SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q
                                    ---------

         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

                                EXCHANGE ACT OF 1934


                          For the Quarter Ended June 30, 2003

                                    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)

750 East Park Dr., Harrisburg, PA                            17111
------------------------------------------               -----------
(Address of Principal Executive Offices)                  (Zip Code)

                                  (717) 920-1698
                           -------------------------------
                           (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
                                             ----      ----

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

                  Number of shares outstanding as of July 31, 2003

CAPITAL STOCK-COMMON                                            9,640,000
--------------------                                      ---------------------
 (Title of Class)                                          (Outstanding Shares)







<PAGE>










                     COMMUNITY BANKS, INC. and SUBSIDIARIES

                                   INDEX 10-Q


PART I - Financial Information

Item 1.     Financial Statements

      Consolidated Interim Balance Sheets..................................    3
      Consolidated Interim Statements of Income............................    4
      Consolidated Interim Statements of Changes in Stockholders' Equity...    5
      Consolidated Interim Statements of Cash Flows........................    6
      Notes to Consolidated Interim Financial Statements................... 7-12

Item 2.     Management's Discussion and Analysis of Financial
     Condition and Results of Operation....................................13-19

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.....20-21

Item 4.     Controls and Procedures .......................................   22


PART II - Other Information

Item 1.     Legal Proceedings..............................................   23

Item 2.     Changes in Securities and Use of Proceeds......................   23

Item 3.     Defaults Upon Senior Securities................................   23

Item 4.     Submission of Matters to a Vote of Security Holders............   23

Item 5.     Other Information..............................................   23

Item 6.     Exhibits and Reports on Form 8-K...............................23-25


SIGNATURES.................................................................   26


                                       2
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

                         PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements
-----------------------------
<TABLE>
<CAPTION>

Consolidated Interim Balance Sheets
(Unaudited)
(Dollars in thousands except per share data)

                                                                             June 30,                 December 31,
                                                                               2003                       2002
                                                                          --------------             -------------

ASSETS

<S>                                                                       <C>                        <C>
Cash and due from banks.....................................              $       58,364             $      36,137
Interest-bearing time deposits in other banks...............                       1,040                       951
Investment securities, available for sale...................                     713,516                   667,801
Loans.......................................................                   1,004,067                   904,568
   Less:  Allowance for loan losses.........................                     (12,922)                  (12,343)
                                                                          --------------             -------------
              Net loans.....................................                     991,145                   892,225
Premises and equipment, net.................................                      24,323                    24,209
Goodwill....................................................                       1,754                     1,031
Identifiable intangible assets..............................                         692                       729
Other real estate owned.....................................                         359                     1,183
Loans held for sale.........................................                       6,780                    11,483
Accrued interest receivable and other assets................                      44,710                    44,149
                                                                          --------------             -------------

     Total assets...........................................              $    1,842,683             $   1,679,898
                                                                          ==============             =============

LIABILITIES

Deposits:
   Demand (non-interest bearing)............................              $      184,410             $     168,277
   Savings..................................................                     399,022                   345,598
   Time.....................................................                     500,760                   506,991
   Time in denominations of $100,000 or more................                     110,033                   112,047
                                                                          --------------             -------------
   Total deposits..........................................                    1,194,225                 1,132,913
Short-term borrowings.......................................                     156,015                    69,125
Long-term debt..............................................                     319,112                   320,533
Subordinated debentures.....................................                      15,000                    15,000
Accrued interest payable and other liabilities..............                      16,269                    13,165
                                                                          --------------             -------------

   Total liabilities........................................                   1,700,621                 1,550,736
                                                                          --------------             -------------

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; 9,878,000 and 9,881,000 shares
   issued in 2003 and 2002, respectively....................                      49,388                    47,053
Surplus.....................................................                      57,318                    46,418
Retained earnings...........................................                      28,097                    35,344
Accumulated other comprehensive income, net of
   tax of $7,336 and $3,520, respectively...................                      13,626                     6,538
Less: Treasury stock of 262,000 and 271,000
   shares at cost, respectively.............................                      (6,367)                   (6,191)
                                                                          --------------             -------------
  Total stockholders' equity................................                     142,062                   129,162
                                                                          --------------             -------------

  Total liabilities and stockholders' equity................              $    1,842,683             $   1,679,898
                                                                          ==============             =============
</TABLE>

Issued and treasury shares have been restated to reflect the stock dividend paid
April 30, 2003.
The accompanying notes are an integral part of the consolidated
interim financial statements.

                                       3
<PAGE>


<TABLE>
<CAPTION>

COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
                                                                         Three Months Ended                  Six Months Ended
                                                                                June 30,                          June 30,
                                                                      --------------------------          -------------------------
                                                                         2003            2002                2003           2002
                                                                      --------------------------          -------------------------
INTEREST INCOME:
<S>                                                                   <C>             <C>                 <C>            <C>
   Interest and fees on loans.....................................    $   16,364      $   16,897          $   32,430     $   33,505
   Interest and dividends on investment securities:
      Taxable.....................................................         4,749           4,818               9,860          9,773
      Exempt from federal income tax..............................         2,609           2,363               5,201          4,870
   Other interest income..........................................             1             137                   3            174
                                                                      ----------      ----------          ----------     ----------
      Total interest income.......................................        23,723          24,215              47,494         48,322
                                                                      ----------      ----------          ----------     ----------


INTEREST EXPENSE:
   Interest on deposits:
      Savings.....................................................           807           1,121               1,562          2,245
      Time........................................................         4,206           5,412               8,584         10,611
      Time in denominations of $100,000 or more...................           861             970               1,746          1,937
   Interest on short-term borrowings and long-term debt...........         4,600           4,192               9,041          8,372
   Interest on subordinated debentures............................           176             ---                 355            ---
   Federal funds purchased and repo interest......................            44             181                 104            349
                                                                      ----------      ----------          ----------     ----------
      Total interest expense.....................................         10,694          11,876              21,392         23,514
                                                                      ----------      ----------          ----------     ----------
      Net interest income.........................................        13,029          12,339              26,102         24,808
Provision for loan losses.........................................           600             650               1,000          2,250
                                                                      ----------      ----------          ----------     ----------
      Net interest income after provision for loan losses........         12,429          11,689              25,102         22,558
                                                                      ----------      ----------          ----------     ----------

NON-INTEREST INCOME:
   Investment management and trust services.......................           333             304                 650            505
   Service charges on deposit accounts...........................          1,295             816               2,336          1,576
   Other service charges, commissions and fees....................           776             636               1,530          1,287
   Investment security gains .....................................           500              18               1,547            536
   Insurance premium income and commissions.......................           848             652               1,258          1,182
   Gains on loan sales............................................           445             101                 871            486
   Other income...................................................           809           1,136               1,203          1,773
                                                                      ----------      ----------          ----------     ----------
      Total non-interest income...................................         5,006           3,663               9,395          7,345
                                                                      ----------      ----------          ----------     ----------

NON-INTEREST EXPENSES:
   Salaries and employee benefits.................................         6,276           5,178              12,176         10,330
   Net occupancy expense..........................................         1,778           1,609               3,544          2,805
   Other operating expense........................................         3,335           3,240               6,458          6,315
                                                                      ----------      ----------          ----------     ----------
      Total non-interest expenses.................................        11,389          10,027              22,178         19,450
                                                                      ----------      ----------          ----------     ----------
      Income before income taxes..................................        6,046            5,325              12,319         10,453
Income taxes .....................................................         1,070             706               2,242          1,383
                                                                      ----------      ----------          ----------     ----------

      Net income..................................................    $    4,976      $    4,619          $   10,077     $    9,070
                                                                      ==========      ==========          ==========     ==========

CONSOLIDATED PER SHARE DATA:
   Basic earnings per share.......................................    $      .52      $      .48          $     1.05     $      .93
   Diluted earnings per share.....................................    $      .50      $      .46          $     1.02     $      .91
Dividends declared................................................    $      .20      $      .17          $      .39     $      .32

</TABLE>

Per share data has been restated to reflect the stock dividend paid April 30,
2003.
The accompanying notes are an integral part of the consolidated interim
financial statements.

                                       4
<PAGE>



<TABLE>
<CAPTION>


COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Changes in Stockholders' Equity
(Unaudited)
(Dollars in thousands except per share data)

                                                              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, 2002.................     $44,839     $35,906      $36,923          $ (4,024)          $ (2,395)      $111,249
   Comprehensive income:
      Net income.........................                                9,070                                               9,070
      Unrealized gain on securities,
      net of reclassification
        adjustments......................                                                  6,526                             6,526
                                                                                                                          --------
     Total comprehensive income..........                                                                                   15,596
Cash dividends ($.32 per share)..........                               (3,161)                                             (3,161)
5% stock dividend (448,000 shares).......       2,241      10,177      (12,418)
Purchases of treasury stock
   (103,000 shares)......................                                                                    (2,493)        (2,493)
Issuance of additional shares
   (54,000 net shares of treasury
   stock reissued and 3,000 shares
   of common stock canceled).............         (16)                    (389)                               1,076            671
                                              -------     -------      -------          --------           --------       --------

Balance, June 30, 2002...................     $47,064     $46,083      $30,025          $  2,502           $ (3,812)      $121,862
                                              =======     =======      =======          ========           ========       ========


Balance, January 1, 2003.................     $47,053     $46,418      $35,344          $  6,538           $ (6,191)      $129,162
   Comprehensive income:
     Net income..........................                               10,077                                              10,077
     Unrealized gain on securities,
     net of reclassification
        adjustments......................                                                  7,088                             7,088
                                                                                                                          ---------
     Total comprehensive income..........                                                                                   17,165
Cash dividends ($.39 per share)..........                               (3,750)                                             (3,750)
5% stock dividend (470,000 shares).......       2,346      10,612      (12,984)                                               ( 26)
Purchases of treasury stock
   (100,000 shares)......................                                                                    (2,822)        (2,822)
Issuance of additional shares
    (109,000 net shares of treasury
   stock reissued and 2,000 shares
    of common stock canceled)............         (11)        288         (590)                               2,646         2,333
                                              -------     -------      -------          --------           --------       --------

Balance, June 30, 2003...................     $49,388     $57,318      $28,097          $ 13,626           $ (6,367)      $142,062
                                              =======     =======      =======          ========           ========       ========


</TABLE>

Per share data has been restated to reflect the stock dividend paid April 30,
2003.
The accompanying notes are an integral part of the consolidated interim
financial statements.

                                       5
<PAGE>


<TABLE>
<CAPTION>

COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
                                                                                                Six Months Ended
                                                                                                    June 30,
                                                                                     --------------------------------------
                                                                                         2003                       2002
                                                                                     --------------------------------------
Operating Activities:
<S>                                                                                  <C>                        <C>
   Net income.....................................................                   $    10,077                $     9,070
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for loan losses....................................                         1,000                      2,250
     Depreciation and amortization................................                         1,532                      1,207
     Amortization of security premiums and discounts, net.........                         1,436                        117
     Investment security gains....................................                        (1,547)                      (536)
     Loans originated for sale....................................                       (39,711)                   (28,027)
     Proceeds from sales of loans.................................                        45,284                     33,983
     Gains on loan sales..........................................                          (871)                      (486)
     Change in other assets, net..................................                         3,447                       (667)
     Change in accrued interest payable and
      other liabilities, net......................................                        (4,234)                      (932)
                                                                                     -----------                -----------
     Net cash provided by operating activities....................                        16,413                     15,979
                                                                                     -----------                -----------

Investing Activities:
   Net (increase) decrease in interest-bearing time
    deposits in other banks.......................................                           (89)                       754
   Proceeds from sales of investment securities...................                       110,442                    134,510
   Proceeds from maturities of investment securities..............                        73,013                      3,127
   Purchases of investment securities.............................                      (218,154)                  (152,434)
   Net increase in total loans....................................                      (100,170)                   (29,880)
   Additions to premises and equipment.........................                           (1,448)                    (1,413)
   Other..........................................................                          (322)                       ---
                                                                                     -----------                -----------
   Net cash used by investing activities..........................                      (136,728)                   (45,336)
                                                                                     -----------                -----------

Financing Activities:
   Net increase in total deposits.................................                        61,312                    110,451
   Net increase (decrease) in short-term borrowings...............                        86,890                    (17,080)
   Repayment of long-term debt....................................                        (1,421)                   (21,377)
   Cash dividends.................................................                        (3,750)                    (3,161)
   Purchases of treasury stock....................................                        (2,822)                    (2,493)
   Proceeds from issuance of common stock.........................                         2,333                        671
                                                                                     -----------                -----------
      Net cash provided by financing activities...................                       142,542                     67,011
                                                                                     -----------                -----------

     Increase in cash and cash equivalents........................                        22,227                     37,654

   Cash and cash equivalents at beginning of period...............                        36,137                     44,764
                                                                                     -----------                -----------
   Cash and cash equivalents at end of period.....................                   $    58,364                $    82,418
                                                                                     ===========                ===========
</TABLE>

The accompanying notes are an integral part of the consolidated interim
financial statements.


                                       6
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
 (Unaudited)


1.  Summary of Significant Accounting Policies

     Basis of Presentation - The accompanying  unaudited  consolidated financial
statements of Community  Banks,  Inc. and Subsidiaries  ("Community")  have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States for interim  financial  information and  instructions to Form 10-Q
and Article 10 of Regulation  S-X.  Accordingly,  they do not include all of the
information and footnotes required by accounting  principles  generally accepted
in the United  States  for  complete  financial  statements.  In the  opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included.

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

     Operating  results  for  the  six  months  ended  June  30,  2003,  are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 2003.

     For  further  information,  refer  to the  audited  consolidated  financial
statements,  and footnotes thereto,  included in the Annual Report on Form 10-K,
for the year ended December 31, 2002.

     Community  Banks,  Inc.  (Community) is a financial  holding  company whose
wholly-owned  subsidiaries include Community Banks,  Community Bank Investments,
Inc.  (CBII),  Community Banks Life Insurance Co. (CBLIC) and CMTY Capital Trust
I.  Community  Banks  provides a wide range of  services  through its network of
offices in Adams,  Cumberland,  Dauphin,  Luzerne,  Northumberland,  Schuylkill,
Snyder, and York Counties in Pennsylvania and Carroll County in Maryland.

     Statement  of Cash Flows - Cash and cash  equivalents  include cash and due
from banks and  federal  funds  sold.  The  company  made cash  payments of $1.3
million and $1.8  million and $21.4  million and $23.8  million for income taxes
and  interest,  respectively,  for each of the six month  periods ended June 30,
2003 and 2002.  Excluded from the consolidated  statements of cash flows for the
periods  ended  June  30,  2003  and 2002 was the  effect  of  certain  non-cash
activities.  The company  acquired  real  estate  through  foreclosure  totaling
$251,000 and $2.4 million, respectively.

     Acquisitions - During the quarter ended June 30, 2003,  Community completed
its  acquisition  of the  Abstracting  Company of York  County  and the  Schultz
Insurance  Agency.  In July 2003,  Community  completed its  acquisition of Erie
Financial Group, LTD a mortgage banking company. All acquisitions were accounted
for under the purchase  method of accounting and did not have a material  effect
on Community's financial position or results of operation.

                                       7
<PAGE>

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

     Stock-Based  Compensation - Community has a stock-based  compensation  plan
and accounts for this plan under the recognition  and  measurement  principle of
APB  No.  25,   "Accounting   for  Stock  Issued  to  Employees,"   and  related
Interpretations. No stock-based compensation cost is reflected in net income, as
all options  granted  under this plan had an exercise  price equal to the market
value of the underlying  common stock on the date of grant.  The following table
illustrates  the effect on net income and earnings  per share if  Community  had
applied the fair value recognition  provisions of FASB No. 123,  "Accounting for
Stock-Based Compensation," to stock-based compensation (in thousands, except per
share data):
<TABLE>
<CAPTION>

                                                 Three Months Ended June 30,       Six Months Ended June 30,
                                                   2003            2002                 2003        2002
                                                 ---------------------------          ----------------------
<S>                                                <C>            <C>                  <C>         <C>
        Net income, as reported                    4,976          4,619                10,077      9,070
        Deduct:  Total stock-based
           compensation expense determined
           under fair value based method for
           all awards, net of related tax effect     127             99                   253        197
                                                  ------         ------                ------     ------
        Pro forma net income                      $4,849         $4,520                $9,824     $8,873
                                                  ======         ======                ======     ======
        Earnings per share:
           Basic-as reported                       $ .52          $ .48                $ 1.05      $ .93
                                                   =====          =====                ======      =====
           Basic-pro forma                         $ .50          $ .47                $ 1.02      $ .91
                                                   =====          =====                ======      =====
           Diluted-as reported                     $ .50          $ .46                $ 1.02      $ .91
                                                   =====          =====                ======      =====

           Diluted-pro forma                       $ .49          $ .45                $ 1.00      $ .89
                                                   =====          =====                ======      =====
</TABLE>


     Recent Accounting  Developments - In January 2003, the Financial Accounting
Standards Board issued FASB  Interpretation  No. 46,  "Consolidation of Variable
Interest  Entities,  an  Interpretation  of ARB  No.  51."  This  interpretation
provides new guidance for the consolidation of variable interest entities (VIEs)
and requires such entities to be consolidated by their primary  beneficiaries if
the  entities do not  effectively  disperse  risk among  parties  involved.  The
interpretation also adds disclosure requirements for investors that are involved
with  unconsolidated  VIEs. The disclosure  requirements  apply to all financial
statements issued after January 31, 2003. The consolidation  requirements  apply
immediately  to VIEs created  after  January 31, 2003 and are  effective for the
first  fiscal  year or interim  period  beginning  after June 15,  2003 for VIEs
acquired  before February 1, 2003. The adoption of this  interpretation  did not
have any impact on Community's financial condition or results of operations.

     SFAS No. 149,  "Amendment of Statement 133 on  Derivative  Instruments  and
Hedging  Activities,"  was issued in April 2003.  SFAS 149 amends and  clarifies
financial  accounting  and  reporting  for  derivatives  instruments,  including
certain  derivative  instruments  embedded  in  other  contracts   (collectively
referred  to  as  derivatives)  and  for  hedging  activities  under  SFAS  133,
"Accounting  for Derivative  Instruments and Hedging  Activities."  SFAS 149 was
effective  for  contracts  entered  into or modified  after June 30,  2003.  The
adoption  of  this  standard  did not  have a  material  impact  on  results  of
operations, financial position, or liquidity.

     SFAS  No.  150,   "Accounting  for  Certain   Financial   Instruments  with
Characteristics  of both  Liabilities  and Equity," was issued in May 2003. SFAS
150 requires that an issuer  classify a financial  instrument that is within its
scope as a liability.  Many of these  instruments were previously  classified as
equity.  SFAS  150 was  effective  for  financial  instruments  entered  into or
modified after May 31, 2003 and otherwise was effective  beginning July 1, 2003.
The adoption of this standard did not have any impact on results of  operations,
financial position, or liquidity.


                                       8
<PAGE>

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




2.  Investment Securities
    ---------------------

     The  amortized  cost and fair values of  investment  securities at June 30,
2003 and December 31, 2002 were as follows(Dollars in thousands):
<TABLE>
<CAPTION>

                                                                                                 June 30, 2003
                                                                                                ---------------
                                                                                       Amortized                  Fair
                                                                                         Cost                     Value
                                                                                      ----------               -----------
<S>                                                                                   <C>                      <C>
U.S. Treasury and federal agencies ......................................             $  172,055               $   177,180
Mortgage-backed U.S. government agencies.................................                159,614                   163,035
Obligations of states and political subdivisions.........................                184,263                   194,776
Corporate securities.....................................................                107,444                   108,341
Equity securities........................................................                 66,855                    70,184
                                                                                      ----------               -----------

     Total...............................................................             $  690,231               $   713,516
                                                                                      ==========               ===========
</TABLE>


<TABLE>
<CAPTION>

                                                                                               December 31, 2002
                                                                                               -----------------

                                                                                       Amortized                  Fair
                                                                                         Cost                     Value
                                                                                      ----------               -----------
<S>                                                                                   <C>                      <C>
U.S. Treasury and federal agencies ......................................             $  130,947               $   134,334
Mortgage-backed U.S. government agencies.................................                206,450                   210,825
Obligations of states and political subdivisions.........................                172,391                   177,135
Corporate securities.....................................................                 95,022                    93,094
Equity securities........................................................                 50,610                    52,413
                                                                                      ----------               -----------

     Total...............................................................             $  655,420               $   667,801
                                                                                      ==========               ===========

</TABLE>

                                       9
<PAGE>



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

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

     Changes  in the  allowance  for loan  losses  are as  follows  (Dollars  in
thousands):
<TABLE>
<CAPTION>

                                                                  Six Months Ended           Year Ended         Six Months Ended
                                                                       June 30,              December 31,            June 30,
                                                                         2003                   2002                   2002
                                                                 ------------------         --------------      ------------------
<S>                                                                  <C>                      <C>                     <C>
Balance, January 1...................................                $  12,343                $12,132                 $12,132
Provision for loan losses............................                    1,000                  3,350                   2,250
Loan charge-offs.....................................                     (796)                (4,180)                 (2,046)
Recoveries...........................................                      375                  1,041                     290
                                                                     ---------               --------                --------
Balance, June 30, 2003, December 31,
 2002, and June 30, 2002.............................                $  12,922                $12,343                 $12,626
                                                                     =========                =======                 =======
</TABLE>
<TABLE>
<CAPTION>


                                RISK ELEMENTS (a)


                                                                      June 30,              December 31,              June 30,
                                                                        2003                   2002                    2002
                                                                     ---------                -------                 -------
<S>                                                                  <C>                      <C>                     <C>
Loans on which accrual of interest has been
 discontinued:
     Commercial................................................      $   3,071                $   757                 $ 4,643
     Residential and commercial mortgages......................          7,450                  8,250                   4,237
     Other.....................................................            760                    386                     214
                                                                     ---------                -------                 -------
                                                                        11,281                  9,393                   9,094
                                                                     ---------                -------                 -------

Other real estate..............................................            359                  1,183                     411
                                                                     ---------                -------                 -------

       Total non-performing assets.............................         11,640                 10,576                   9,505

Loans past due 90 days or more and still accruing interest:
     Commercial................................................            ---                    817                     495
     Residential and commercial mortgages.....................             38                      49                     440
     Consumer.................................................              23                     95                      46
                                                                     ---------                -------                 -------
                                                                            61                    961                     981
                                                                     ---------                -------                 -------

Total risk elements.....................................             $  11,701                $11,537                 $10,486
                                                                     =========                =======                 =======

</TABLE>


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

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

     At June 30, 2003 and December 31, 2002,  the recorded  investment  in loans
for which impairment has been recognized  totaled $8.9 million and $7.0 million,
respectively.  The valuation  allowance for impaired loans totaled  $486,000 and
$326,000 at June 30,  2003 and  December  31,  2002,  respectively.  For the six
months ended June 30, 2003, and 2002 the average recorded investment in impaired
loans  approximated  $8.1  million  and  $7.6  million,  respectively.  Interest
recognized on impaired  loans on the cash basis for the six month periods ending
June  30,  2003  and  2002  was  not  significant.

                                       10
<PAGE>


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

4. Earnings Per Share:

     The  following  table  sets  forth the  calculations  of Basic and  Diluted
Earnings Per Share for the periods indicated:
<TABLE>
<CAPTION>

                                                                                        Three Months Ended June 30,
                                                                  ----------------------------------------------------------------
                                                                               2003                                2002
                                                                  ----------------------------------------------------------------
                                                                                        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:
Net income available to common stockholders................       $ 4,976      9,625     $ .52         $4,619      9,715      $.48
                                                                  =======                =====         ======                 ====
Effect of Dilutive Securities:
Incentive stock options outstanding........................                      243                                 237
                                                                                ----                               -----
Diluted EPS:
Income available to common stockholders &
   assumed conversion......................................       $ 4,976      9,868     $ .50         $4,619      9,952      $.46
                                                                  =======                =====         ======                 ====
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Six Months Ended June 30,
                                                           -----------------------------------------------------------------------
                                                                               2003                                 2002
                                                           -----------------------------------------------------------------------
                                                                                        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:
Net income available to common stockholders................       $10,077      9,612     $1.05         $9,070      9,723      $.93
                                                                  =======                =====         ======                 ====
Effect of Dilutive Securities:
Incentive stock options outstanding........................                      230                                 231
                                                                              ------                               -----
Diluted EPS:
Income available to common stockholders &
   assumed conversion......................................       $10,077      9,842     $1.02         $9,070      9,954      $.91
                                                                  =======                =====         ======                 ====
</TABLE>

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


5.        Letters of Credit:
          ------------------

     Outstanding letters of credit written are conditional commitments issued by
the bank subsidiary to guarantee the performance of a customer to a third party.
Community's  exposure to credit loss in the event of nonperformance by the other
party to the financial  instrument for standby  letters of credit is represented
by the contractual amount of those  instruments.  Community had $23.6 million of
standby letters of credit as of June 30, 2003. The subsidiary bank uses the same
credit  policies in making  conditional  obligations  as it does for  on-balance
sheet instruments.

     The  majority of these  standby  letters of credit  expire  within the next
twelve  months.  The  credit  risk  involved  in  issuing  letters  of credit is
essentially the same as that involved in extending other loan  commitments.  The
subsidiary bank requires  collateral and personal  guarantees  supporting  these
letters of credit as deemed  necessary.  Management  believes  that the proceeds
obtained  through  a  liquidation  of such  collateral  and the  enforcement  of
personal guarantees would be sufficient to cover the maximum potential amount of
future payments required under the corresponding guarantees.  The current amount
of the liability as of June 30, 2003 for  guarantees  under  standby  letters of
credit issued after December 31, 2002 is not material.

                                       11
<PAGE>



6.   Comprehensive Income (Dollars in thousands):
     --------------------------------------------

<TABLE>
<CAPTION>
                                                                       Three Months Ended                Six Months Ended
                                                                           June 30,                           June 30,
                                                                  --------------------------          -------------------------
                                                                    2003             2002                2003           2002
                                                                  --------------------------          -------------------------
<S>                                                               <C>             <C>                 <C>           <C>
Investment Securities:
     Unrealized holding gains
        arising during the period..........................       $12,822         $   13,516          $   12,451     $   10,576
     Reclassification adjustments for
        (gains) included in net income.....................        (1,047)              (518)             (1,547)          (536)
Unfunded pension liability.................................             -                  -                   -              -
                                                                  -------         ----------          ----------     ----------
Other comprehensive income..........................               11,775             12,998              10,904         10,040
Tax effect.................................................         4,121              4,549               3,816          3,514
                                                                  -------         ----------          ----------     ----------
Other comprehensive income,
     net of tax............................................       $ 7,654          $   8,449          $    7,088     $    6,526
                                                                  =======         ==========          ==========     ==========
</TABLE>

                                       12
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

Part I - Item 2.     Management's Discussion and Analysis of Financial Condition
                     -----------------------------------------------------------
                     and Results of Operations
                     -------------------------

Overview

     The purpose of this review is to provide additional  information  necessary
to  fully  understand  the  consolidated  financial  condition  and  results  of
operations of Community.  Throughout  this review,  net interest  income and the
yield on  earning  assets  are  stated on a fully  taxable-equivalent  basis and
balances  represent  average  daily  balances  unless  otherwise  indicated.  In
addition, income statement comparisons are based on the first six months of 2003
compared to the same period of 2002 unless otherwise indicated.

Forward-Looking Statements

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

Critical Accounting Policies

     The  following is a summary of those  accounting  policies  that  Community
considers to be most  important to the portrayal of its financial  condition and
results of operations,  as they require management's most difficult judgments as
a result of the need to make  estimates  about the  effects of matters  that are
inherently  uncertain.

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

     Impairment  is  measured  on a  loan  by  loan  basis  for  commercial  and
construction  loans over $250,000 by either the present value of expected future
cash  flows  discounted  at the  loan's  effective  interest  rate,  the  loan's
obtainable  market  price,  or the fair value of the  collateral  if the loan is
collateral dependent.

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

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

                                       13
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
                     -----------------------------------------------------------
                     and Results of Operations (Continued)
                     -------------------------------------

Summary of Financial Results

     Community,  the parent  company of  Community  Banks,  continued  to report
improved  earnings  performance  for both the second  quarter  and first half of
2003. In the second quarter, earnings per share rose to $0.50, or nearly 9% over
the $0.46 reported in the same quarter of 2002. At the same time, net income for
the period rose to almost $5.0 million  compared with $4.6 million in the second
quarter of the year  earlier  period.  Results  for the  second  quarter of 2003
produced a return on average  assets  and return on average  equity,  two common
measures   of   financial   institution   performance,   of  1.12%  and  14.62%,
respectively.

     While steady  improvement was recorded on a quarterly  basis,  year-to-date
performance  rose more  substantially  as  earnings  per share for the first six
months of 2003  reached  $1.02,  a 12% increase  over the $0.91  recorded in the
first  half of 2002.  Net income for the first half of 2003 was in excess of $10
million.  Results  for both the  second  quarter  and  first  half of 2003  were
influenced by a number of factors,  including an uncertain  economic climate,  a
record decline in the level of interest rates, and ongoing efforts to reposition
the investment  portfolio to accommodate  improved loan demand.  Declines in key
benchmark  interest rates continued to compress net interest margin  performance
and constrained the overall rate of growth in net interest  income.  Despite the
influence of these negative extrinsic  factors,  profit performance was enhanced
by renewed loan growth trends,  by a sustained  credit quality focus, and by the
continued  diversification  of the  non-interest  fee and service income revenue
base. Operating expenses have continued to increase at a level commensurate with
the rate of increase in related revenue generation activities, and also included
the impact of a marketing  campaign to promote brand awareness  during the first
half of the year.

     Growth  trends in loans and overall  earning  assets  rebounded  during the
quarter, reversing a period of less robust growth experienced since the economic
downturn that began in early 2002.  Quarter-over-quarter average loan growth was
10.5% in the second quarter of 2003 compared to the same period of 2002. Deposit
growth,  though steady,  was 6.9%, while earning assets grew 14.5%. These growth
measures  exceeded the rate of growth in the first  quarter of the current year,
suggesting  that the  economic  slowdown  may have  begun  to  exhibit  signs of
abatement.  Total assets grew to $1.8  billion by the end of the second  quarter
while loans and deposits reached $1.0 billion and $1.2 billion,  respectively at
June 30,  2003.  Mortgage  generation  activities  continued  to be  vigorous as
origination  income was fueled by the lower interest rates and the affordability
of financing for both new and existing homes.

     Performance  continues  to be  favorably  influenced  by a  credit  quality
profile that has reflected substantial improvement from the year earlier period.
During both the first and second  quarters  of 2003,  net  charge-offs  remained
substantially  below the amounts recorded  throughout 2002, when net charge-offs
reached .35% of total loans.  Annualized  net  charge-offs  in the first half of
2003 were .09%, reflecting Community's solid asset quality.

     During the first half of 2003,  Community completed its acquisitions of the
Abstracting  Company of York County, a title insurance and abstracting  company,
and Shultz Insurance Agency in Hanover,  Pennsylvania.  In July 2003,  Community
announced its agreement to acquire Your Insurance  Partner,  an insurance agency
with offices in Mechanicsburg and Dillsburg, Pennsylvania, and the completion of
its  acquisition  of Erie  Financial  Group,  Ltd.,  a York,  Pennsylvania-based
mortgage banking company. The Corporation also opened its first banking facility
in downtown  Harrisburg  in July.  Community  now  operates a  community  office
network of 47 branches,  combined with an expansive ATM network and a variety of
financial  services  offered  through  both  its  banking  offices  and  through
specialized subsidiaries.


                                       14
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
                     -----------------------------------------------------------
                     and Results of Operations (Continued)
                     --------------------------------------

Average Statement of Condition

The average balance sheets for the six months ended June 30, 2003 and 2002 were
as follows (Dollars in thousands):
<TABLE>
<CAPTION>

                                                                                                          Change
                                                          2003                2002               Volume               %
-------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>                   <C>                   <C>
Cash and due from banks                              $      35,187              36,818         $    (1,631)          (4)%
Federal funds sold and other                                 1,036              20,207             (19,171)         (95)%
Investments                                                690,799             551,028             139,771            25%
Loans                                                      947,413             873,771              73,642             8%
Allowance for loan losses                                   12,750              12,610                 140             1%
-------------------------------------------------------------------------------------------------------------------------
Net loans                                                  934,663             861,161              73,502             9%
Goodwill and identifiable intangibles                        1,953                 992                 961            97%
Loans held for sale                                          8,335               6,887               1,448            21%
Other assets                                                69,161              64,956               4,205             6%
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                         $   1,741,134       $   1,542,049         $   199,085            13%
-------------------------------------------------------------------------------------------------------------------------


Noninterest-bearing deposits                         $     163,674       $     160,092         $     3,582             2%
Interest-bearing deposits                                  985,415             906,393              79,022             9%
Short-term borrowings                                      110,752              48,305              62,447           129%
Long-term debt                                             319,906             300,270              19,636             7%
Subordinated debentures                                     15,000                 ---              15,000            n/a
Other liabilities                                           12,742              11,687               1,055             9%
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                        1,607,489           1,426,747             180,742            13%
-------------------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY                                       133,645             115,302              18,343            16%
-------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY                                 $   1,741,134       $   1,542,049         $   199,085            13%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


     Loan  growth  trends  have been  steady  since the second  quarter of 2002.
Quarterly  average loan growth has been between 6% and 7% on an annualized basis
for each  quarter from the second  quarter of 2002 through the first  quarter of
2003. In the quarter ended June 30, 2003,  loan growth was more robust as growth
during the second quarter over the same quarter of 2002 reached nearly 11%. This
helped  push  the  six-month  growth  rate to 8% for  the  first  half of  2003.
Commercial loan growth remains strong in the commercial real estate market,  and
general commercial lending has also shown recent growth. Residential real estate
lending, composed primarily of loans to single-family creditors, has experienced
a steady decline as a result of refinancing  activity and the  accessibility  of
secondary  market  liquidity,  with most new credits being sold in the secondary
market.  This strategy  reduces the interest rate risk  associated with consumer
preferences for long term, fixed rate lending,  and provides valuable  liquidity
for other forms of relationship  lending.  Consumer demand for credit facilities
continues to be a  significant  contributing  factor to sustaining  lending.  In
March of 2003, Community began offering a longer-term equity loan with bi-weekly
payments as an alternative to consumers seeking low cost financing.

     Deposit  balances  remain  the  primary  source of  funding  for  financial
institutions  and  Community   recognized  growth  of  7.8%  in  this  important
core-funding  source.  Throughout  2002,  deposit growth occurred evenly between
core accounts and time deposits.  In 2003,  deposit products such as Community's
higher  interest  PowerNOW Plus accounts  contributed  to more growth within the
interest bearing deposit accounts than in demand deposits or time deposits.

                                       15
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
                     -----------------------------------------------------------
                     and Results of Operations (Continued)
                     -------------------------------------


     Community has made strategic use of short-tem  funding  sources at historic
low rates to  augment  its  funding  needs.  Increases  in  overnight  fed funds
borrowings  have been used to fund earning  asset growth  short-term.  Community
monitors its funding needs and the benefits of this currently low cost source of
funds and  considers it in relation to its ability to generate  funding  through
increased deposits and term borrowings.  Subsequent to June 30, 2003,  overnight
borrowings  through  the  Federal  Home  Loan Bank have  begun to  decrease.  In
December of 2002,  Community  executed a pooled trust preferred  issuance of $15
million in order to increase its amount of regulatory capital.  The use of these
alternative funding vehicles continues to provide the excess liquidity necessary
to fund earning asset growth.


Net Interest Income

     The  following  table  summarizes,  on a fully  taxable  equivalent  basis,
changes in net interest  income and net interest margin for the six months ended
June 30, 2003 and 2002 (Dollars in thousands):
<TABLE>
<CAPTION>


                                                 2003                       2002                  Increase    (Decrease)
                                       Amount         Yield/rate    Amount          Yield/rate      Amount    Yield/rate
-------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                 <C>      <C>                   <C>       <C>               <C>
Interest income                      $   50,601          6.21%    $   51,217            7.13%     $     (616)       (.92)
Interest expense                         21,392          3.01%        23,514            3.78%         (2,122)       (.77)
-------------------------------------------------------------------------------------------------------------------------
Net interest income                  $   29,209                   $   27,703                      $    1,506
Interest spread                                          3.20%                          3.35%                       (.15)
Impact of non-interest funds                              .39%                          0.51%                       (.12)
-------------------------------------------------------------------------------------------------------------------------
Net interest margin                                      3.59%                          3.86%                       (.27)
-------------------------------------------------------------------------------------------------------------------------

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

     Net interest  income  increased  $1.5 million,  or 5.4% in 2003 compared to
2002. Both earning asset and  interest-bearing  liability levels increased and a
decline in asset yields  outpaced the decline in funding costs. As such, the net
interest spread decreased 15 basis points.

     Interest income decreased $616,000 or 12% during the first half of 2003. An
increase  in  earning  assets of  approximately  $195  million  was  offset by a
decrease in the yield on loans and  investments,  which decreased in line with a
general decline in overall rates.  Interest expense declined more substantially,
by $2.1  million,  or  9.0%.  Although  interest-bearing  liabilities  increased
approximately  $176 million,  the benefit of a lower  interest rate  environment
resulted  in a decrease  in the total  rate paid on funding  sources of 77 basis
points.  Given the reduction in interest rates since last year, the contribution
from  non-interest  funding  sources  declined  from 51 basis points to 39 basis
points and added to the decrease in net interest margin.

     In isolating second quarter 2003 performance,  net interest margin declined
from the  levels  achieved  in the prior  quarter  and from a year  ago.  Second
quarter net  interest  margin for 2003  reached  3.49%  compared to 3.68% in the
first quarter and 3.76% in the second quarter of 2002.

     Within the scope of its  asset/liability  management policy,  Community has
repositioned  its balance  sheet  posture in  anticipation  of a gradual rise in
interest rates.  Expectations are that further  substantial  declines in overall
interest  rates  are  considered  to be  unlikely  and  that  Community  is well
positioned to benefit from a measured  increase in the rate  environment in 2003
and 2004.

                                       16
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
                     -----------------------------------------------------------
                     and Results of Operations (Continued)
                     -------------------------------------


Provision for Loan Losses

     Community remains attuned to the influence of unfolding economic conditions
and  their  potential  impact  on  credit  conditions  and the  adequacy  of the
allowance for loan losses.  The  provision for loan losses  charged to income in
2003 was $1.0 million  compared to $2.3 million in 2002. Net loan charge-offs in
2003 were  $421,000,  or .08% of  average  loans  annualized,  compared  to $1.8
million,  or .40% of  average  loans  annualized,  in the  first  half of  2002.
Non-accrual loans of $11.3 million at June 30, 2003, increased from $9.1 million
a year  earlier,  reflecting  in part a migration of loans from the 90 days past
due category,  but also an increase in commercial  accounts.  Loans 90 days past
due but still accruing interest showed a dramatic decline to $61,000 at June 30,
2003, from $981,000 at June 30, 2002.  Overall credit quality trends continue to
reflect the underlying credit quality  standards applied to Community's  lending
function.


Non-Interest Income

     Non-interest  income  continued  to  improve  on  a  year-over-year  basis,
reflecting  Community's  continuing  emphasis on the  expansion  of products and
services.  Non-interest  income,  exclusive of security  gains,  increased  $1.0
million, or 15%, in the first half of 2003 compared to the first half of 2002.

     Service charges on deposit accounts  increased  $760,000,  or 48.2%, in the
first half of 2003 compared to 2002.  Service charges include the impact of fees
associated  with  insufficient  funds,  deposit  service fees, and other similar
fee-based products.  In 2003, Community  instituted an overdraft program,  which
fees accounted for a portion of the increase in deposit account service charges

     Insurance  premium income and commissions  increased  $76,000,  or 1.1%, in
2003 from 2002 and  reflected  an increase in title  insurance  activity  offset
partially by a decrease in fees earned  through  Community's  captive  insurance
business.  Consistent  with the  growth  in  mortgage  related  activity,  title
insurance  volume  reached an all-time high and included the impact of the April
2003  acquisition of the Abstracting  Company of York County.  During the latter
part of 2002,  changes in federal  regulations  required  that all banks convert
from a single  premium  to a monthly  premium  on credit  insurance,  which will
require income recognition over the life of the related loan.  Previously,  such
fees could be recognized upon remittance of the single premium.  Over time, this
change in income  recognition is not expected to adversely affect fees from this
service.  Insurance  premium  income and  commissions  of $848,000 in the second
quarter of 2003 increased  $438,000,  or 106.8%, over the $410,000 recognized in
the first quarter.

     Community  derives  revenue from the origination and sale of mortgage loans
into the secondary market.  Gains on loan sales increased $385,000,  or 79.2% in
2003 as a result of continued  demand for  fixed-rate  real estate loans in this
historically low interest rate environment.

     Investment security gains of $1.5 million were recognized in the first half
of 2003  compared  to  $536,000 in 2002.  Such gains were  realized  pursuant to
management's   ongoing  effort  to  review  investment  holdings  and  portfolio
strategy. During the first half of 2003, Community recognized gains arising from
discrete sales of certain callable  investments,  which were likely to be called
in the near term.  Other gains  resulted  from the sale of equity  securities of
other financial institutions that had been recently acquired.

     Other income for the first half of 2003  totaled  $1.2 million  compared to
$1.8  million  for the first  half of 2002.  In 2002,  a gain on the sale of two
branches  was  recognized.  In July 2003,  Community  announced  the sale of one
branch, which is expected to be consummated during the third quarter.  Community
constantly  monitors the performance of its office locations,  using its ongoing
analysis  and   rationalization   of  its  current   office   structure  in  its
consideration of maintaining existing markets, as well as expansion into markets
with more vibrant growth characteristics. Other income for the second quarter of
2003 totaled  $809,000,  an increase of $415,000  over first  quarter  income of
$394,000.  During the  second  quarter,  Community  recognized  a  one-time  fee
associated with a change in its check-printing  vendor for customer checks. This
enabled  Community  to unify its entire  customer  base  under a single  service
provider.

                                       17
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
                     -----------------------------------------------------------
                     and Results of Operations (Continued)
                     -------------------------------------


Non-Interest Expenses

     The increase in salaries and employee benefits of $1.8 million or 17.8% for
2003  compared to 2002 was affected by a number of factors  including the annual
merit  increase and employees  added  through the expansion of both  Community's
office network, its fee-based activities, and corporate acquisitions.

     The  increase in  occupancy  expense of  $739,000,  or 26.4%,  includes the
effect of branch expansion and the opening of the Southern  Operations Center in
2002, as well as increased costs of facilities  maintenance  associated with the
harsh winter weather experienced throughout Community's geographic region in the
first quarter of 2003.

     Other  operating  expense  increased  $143,000 or 2.3% in the first half of
2003. Marketing costs increased approximately $475,000 in the first half of 2003
and will  continue  to  increase  throughout  2003 as part of a plan to  broaden
customer  awareness of Community  Banks and the services it provides in targeted
markets.  Community continues to execute a targeted strategic marketing campaign
that includes radio, billboard,  direct mail, and television mediums. The timing
of  these   expenditures  is  intended  to  correspond  with  market   expansion
opportunities  within several of the markets currently  experiencing  disruption
from merger activity.


Income Taxes

     Income  tax  expense  for the  first six  months of 2003 was $2.2  million,
resulting in an effective  tax rate of 18.2%.  The relative  level of tax-exempt
income  influences  Community's  effective  income  tax  rates  and  is  largely
responsible for the difference  between the effective tax rate for 2003 and 2002
and the statutory federal tax rate for corporations.


 Stockholders' Equity

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

     The most fundamental source of capital is earnings and earnings  retention.
This  cornerstone  of capital  adequacy  can be augmented by a number of capital
management  strategies,  many of which were used in 2002 and which will continue
in 2003. As it has for a number of years,  the Board  approved the issuance of a
5% dividend in the first quarter of 2003.  Community's strong earnings supported
an increase in the return of capital to existing  shareholders in the form of an
increase in the  traditional  cash  dividend.  Community  also continues to make
strategic  use of share  repurchase  as  another  efficient  means of  returning
capital to  shareholders.  These  strategies and techniques  allow management to
maintain  capital at levels that  represent  an efficient  use of this  valuable
resource.

     Regulators have established standards for the monitoring and maintenance of
appropriate levels of capital for financial institutions. All regulatory capital
guidelines  are now based upon a risk-based  supervisory  approach that has been
designed  to ensure  effective  management  of  capital  levels  and  associated
business risk. The following table provides the risk-based  capital positions at
June 30, 2003 for Community and its banking  subsidiary,  CommunityBanks,  along
with a comparison to the various regulatory capital requirements:

                                       18
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
                     -----------------------------------------------------------
                     and Results of Operations (Continued)
                     -------------------------------------

<TABLE>
<CAPTION>

                                                    June 30,                  Regulatory                 "Well
                                                      2003                     Minimums               Capitalized"
                                                      ----                   ------------              --------
<S>                                                  <C>                       <C>                        <C>
     Leverage ratio
     --------------
     Community Banks, Inc.                             7.85%                      4%                      N/A
     CommunityBanks                                    7.59%                      4%                        5%

     Tier 1 capital ratio
     --------------------
     Community Banks, Inc.                            10.51%                      4%                      N/A
     CommunityBanks                                    9.94%                      4%                        6%

     Total risk-based capital ratio
     ------------------------------
     Community Banks, Inc.                            11.60%                      8%                      N/A
     CommunityBanks                                   10.97%                      8%                       10%
</TABLE>



     At June 30, 2003, total  stockholders'  equity reflected  accumulated other
comprehensive  income  of  $13.6  million  compared  to  the  accumulated  other
comprehensive  income of $6.5 million reflected in total stockholder's equity at
year-end  2002.  This  increase  can be  attributed  to the  change  in the  net
unrealized  gain on  investment  securities  available  for sale,  net of taxes.
During the early  portion of the third  quarter of 2003,  interest  rate  trends
began to reverse. Such a pattern, if sustained, would have the effect of eroding
the unrealized  gains  reflected in  stockholders'  equity.  Community  reissued
approximately  108,000  shares and  purchased  approximately  100,000  shares of
treasury  stock  during the first six months of 2003.  Community  currently  has
board  approval  to  purchase  an  additional  182,000  shares  through it share
repurchase plan.

                                       19
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 3.     Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------------------

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

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

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


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

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

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

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

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

                                       20
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 3.     Quantitative and Qualitative Disclosures About Market Risk
                     -----------------------------------------------------------
                     (Continued)
                     -----------

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

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

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

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

Interest Rate Sensitivity at June 30, 2003
------------------------------------------
                                              1-90           90-180           180-365           1 year
Dollars in thousands                          days            days             days             or more        Total
-----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>               <C>              <C>            <C>
Assets
Interest-bearing deposits in
   other banks                              $  1,040               ---              ---               ---    $    1,040
Investment securities                         97,780       $    49,259       $  113,672       $   452,805       713,516
Loans, net of unearned income                354,768            82,809          105,356           461,134     1,004,067
Loans held for sale                            3,179                96              192             3,313         6,780
-----------------------------------------------------------------------------------------------------------------------
Total                                       $456,767       $   132,164       $  219,220       $   917,252    $1,725,403
-----------------------------------------------------------------------------------------------------------------------
Liabilities
Savings                                     $399,022       $       ---       $      ---       $       ---    $  399,022
Time                                          91,685            64,000           86,026           259,049       500,760
Time in denominations of
   $100,000 or more                           30,424            16,949           19,306            43,354       110,033
Short-term borrowings                        156,015               ---              ---               ---       156,015
Long-term debt                                   849             5,849            1,698           310,716       319,112
Subordinated debentures                       15,000               ---              ---               ---        15,000
-----------------------------------------------------------------------------------------------------------------------
Total                                       $692,995       $    86,798       $  107,030       $   613,119    $1,499,942
-----------------------------------------------------------------------------------------------------------------------

Interest Sensitivity Gap
Periodic                                    (236,228)      $    45,366       $  112,190       $   304,133
Cumulative                                                    (190,862)         (78,672)          225,461
Cumulative gap as a percentage
   of earning assets                            (14)%             (11)%             (5)%               13%

</TABLE>
     The  negative  GAP  between  interest-earning  assets and  interest-bearing
liabilities  maturing or repricing within one year  approximated 5% at both June
30, 2003,  and December 31,  2002.  Community's  interest  rate risk posture has
remained relatively constant since the end of the year.


                                       21
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 4.  Controls and Procedures
-----------------------------------------

     Under  the  supervision  and  with  the   participation  of  the  Company's
management,  including its Chief Executive Officer and Chief Financial  Officer,
the Company has evaluated the  effectiveness  of the design and operation of its
disclosure  controls  and  procedures  as of June  30,  2003.  Based  upon  this
evaluation,  the Chief  Executive  Officer  and  Chief  Financial  Officer  have
concluded that the Company's disclosure controls and procedures are adequate and
effective to ensure that  material  information  relating to the Company and its
consolidated subsidiaries is made known to them by others within those entities,
particularly  during  the period in which this  quarterly  report was  prepared.
There were no significant changes in the Company's internal controls or in other
factors that could significantly  affect these controls during the quarter ended
June 30, 2003.

                                       22
<PAGE>


COMMUNITY BANKS, INC. and SUBSIDIARIES

                           PART II - OTHER INFORMATION



Item 1 - Legal Proceedings

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


Item 2 - Changes in Securities and Use of Proceeds

          Not applicable.

Item 3 - Defaults Upon Senior Securities

          Not applicable.

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

          The annual meeting of shareholders of Community  Banks,  Inc. was held
          on May 1, 2003 for the  purpose of  considering  and  voting  upon the
          following matter:

                    To elect four (4) directors:  Robert W.  Rissinger,  John W.
                    Taylor, Jr., Wayne H. Mummert, and Scott J. Newkam, to serve
                    until the 2007 annual meeting of shareholders. Each director
                    received  affirmative votes  representing at least 77.13% of
                    the shares outstanding.


Item 5 - Other Information

          Not applicable.

Item 6 - Exhibits and Reports on Form 8-K

(a)       Exhibits


          3(i)      Amended Articles of Incorporation (Incorporated by reference
                    to Exhibit 3.1,  attached to  Registrant's  registration  on
                    Form 8-A, filed on May 13, 2002)
          3(ii)     Amended By-Laws  (Incorporated  by reference to Exhibit 3.2,
                    attached to  Community's  Quarterly  Report on Form 10-Q for
                    the quarter ended March 31, 2003)
          4         Instruments  defining  the  rights of the  holders  of trust
                    capital  securities  and sold by Community in December  2002
                    are not attached,  as the amount of such  securities is less
                    than 10% of the  consolidated  assets of  Community  and its
                    subsidiaries,  and the securities have not been  registered.
                    Community  agrees to provide  copies of such  instruments to
                    the SEC upon request.
          10.1      2000 Directors' Stock Option Plan, incorporated by reference
                    to Exhibit 4 to Community's  registration on Form S-8, filed
                    on May 17, 2000  (Incorporated  by reference to Exhibit 10.1
                    to Community's Annual Report on Form 10-K for the year ended
                    December 31, 2002,  filed with the  Commission  on March 28,
                    2003)
          10.2      1998 Long-Term Incentive Plan,  incorporated by reference to
                    Exhibit 4 to Community's  registration on Form S-8, filed on
                    June 18,  1998(Incorporated  by reference to Exhibit 10.2 to
                    Community's  Annual  Report on Form 10-K for the year  ended
                    December 31, 2002,  filed with the  Commission  on March 28,
                    2003)

                                       23
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES


PART II - Item 6.   Exhibits and Reports on Form 8-K - (a) Exhibits (Continued)
--------------------------------------------------------------------------------


          10.3      Form of Stock Option Agreement - Directors Stock Option Plan
                    (Incorporated  by reference  to Exhibit 10.3 to  Community's
                    Annual  Report on Form 10-K for the year ended  December 31,
                    2002, filed with the Commission on March 28, 2003)
          10.4      Form of Stock Option  Agreement - Long-Term  Incentive  Plan
                    (Incorporated  by reference  to Exhibit 10.4 to  Community's
                    Annual  Report on Form 10-K for the year ended  December 31,
                    2002, filed with the Commission on March 28, 2003)
          10.5      Employment Agreement of Eddie L. Dunklebarger  (Incorporated
                    by reference to Exhibit 10.5 to Community's Annual Report on
                    Form 10-K for the year ended  December 31, 2002,  filed with
                    the Commission on March 28, 2003)
          10.6      Employment  Agreement  of Donald F.  Holt  (Incorporated  by
                    reference to Exhibit 10.6 to  Community's  Annual  Report on
                    Form 10-K for the year ended  December 31, 2002,  filed with
                    the Commission on March 28, 2003)
          10.7      Employment  Agreement,  and amendment thereto,  of Robert W.
                    Lawley   (Incorporated  by  reference  to  Exhibit  10.7  to
                    Community's  Annual  Report on Form 10-K for the year  ended
                    December 31, 2002,  filed with the  Commission  on March 28,
                    2003)
          10.8      Employment  Agreement,  and amendment thereto, of Anthony N.
                    Leo   (Incorporated   by   reference   to  Exhibit  10.8  to
                    Community's  Annual  Report on Form 10-K for the year  ended
                    December 31, 2002,  filed with the  Commission  on March 28,
                    2003)
          10.9      Employment  Agreement,  and amendment thereto, of Jeffrey M.
                    Seibert  (Incorporated  by  reference  to  Exhibit  10.9  to
                    Community's  Annual  Report on Form 10-K for the year  ended
                    December 31, 2002,  filed with the  Commission  on March 28,
                    2003)
          10.10     Salary  Continuation  Agreement,  and amendment thereto,  of
                    Eddie L. Dunklebarger  (Incorporated by reference to Exhibit
                    10.10 to Community's Annual Report on Form 10-K for the year
                    ended December 31, 2002,  filed with the Commission on March
                    28, 2003)
          10.11     Salary  Continuation  Agreement,  and amendment thereto,  of
                    Robert W. Lawley (Incorporated by reference to Exhibit 10.11
                    to Community's Annual Report on Form 10-K for the year ended
                    December 31, 2002,  filed with the  Commission  on March 28,
                    2003)
          10.12     Salary  Continuation  Agreement,  and amendment thereto,  of
                    Anthony N. Leo  (Incorporated  by reference to Exhibit 10.12
                    to Community's Annual Report on Form 10-K for the year ended
                    December 31, 2002,  filed with the  Commission  on March 28,
                    2003)
          10.13     Salary  Continuation  Agreement,  and amendment thereto,  of
                    Jeffrey M.  Seibert  (Incorporated  by  reference to Exhibit
                    10.13 to Community's Annual Report on Form 10-K for the year
                    ended December 31, 2002,  filed with the Commission on March
                    28, 2003)
          10.14     Rights Agreement between Community Banks, Inc. and Community
                    Banks, dated February 28, 2002, incorporated by reference to
                    Exhibit 1 to Community's  registration on Form 8-A, filed on
                    February 27, 2002
          10.15     Community Banks, Inc. 401(k) Plan (Incorporated by reference
                    to Exhibit 10.15 to  Community's  Annual Report on Form 10-K
                    for the  year  ended  December  31,  2002,  filed  with  the
                    Commission on March 28, 2003)
          31.1      Rule  13a-14(a)/15d-14(a)   Certification  (Chief  Executive
                    Officer)
          31.2      Rule  13a-14(a)/15d-14(a)   Certification  (Chief  Financial
                    Officer)
          32.1      Section 1350 Certification (Chief Executive Officer)
          32.2      Section 1350 Certification (Chief Financial Officer)


                                       24
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART II - Item 6 - Exhibits and Reports on Form 8-K (Continued)
---------------------------------------------------------------


(b)      Reports on Form 8-K
----------------------------

          Registrant filed the following  reports on Form 8-K during the quarter
          ended June 30, 2003:

          Report Dated April 17, 2003
          ---------------------------
          Registrant announced its earnings for the period ended March 31, 2003.

          Report Dated May 1, 2003
          ------------------------
          Registrant announced  the  declaration  of a second  quarter
          dividend.
          Registrant  also  reported  that  its  annual  shareholders'
          meeting was held on May 1, 2003.

          Report Dated June 4, 2003
          -------------------------
          Registrant  engaged  Beard  Miller  Company  LLP  as  its  independent
          accountant, replacing PriceWaterHouseCoopers LLP.


                                       25
<PAGE>







                                   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   August 14, 2003                            /s/ Eddie L. Dunklebarger
    ------------------                            ----------------------------
                                                     Eddie L. Dunklebarger
                                                     Chairman and President
                                                    (Chief Executive Officer)


Date   August 14, 2003                            /s/ Donald F. Holt
    ------------------                            ----------------------------
                                                     Donald F. Holt
                                                    Executive Vice President
                                                    (Chief Financial Officer)

                                       26