment securities available for
   sale.
<TABLE>
   
   
   5.  Earnings Per Share:
   
            The following tables set forth the calculation of Basic and Diluted
   Earnings Per Share for the periods indicated:
<CAPTION>
   
                                                                   Three Months Ended June 30,            
                                                               1998                         1997          
                                                                   Per-Share                    Per-Share
                                                     Income  Shares  Amount   Income   Shares     Amount  
                                                               (in thousands except per share data)
<S>                                                  <C>     <C>     <C>         <C>       <C>      <C>   
   Basic EPS:
   Income available to common stockholders...        $2,464   6,551   $.38       $2,052    6,515    $.31  
   Effect of Dilutive Securities:                                     ====                          ====     
   Incentive stock options outstanding.......                   160                          169
   Diluted EPS:
   Income available to common stockholders
      & assumed conversion...................        $2,464   6,711   $.37       $2,052    6,684    $.31
                                                     ======   =====   ====       ======    =====    ====
   
   
   
                                                                       Six Months Ended June 30,          
                                                               1998                         1997          
                                                                   Per-Share                    Per-Share
                                                     Income  Shares  Amount   Income   Shares     Amount  
                                                               (in thousands except per share data)
   
   Basic EPS:
   Income available to common stockholders...        $4,841   6,545   $.74       $4,155    6,518    $.64  
   Effect of Dilutive Securities:                                     ====                          ====     
   Incentive stock options outstanding.......                   161                          168
   Diluted EPS:
   Income available to common stockholders
      & assumed conversion...................        $4,841   6,706   $.72       $4,155    6,686    $.62
                                                     ======   =====   ====       ======    =====    ====
   
   
   Per share data has been adjusted to reflect a three for two stock split payable May 8,1998.
   
   All periods reflect the combined data of Community Banks, Inc. and The Peoples State Bank.
   
        
   
    
                                                   -9-
   
</TABLE>
   
   
   
   
   
   
   
   
   
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      



                                       



   
   
   
                    Community Banks, Inc. and Subsidiaries
                     Management's Discussion and Analysis
               of Financial Condition and Results of Operations
                                       
   Results of Operations
                                       
        Net interest income after provision for loan losses for the first
   Six months of 1998 was $1,397,000 or 10.9% greater than 1997. Total
   interest income for the first six months increased $1,964,000 or 7.8%
   while total interest expense increased $823,000 or 7.0% over the
   comparable period of 1997. The amount of net interest income and total
   interest income are dependent upon many factors including the volume of
   earning assets and interest bearing liabilities, the level of and
   changes in interest rates and levels of non-performing assets. The cost
   of interest bearing liabilities changes with the amount of funds
   necessary to support earning assets, the rates paid to attract and
   maintain deposits, rates paid on borrowed funds and the level of
   non-interest bearing demand deposits and equity capital. The increases
   in net interest income and total interest income were impacted by an
   increase in average earning assets of approximately $57,827,000 or 9.3%
   while average interest bearing liabilities increased  $59,280,000 or
   10.7% for the first six months of 1998 over the comparable period of
   1997. Impacting the increase in average earning assets were increases in
   average loan balances of 8.4%. The average yields realized on earning
   assets for the first six months approximated 8.2% and 8.3% in 1998 and
   1997, respectively. The average costs of interest-bearing liabilities
   approximated 4.1% and 4.2%, respectively. Net interest margins, on a tax
   equivalent basis for the first six months approximated 4.6% and 4.8% in
   1998 and 1997, respectively. The provision for loan losses charged to
   income decreased 37.6% in 1998. Total loans past due 90 days and still
   accruing interest, non-performing loans, and other real estate
   approximated $5,848,000 and $6,950,000, respectively, as of June 30,
   1998 and June 30, 1997. The balance of the allowance for loan losses
   increased from $5,894,000 at June 30, 1997 to $6,495,000 at June 30,
   1998.   
   
        Total other income for the first six months of 1998 was $279,000 or
   13.2% more than total other income for the first six months of 1997.
   Affecting this change were increases in service charges on deposit
   accounts and other service charges, commissions, and fees of $175,000.
   In addition, security gains of $343,000 and $477,000 were recognized in
   1998 and 1997, respectively. Gains recognized on mortgage sales totalled
   $284,000 and $102,000 in 1998 and 1997, respectively. Loans held for
   sale are comprised for the most part of fixed-rate real estate and
   education loans extended specifically for resale. Demand for these
   products has been greater in 1998 than 1997. Loans held for sale as of
   June 30, 1998 totalled $2,667,000. The market value of these loans
   approximated book value at that time.
   
        Total other expenses for the first six months of 1998 increased
   $834,000 or 9.3%. Contributing factors were increases of $479,000 or
   10.5% in salaries and employee benefits, $115,000 or 7.9% in net
   occupancy expense, and $205,000 or 7.4% in other operating expense.
   These increases were affected by the opening of new banking offices and
   the recognition of certain retirement plan obligations.
   
        The provision for income taxes increased $156,000  or 9.0% for the
   first six months of 1998 in comparison to the first six months of 1997.
   Affecting this change was an increase in the relative amount of tax-free
   income in 1998. The effective tax rates approximated 28.1% and 29.5% for
   the respective periods.  
   
        The previously described factors contributed to a net increase of
   $686,000 or 16.5% in net income for the six month period ended June 30,
   1998.
   
        The significant changes and related causes which occurred during
   the three month period ending June 30, 1998 were generally consistent
   with those described for the six month period ending June 30, 1998.
   Investment security gains declined in the second quarter of 1998. Gains
   on mortgage sales were $142,000 and $62,000, respectively, for the three
   month periods ending June 30, 1998 and 1997. 
                                 
                                    -10-
   
   
   
   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.
                                     
                                                         Increase (Decrease)
                                         Balance                since
                                      June 30, 1998        December 31, 1997 
                                              (dollars in thousands)
                                         
   
                                                            Amount         %
   Funding Sources:
   
   Deposits and borrowed funds:
   
    Non-interest bearing............    $ 43,329           $  (852)     (1.9)%
    Interest bearing................     510,256             4,682        .9  
       Total deposits...............     553,585             3,830        .7
   
    Borrowed funds..................     106,077            18,257      20.8
   Other liabilities................       8,975             1,101      14.0
   Shareholders' equity.............      76,834             2,821       3.8  
   
      Total sources.................    $745,471           $26,009       3.6% 
                                        ========           =======      ==== 
   
   Funding uses:
   
   Interest earning assets:
   
    Short-term investments..........    $  5,954           $ 1,448      32.1%
    Investment securities...........     235,154            15,870       7.2
    Loans, net of unearned income...     458,911            14,880       3.4
                                    
      Total interest earning assets.     700,019            32,198       4.8 
   
   Cash and due from banks..........      19,847            (8,168)    (29.2)
   Other assets.....................      25,605             1,979       8.4
   
      Total uses....................    $745,471           $26,009       3.6%
                                        ========           =======     =====  
   
   
    
      
   
   
   
               
   
   
                                     -11-       
   
   
   
   
   
   Management's Discussion, Continued
   
   
   
   
        As of June 30, 1998 cash and due from banks was $8,168,000 or 29.2%
   less than it was at December 31, 1997. Interest-bearing time deposits in
   other banks and investment securities increased $14,943,000 or 6.7%
   while fed funds sold increased $2,375,000. The approximate market value
   of debt securities was $2,400,000 greater than amortized cost at June
   30, 1998. The approximate market value of debt securities was $2,437,000
   greater than amortized cost at December 31, 1997. Securities to be held
   for indefinite periods of time and not intended to be held to maturity
   or on a long-term basis are classified as available for sale and carried
   at market value. Securities held for indefinite periods of time include
   securities that management intends to use as part of its asset/liability
   management strategy and that may be sold in response to changes in
   interest rates, resultant prepayment risk and other factors related to
   interest rate and resultant prepayment risk changes. At June 30, 1998
   and December 31, 1997, management classified investment securities with
   amortized costs and market values of $230,690,000 and $235,154,000, and
   $214,379,000 and $219,284,000, respectively, as available for sale. Net
   loans increased $14,655,000 or 3.3% from December 31, 1997 to June 30,
   1998. Affecting this change were increases in real estate loans of
   $8,649,000 and consumer loans of $2,019,000. Commercial loans increased
   $3,604,000 during the period. The allowance for loan losses approximated
   1.42% and 1.41% of net loans at June 30, 1998 and December 31, 1997.
   Much of the increase in net premises and equipment of $433,000 related
   to new banking offices. Goodwill continues to be amortized at an
   annualized rate of $240,000. As previously noted, Community Banks, Inc.
   sells only fixed-rate real estate and education loans specifically
   designated for resale on the secondary market and at June 30, 1998 and
   December 31, 1997 these loans totalled $2,667,000 and $2,641,000,
   respectively. Affecting the increase of $1,986,000 in accrued interest
   receivable and other assets was an increase in prepaid expenses and
   deferred taxes. These factors contributed to an increase of $26,009,000
   or 3.6% in total assets from December 31, 1997 to June 30, 1998. 
     
        Total deposits increased $3,830,000 or 0.7% from December 31, 1997
   to June 30, 1998. Most of this increase can be attributed to increases
   in savings deposits. It is management's philosophy to generally maintain
   competitive but not overly-aggressive interest rates relative to
   interest-bearing liabilities. 
        
        Management decreased short-term borrowings and increased long-term
   debt in 1998 in an attempt to better balance rate sensitive assets and
   liabilities and enhance earnings through more effective use of equity.
   At June 30, 1998 long-term debt totalling $105,407,000 included
   borrowings from the Federal Home Loan Bank of Pittsburgh of $81,000,000
   and repurchase agreements totalling $20,000,000 at a weighted average
   interest rate of 5.56%.  
                
        Based on a one year interval, rate sensitive assets to rate
   sensitive liabilities approximated 95% as of June 30, 1998.
   
   
   
   
   
   
    
                                     -12-
   
   
   
   Management's Discussion, Continued 
   
        As of June 30, 1998 the Corporation had risk-based capital in
   excess of the fully implemented regulatory requirements, and tier 1 plus
   tier 2 capital approximated 16% of risk-weighted assets.  
   
   Liquidity 
        
        Liquidity is the ratio of net liquid assets to net liabilities. The
   primary functions of asset/liability management are the assurance of
   adequate liquidity and maintenance of an appropriate balance between
   interest-sensitive earning assets and interest-bearing liabilities.
   Liquidity management refers to the ability to meet the cash flow
   requirements of depositors and borrowers.
        
        A continuous review of net liquid assets is conducted to assure
   appropriate cash flow to meet needs and obligations in a timely manner.
   There was an adequate relationship of liquid assets to short-term
   liabilities at June 30, 1998
   
   Forward Outlook
        
        Management is unaware of any regulatory recommendations which, if
   implemented, would have a material effect on the liquidity, capital
   resources, or operations of CBI. Adequate loan demand is anticipated for
   the remainder of 1998 and management will continue to carefully evaluate
   this demand based on the creditworthiness of the borrower and the
   relative strength of the economy in the Corporation's market.     
   
        The Corporation is anticipating the maintenance of a favorable net
   interest margin throughout the remainder of 1998.
   
   Other Events
   
        On March 31, 1998, Community Banks, Inc. (Community) completed its
   merger of The Peoples State Bank (Peoples). Peoples has six banking
   offices which are located in York and Adams Counties, Pennsylvania.
   Community issued 1,325,330 shares of common stock for all of the
   outstanding common stock of Peoples. This transaction was accounted for
   as a pooling of interests and combined unaudited financial information
   is included in this report.
   
                              
                                  For Three Months Ended June 30, 1997
                               (dollars in thousands except per share data)
   
                                Community         Peoples         Combined
   
   Interest income............   $8,275           $4,513          $12,788
   Interest expense...........    3,494            2,447            5,941 
   Net interest income........    4,781            2,066            6,847
   Loan loss provision........      140              150              290
   Other income...............      755              159              914
   Other expense..............    3,237            1,351            4,588
   Income before taxes........    2,159              724            2,883
   Taxes......................      621              210              831
                                                                          
   Net income.................   $1,538           $  514           $2,052  
                                 ========================================
   
   Earnings per common share:
   
      Basic                      $  .34           $  .23           $  .31 
      Diluted                    $  .33           $  .23           $  .31 
     
   
                                        -13-
   
   
   
   Management's Discussion, Continued
   
   
   
   
   
                                  For the Six Months Ended June 30, 1997
                               (dollars in thousands except per share data)
   
                                Community         Peoples         Combined
   
   Interest income............   $16,402          $8,792          $25,194
   Interest expense...........     6,929           4,813           11,742
   Net interest income........     9,473           3,979           13,452
   Loan loss provision........       380             300              680
   Other income...............     1,712             394            2,106
   Other expense..............     6,371           2,612            8,983
   Income before taxes........     4,434           1,461            5,895 
   Taxes......................     1,272             468            1,740
                                                                          
   Net income.................   $ 3,162          $  993           $4,155
                                 ========================================
   
   Earnings per common share:    
   
      Basic                      $   .70          $  .47           $  .64
      Diluted                    $   .69          $  .47           $  .62
   
   
   Per share data has been adjusted to reflect a three for two stock split
   payable May 8, 1998.
                                       
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                     -14-
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                    -14-
    
   
   
   
   
   
            

    
    
    
    
    
    
    
    
                      COMMUNITY BANKS, INC. and SUBSIDIARIES
                                          
                     PART II - OTHER INFORMATION AND SIGNATURES
    
    
    Item 4.  Submission of Matters to Vote of Security Holders
    
    
         The annual meeting of shareholders of Community Banks, Inc. was held
    May 26, 1998 for the purpose of considering and voting upon the following
    matters:
    
            1.  To elect four (4) Directors:  Kenneth L. Deibler, Allen
    Shaffer, Ernest L. Lowe, and Earl L. Mummert, to serve until the 2002
    Annual Meeting of Shareholders. Each director received affirmative votes
    representing at least 75.05% of the shares outstanding.
    
            2.  To approve the 1998 Long-Term Incentive Plan. This proposal
    received affirmative votes representing 84.75% of the shares
    outstanding.         
    
    
    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 June 30, 1998.
    
             Reports Dated March 31, 1998
    
             Registrant reported the merger of the Peoples State Bank of
             East Berlin. Incorporated by reference in Form 8-K/A-1 were the 
             Pro Forma Unaudited Consolidated Statements of Income for the 
             years 1994, 1995, and 1996, and nine months ended September 30,  
             1996, and 1997; Pro Forma Unaudited Combined Balance Sheet as of 
             September 30, 1997; Pro Forma Unaudited Capital Schedule 
             as of September 30, 1997; and notes to Unaudited Pro Forma 
             Financial Information.       
                                          
                                          
                                     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 thereunto duly authorized.
    
                                                COMMUNITY BANKS, INC.
                                                (Registrant)
    
    
    Date    August 11, 1998                    /S/ Eddie L. Dunklebarger   
                                                    Eddie L. Dunklebarger
                                                          President       
                                                  (Chief Executive Officer)
                                              
    
    
    Date    August 11, 1998                   /S/  Terry L. Burrows        
                                                    Terry L. Burrows
                                                 Executive Vice-President
                                                 (Chief Financial Officer)
    
    
                                       -15-