SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

                                     OF 1934


                      For the Quarter Ended March 31, 2000

                                     No. 0-15786
                                (Commission File Number)

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


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

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

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


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

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


                  Number of shares outstanding as of March 31, 2000


CAPITAL STOCK-COMMON                                      7,094,000
--------------------                                 -------------------
  (Title of Class)                                   (Outstanding Shares)




<PAGE>



                   COMMUNITY BANKS, INC. and SUBSIDIARIES

                                   INDEX 10-Q


PART I

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

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

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

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

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

Notes to Consolidated Financial Statements............................6-9

Management's Discussion and Analysis of Financial
   Condition and Results of Operation...............................10-14



PART II

Other Information and Signatures.......................................15




















<PAGE>



                         PART I - FINANCIAL INFORMATION

                    COMMUNITY BANKS, INC. and SUBSIDIARIES


The  following  financial  information  sets forth the  operations  of Community
Banks, Inc. and Subsidiaries  (CTY) for the three month periods ending March 31,
2000 and 1999.

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

































                               -1-


<PAGE>


CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands except per share data)

<TABLE>


                                                                               March 31,                 December 31,
                                                                                2000                        1999
                                                                            ------------                 ----------
<S>                                                                   <C>                                <C>
ASSETS

Cash and due from banks.....................................                $     29,050                   $ 29,094
Interest-bearing time deposits in other banks...............                         897                      1,789
Investment securities, available for sale
   (Market value)...........................................                     333,195                    312,075
Fed funds sold..............................................                       8,945                      2,050
Loans.......................................................                     610,344                    596,301
Less: Unearned income.......................................                     (6,181)                    (6,986)
      Allowance for loan losses.........................                         (7,586)                    (7,456)
                                                                              ----------                 ----------
      Net loans.........................................                         596,577                    581,859
Premises and equipment, net.................................                      15,965                     15,385
Goodwill....................................................                         364                        424
Other real estate owned.....................................                         480                        405
Loans held for sale.........................................                       3,804                      4,004
Accrued interest receivable and other assets................                      25,795                     24,739
                                                                              ----------                 ----------

  Total assets...........................................                     $1,015,072                   $971,824
                                                                          ==============             ==============
LIABILITIES

Deposits:
   Demand (non-interest bearing)............................               $      62,391                  $  55,330
   Savings..................................................                     282,567                    266,464
   Time.....................................................                     347,506                    329,221
   Time in denominations of $100,000 or more................                      46,006                     42,421
                                                                              ----------                 ----------
   Total deposits..........................................                      738,470                    693,436
Short-term borrowings.......................................                       4,530                      3,338
Long-term debt..............................................                     192,000                    197,000
Accrued interest payable and other liabilities..............                       7,171                      6,969
                                                                              ----------                 ----------

   Total liabilities........................................                     942,171                    900,743
                                                                              ----------                 ----------

STOCKHOLDERS' EQUITY

Preferred stock, no par value; 500,000 shares
  authorized; no shares issued and outstanding.............                     ---                        ---
Common stock-$5.00 par value; 20,000,000
  shares authorized; 7,331,000 and 6,976,000
  shares issued in 2000 and 1999, respectively.............                       36,655                     34,878
Surplus.....................................................                      29,063                     24,259
Retained earnings...........................................                      22,045                     26,379
Accumulated other comprehensive income (loss)
  net of tax (benefit) of $(5,526) and $(5,841),
     respectively...........................................                    (10,263)                   (10,847)
Less: Treasury stock of 237,000 and 175,000
  shares at cost...........................................                      (4,599)                   ( 3,588)
                                                                             -----------                -----------
  Total stockholders' equity...............................                       72,901                     71,081
                                                                             -----------                -----------

Total liabilities and stockholders' equity................                    $1,015,072                   $971,824
                                                                             ===========                ===========
<FN>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

All periods reflect the combined data of Community Banks, Inc. and the Peoples
State Bank.
</FN>

</TABLE>
                                   -2-


<PAGE>



Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands except per share data)

<TABLE>
                                                                                                                Three Months Ended
                                                                                                                     March 31,
<S>                                                                                                           <C>          <C>
                                                                                                               2000         1999
Interest income:
Interest and fees on loans..............................................................                      $12,748      $10,934
Interest and dividends on investment securities:
   Taxable..............................................................................                        4,292        3,266
   Exempt from federal income tax.......................................................                        1,030        1,164
Fed funds interest......................................................................                          186           94
Other interest income...................................................................                           11           21
                                                                                                             --------     --------
     Total interest income..............................................................                       18,267       15,479
                                                                                                             --------     --------

Interest expense:
Interest on deposits:
   Savings..............................................................................                        1,439        1,325
   Time.................................................................................                        4,520        3,579
   Time in denominations of $100,000 or more............................................                          643          431
Interest on short-term borrowings and long-term debt....................................                        2,331        1,843
Fed funds purchased and repo interest...................................................                          311          345
                                                                                                             --------     --------
   Total interest expense...............................................................                        9,244        7,523
                                                                                                             --------     --------
   Net interest income..................................................................                        9,023        7,956
Provision for loan losses...............................................................                          316          276
                                                                                                             --------     --------
   Net interest income after provision for loan losses..................................                        8,707        7,680
                                                                                                             --------     --------
Other income:
   Trust department income..............................................................                          141           75
   Service charges on deposit accounts..................................................                          568          411
   Other service charges, commissions and fees..........................................                          409          214
   Investment security gains............................................................                          168          153
   Income on insurance premiums.........................................................                          166          222
   Gains on loan sales..................................................................                           65          276
   Other income.........................................................................                          202          107
                                                                                                             --------     --------
      Total other income................................................................                        1,719        1,458
                                                                                                             --------     --------
Other expenses:
   Salaries and employee benefits.......................................................                        3,424        2,925
   Net occupancy expense................................................................                        1,008          826
   Operating expense of insurance subsidiary............................................                           87          168
   Other operating expense..............................................................                        1,799        1,673
                                                                                                             --------     --------
      Total other expense...............................................................                        6,318        5,592
                                                                                                             --------     --------
      Income before income taxes........................................................                        4,108        3,546
Provision for income taxes..............................................................                        1,007          864
                                                                                                             --------     --------

      Net income........................................................................                    $   3,101     $  2,682
                                                                                                             ========     ========
Earnings per share:
   Basic................................................................................                    $     .44     $    .37
   Diluted..............................................................................                    $     .43     $    .36
Dividends paid per share................................................................                    $     .15     $    .14

<FN>

Per share data has been  adjusted to reflect  stock  dividends  and splits.  The
accompanying   notes  are  an  integral  part  of  the  consolidated   financial
statements.  All periods reflect the combined data of Community Banks,  Inc. and
the Peoples State Bank.
</FN>
</TABLE>


                                   -3-

<PAGE>



Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except per share data)

<TABLE>

                                                                               Three Month Periods Ended March 31

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

<S>                                       <C>          <C>          <C>                 <C>               <C>         <C>
Balance, January 1, 1999................. $33,157      $17,989      $27,023             $2,789            $(2,082)    $78,876
   Comprehensive income:
      Net income.........................                             2,682                                             2,682
      Change in unrealized gain (loss)
       on securities, net of tax of $(543)
       and reclassification adjustment
       of $153.........................                                                 (1,009)                        (1,009)
                                                                                                                     ---------
   Total comprehensive income..........                                                                                 1,673
Cash dividends ($.14 per share)..........                            (1,043)                                           (1,043)
5% stock dividend (332,000 shares)          1,660        6,062       (7,722)
Purchases of treasury stock
   (20,000 shares).......................                                                                    (463)       (463)
Issuance of additional shares
   (8,000) shares........................      38           42          (51)                                   80         109
                                          -------      -------       -------            -------            -------    -------

Balance, March 31, 1999.................. $34,855      $24,093       $20,889            $1,780            $(2,465)    $79,152
                                          =======      =======       =======            ======            ========    =======
Balance, January 1, 2000................. $34,878      $24,259       $26,379          $(10,847)           $(3,588)    $71,081
   Comprehensive income:
     Net income..........................                              3,101                                            3,101
     Change in unrealized gain (loss)
     on securities, net of tax of $315
     and reclassification adjustment
     of $168 .........................                                                     584                            584
                                                                                                                      -------
   Total comprehensive income..........                                                                                 3,685
Cash dividends ($.15 per share)..........                             (1,083)                                          (1,083)
5% stock dividend (348,000 shares)          1,740        4,612        (6,352)
Purchases of treasury stock
   (51,000 shares).......................                                                                    (1,011)   (1,011)
Issuance of additional shares
   (7,000 shares)........................      37          192                                                            229
                                          -------      -------        -------          -------               -------  -------

Balance, March 31, 2000.................. $36,655      $29,063        $22,045         $(10,263)              $(4,599) $72,901
                                          =======      =======        =======         ========               =======  =======

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

                                  -4-


<PAGE>



Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>

                                                                                                 Three Months Ended

                                                                                                     March 31,
                                                                                            2000                       1999
                                                                                        -------------------------------------
<S>                                                                                    <C>                          <C>
Operating Activities:
   Net income.....................................................                       $ 3,101                    $ 2,682
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for loan losses....................................                           316                        276
     Provision for depreciation and amortization..................                           103                        388
     Amortization of goodwill.....................................                            60                         60
     Investment security gains....................................                          (168)                      (153)
     Loans originated for sale....................................                        (3,588)                   (12,191)
     Proceeds from sale of loans..................................                         3,853                     12,245
     Gains on mortgage sales......................................                           (65)                      (276)
     Change in other assets, net..................................                        (1,161)                       685
     Increase in accrued interest payable and other
      liabilities, net............................................                           202                        613
                                                                                         -------                    -------
     Net cash provided by operating activities....................                         2,653                      4,329
                                                                                         -------                    -------

Investing Activities:
   Net (increase) decrease in interest-bearing time
    deposits in other banks.......................................                           892                       (776)
   Proceeds from sales of investment securities...................                         5,243                      3,575
   Proceeds from maturities of investment securities..............                         2,134                      9,753
   Purchases of investment securities.............................                       (27,064)                   (37,979)
   Net increase in total loans....................................                       (15,319)                   (22,165)
   Purchases of premises and equipment............................                        (1,049)                      (470)
                                                                                         -------                     -------
      Net cash used by investing activities.......................                       (35,163)                   (48,062)
                                                                                         -------                     -------

Financing Activities:
   Net increase in total deposits.................................                        45,034                     45,444
   Net increase (decrease) in short-term borrowings...............                         1,192                      1,271
   Proceeds from issuance of long-term debt.......................                        10,000                       ---
   Repayment of long-term debt....................................                       (15,000)                      ---
   Cash dividends.................................................                        (1,083)                    (1,043)
   Purchases of treasury stock....................................                        (1,011)                      (463)
   Proceeds from issuance of common stock.........................                           229                        109
                                                                                         -------                    -------
      Net cash provided by financing activities...................                        39,361                     45,318
                                                                                         -------                    -------

     Increase in cash and cash equivalents........................                         6,851                      1,585

   Cash and cash equivalents at beginning of period...............                        31,144                     27,244
                                                                                        --------                   --------
   Cash an cash equivalents at end of period......................                       $37,995                    $28,829
                                                                                        ========                   ========

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

All periods reflect the combined data of Community Banks, Inc. and the Peoples
State Bank.
</FN>
</TABLE>




                                    -5-
<PAGE>



Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands)


1. Accounting Policies

The  information  contained in this report is unaudited and is subject to future
adjustments. However, in the opinion of management, the information reflects all
adjustments  necessary  for a fair  statement  of  results  for the three  month
periods ended March 31, 2000 and 1999.

The accounting policies of Community Banks, Inc. and subsidiaries, as applied in
the  consolidated   interim   financial   statements   presented   herein,   are
substantially  the same as those  followed on an annual  basis as  presented  on
pages 10 and 11 of the 1999 Annual Report to shareholders.




































                        -6-


<PAGE>





2. Investment Securities

The amortized cost and estimated market values of investmen  securities at March
31, 2000 and December 31, 1999 were as follows:

<TABLE>

                                                                 March 31,
                                                                   2000
<S>                                                <C>                        <C>
                                                                              Estimated
                                                    Amortized                   Fair
                                                      Cost                      Value
                                                    ---------                 ---------
U.S. Treasury securities and obligations of
  U.S. government corporations and
  agencies.......................................    $135,626                  $127,088
Mortgage-backed U.S. government agencies.........      70,671                    67,634
Obligations of states and political subdivisions.      85,131                    80,542
Corporate securities.............................      37,894                    38,099
Equity securities................................      19,662                    19,832
                                                    ---------                 ---------

Total............................................    $348,984                  $333,195

                                                     ========                 =========





                                                                December 31,
                                                                    1999



                                                                              Estimated
                                                    Amortized                   Fair
                                                      Cost                      Value
                                                    ---------                 ---------
U.S. Treasury securities and obligations of
  U.S. government corporations and
  agencies........................................   $132,661                  $123,919
Mortgage-backed U.S. government agencies..........     61,788                    58,961
Obligations of states and political subdivisions..     84,778                    78,853
Corporate securities..............................     31,739                    31,876
Equity securities.................................     17,797                    18,466
                                                    ---------                 ---------

Total.............................................   $328,763                  $312,075
                                                    =========                 =========

</TABLE>



                                      -7-


<PAGE>




3. Allowance for loan losses
   -------------------------
   Changes in the allowance for loan losses are as follows:

<TABLE>


                                             Three Months Ended       Year Ended         Three Months Ended
                                                  March 31,           December 31,            March 31,
                                                    2000                 1999                   1999
                                             ------------------       ------------       ------------------
<S>                                          <C>                    <C>                   <C>
Balance, January 1.................                 $7,456             $6,954                  $6,954
Provision for loan losses..........                    316              1,298                     276
Loan charge-offs...................                   (305)            (1,232)                   (223)
Recoveries.........................                    119                436                     104
                                                   --------           --------                --------
Balance, March 31, 2000, December 31,
1999, and March 31, 1999...........                 $7,586             $7,456                  $7,111
                                                   ========           ========                ========


                    NONPERFORMING LOANS (a) AND OTHER REAL ESTATE


                                                  March 31,           December 31,           March 31,
                                                    2000                  1999                  1999
                                                 ----------          --------------         ----------
Loans past due 90 days or more and still
 accruing interest:
   Commercial, financial and agricultural......        $29                   $ 146                ---
   Mortgages...................................        648                     147              $ 451
   Personal installment........................         69                      73                133
   Other.......................................        ---                      12                 14
                                                 ----------          --------------         ----------
                                                       746                     378                598
                                                 ----------          --------------         ----------

Loans renegotiated with borrowers..............        238                     254                250
                                                 ----------          --------------         ----------
Loans on which accrual of interest has been
discontinued:
   Commercial, financial and agricultural......        198                     435              1,031
   Mortgages...................................      3,049                   3,079              2,208
   Other.......................................        277                     222                227
                                                 ----------          --------------         ----------
                                                     3,524                   3,736              3,466


Other real estate..............................        480                     405                629
                                                 ----------          --------------         ----------
   Total.......................................     $4,988                  $4,773             $4,943
                                                 ==========          ==============         ==========

<FN>

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

Impaired Loans

At March 31, 2000 and December 31, 1999, the Corporation  recorded no investment
in impaired loans or related  valuation  allowance.  For the three month periods
ended  March 31,  2000 and 1999,  the  average  balance  of  impaired  loans was
negligible.  In addition,  the  Corporation  recognized  no interest on impaired
loans on the cash basis for the three  month  periods  ended  March 31, 2000 and
1999.
</FN>
</TABLE>


                                       -8-


<PAGE>




4. Statement of Cash Flows

Cash and cash  equivalents  include  cash and due from banks and  federal  funds
sold.  The company made cash payments of $1,005,000  and $680,000 and $9,131,000
and  $7,224,000  for income taxes and  interest,  respectively,  for each of the
three month periods ended March 31, 2000 and 1999.

Excluded  from the  consolidated  statements of cash flows for the periods ended
March 31,  2000 and 1999 was the  effect of  certain  non-cash  activities.  The
company acquired real estate through foreclosure totaling $285,000 and $303,000,
respectively.  The company  also  recorded a decrease in deferred  tax assets of
$315,000 in 2000.  A decrease  in  deferred  tax  liabilities  of  $235,000  was
recognized in 1999.  These  variations  related to the effects of changes in net
unrealized gain (loss) on investment securities available for sale.

Earnings Per Share:

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


                                                                  Three Months Ended March 31

                                                          2000                                   1999
                                                      ----------------------------------------------------------
<S>                                                   <C>        <C>       <C>       <C>       <C>       <C>
                                                                         Per-Share                      Per-Share
                                                      Income     Shares    Amount    Income    Shares    Amount
                                                                 (In thousands except per share data)
Basic EPS:
Income available to common stockholders............   $3,101      7,126     $.44     $2,682     7,188     $.37
Effect of Dilutive Securities:.....................   ======               =====     ======              =====
Incentive stock options outstanding................                 109                           160
                                                                 ------                        ------
Diluted EPS:
Income available to common stockholders &
  assumed conversion...............................   $3,101      7,235     $.43     $2,682     7,348     $.36
                                                      ======               =====     ======              =====

<FN>

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

All periods reflect the combined data of Community  Banks,  Inc. and the Peoples
State Bank.
</FN>
</TABLE>

                                        -9-


<PAGE>



                    Community Banks, Inc. and Subsidiaries
     Management's Discussion of Financial Condition and Results of Operations

     Average Balances, Effective Interest Differential and Interest Yields

Income and Rates on a Tax Equivalent  Basis (b) for the Three Months Ended March
                             31, 2000, 1999, and 1998
                              (dollars in thousands)

<TABLE>

                                               March 31                    March 31,                           March 31,
                                      ---------------------------------------------------------------------------------------------
                                                 2000                        1999                                 1998
<S>                                   ---------------------------------------------------------------------------------------------
                                   <C>          <C>        <C>      <C>        <C>        <C>      <C>        <C>        <C>
                                                           Average                        Average                        Average
                                                Interest   Rates               Interest   Rates               Interest   Rates
                                     Average    Income/    Earned/  Average    Income/    Earned/  Average    Income/    Earned/
                                     Balance(c) Expense(a) Paid (a) Balance(c) Expense(a) Paid (a) Balance(c) Expense(a) Paid (a)

Assets:
 Cash and due from banks........... $ 24,604                       $ 21,662                       $ 19,126
                                    --------                       --------                       --------
Earning Assets:
 Interest-bearing deposits
  In other banks...................    1,226      $ 11       3.6%     1,517      $ 21      5.61%     3.102       $ 28     3.66%
                                    --------                       --------                       --------
Investment securities:
 Taxable...........................  240,357     4,292       7.18   212,423     3,266      6.24    158,297      2,632     6.74
 Tax-exempt(b).....................   79,999     1,585       7.97    81,032     1,791      8.96     53,788      1,153     8.69
                                    --------                       --------                       --------
Total investment
 securities........................  320,356                        293,455                        212,085
                                    --------                       --------                       --------
Federal funds sold.................   12,685       186       5.90     8,307        94      4.59      8,637        124     5.82
                                    --------                       --------                       --------
Loans, net of unearned
 income (b)........................  595,999    12,815       8.65   519,267    10,975      8.57    446,793      9,961     9.04
                                    --------   -------      -----  --------   -------     -----   --------    -------    -----
 Total earning assets..............  930,266   $18,889       8.10   822,546   $16,147      7.96    670,617    $13,898     8.40
                                    --------   -------      -----  --------   -------     -----   --------    -------    -----
Allowance for loans losses.........   (7,514)                        (7,054)                        (6,336)
Premises, equipment, and
 other assets......................   42,524                         32,348                         28,333
                                    --------                       --------                       --------
 Total assets...................... $989,880                       $869,502                       $711,740
                                    ========                       ========                       ========
Liabilities:
Demand deposits....................   54,344                         47,605                         40,988
                                    --------                       --------                       --------
Interest-bearing liabilities:
 Savings deposits..................  244,782     1,439       2.36%  255,043     1,325      2.11%   230,881      1,350    2.37%
                                    --------                       --------                       --------
Time deposits:
 $100,000 or greater...............   50,269                         33,421                         32,059
 Other.............................  365,211                        279,600                        245,993
                                    --------                       --------                       --------
Total time deposits................  415,480     5,163       5.00   313,021     4,010      5.20    278,052      3,720    5.43
                                    --------                       --------                       --------
Total time and savings
 deposits..........................  660,262                        568,064                        508,933
Short-term borrowings..............    2,587        38       5.91     5,463        57      4.23      4,458         48    4.37
Long-term debt.....................  194,066     2,604       5.40   161,000     2,131      5.37     75,292      1,117    6.02
                                    --------   -------      -----  --------   -------     -----   --------    -------    -----
Total interest-bearing
 liabilities.......................  856,915   $ 9,244       4.34   734,527   $ 7,523      4.15    588,683    $ 6,235    4.30
                                    --------   -------      -----  --------   -------     -----   --------    -------    -----
Accrued interest, taxes and
 other liabilities.................    6,709                          8,002                          7,246
                                    --------                       --------                       --------
 Total liabilities.................  917,968                        790,134                        636,917
Stockholders' equity...............   71,912                         79,368                         74,823
                                    --------                       --------                       --------
Total liabilities and
 stockholders' equity.............. $989,880                       $869,502                       $711,740
                                    ========                       ========                       ========
Interest income to earning
 assets............................                          8.17                          7.96                          8.40
Interest expense to earning
 assets............................                          4.00                          3.71                          3.77
                                                            -----                         -----                         -----
   Effective interest
     differential..................            $ 9,645       4.17%            $ 8,624      4.25%              $ 7,663    4.63%
                                               =======      ======            =======     ======              =======   ======
<FN>

(a)  Amortization  of net  deferred  fees  included in interest  income and rate
calculations.  (b) Interest  income on all tax-exempt  securities and loans have
been  adjusted to tax  equivalent  basis  utilizing a Federal tax rate of 35% in
2000 and 1999,  and 34% in 1998.  (c)Averages  are a combination  of monthly and
daily averages.
</FN>
</TABLE>

                                     -10-


<PAGE>



Management's Discussion, Continued

Results of Operations

The most significant  component of operating revenue is net interest income. Net
interest  income is the interest  income  generated by earning assets reduced by
the interest expense  applicable to  interest-bearing  liabilities.  Appropriate
management  of  this   relationship  in  varying   interest  rate  and  economic
environments is critical to the Corporation.

Net interest  income after  provision for loan losses for the first three months
of 2000 was $1,027,000 or 13.4% greater than 1999. Total interest income for the
first three months  increased  $2,788,000 or 18.0% while total interest  expense
increased  $1,721,000 or 22.9% over the comparable period of 1999. The amount of
net  interest  income and total  interest  income are  dependent on many factors
including the volume of earning  assets and  interest-bearing  liabilities,  the
level of and changes in interest rates and levels of non-performing  assets. The
cost of interest-bearing  liabilities changes with the amount of funds necessary
to support  earning  assets,  the rates paid to attract and  maintain  deposits,
rates  paid on  borrowed  funds and the  level of  non-interest  bearing  demand
deposits and equity  capital.  The  increases  in net interest  income and total
interest  income  were  impacted by an  increase  in average  earning  assets of
approximately  $107,720,000 or 13.1% while average interest-bearing  liabilities
increased  $122,388,000  or 16.7%  for the first  three  months of 2000 over the
comparable  period of 1999.  Impacting the increase in average earning assets in
2000 was an increase in average taxable investment  securities of $27,934,000 or
13.2%.  Also affecting earning assets were increases in average loan balances of
$76,732,000  or  14.8%.  Affecting  the  increase  in  average  interest-bearing
liabilities  were decreases in average savings  deposits of $10,261,000 or 4.0%,
increases in average time deposits of  $102,459,000  or 32.7%,  and increases in
average  long-term debt of $33,066,000 or 20.5%.  The average yields realized on
earning assets for the first three months approximated 8.2% and 8.0% in 2000 and
1999,   respectively.   The  average  costs  on   interest-bearing   liabilities
approximated 4.3% and 4.2% in 2000 and 1999, respectively. Net interest margins,
on a tax equivalent basis for the first three months  approximated 4.2% and 4.3%
in 2000 and 1999, respectively.  The provision for loan losses charged to income
increased  $40,000  or 14.5% in 2000.  Total  loans  past due 90 days and  still
accruing  interest,  non-performing  loans,  and other real estate  approximated
$4,988,000  and  $4,943,000,  respectively,  as of March 31, 2000 and 1999.  The
balance of the allowance for loan losses  increased from $7,111,000 at March 31,
1999 to $7,586,000 at March 31, 2000.

Total other income for the first three months of 2000 was $261,000 or 17.9% more
than total  other  income for the first  three  months of 1999.  Affecting  this
change  were  increases  in trust  department  income  of  $66,000  or 88.0% and
increases  in service  charges on deposit  accounts and other  service  charges,
commissions,  and fees of $352,000 or 56.3%. These changes reflect  management's
continuing emphasis on sources of non-interest income. Investment security gains
increased  $15,000  or 9.8% in 2000  while  gains on  mortgage  sales  decreased
$211,000 or 76.4%. Insurance premium income decreased $56,000 or 25.2% while all
other income increased  $95,000 or 88.8%.  Loans held for sale are comprised for
the  most  part  of  fixed-rate   real  estate  and  education   loans  extended
specifically  for resale.  Demand for these products has been lower in 2000 than
1999.  Loans held for sale as of March 31, 2000 totaled  $3,804,000.  The market
value of these loans approximated book value at that time. The increase in other
income was affected by tax refunds.

Total other  expenses for the first three months of 2000  increased  $726,000 or
13.0%.  Contributing factors were increases of $499,000 or 17.1% in salaries and
employee benefits,  $182,000 or 22.0% in net occupancy expense,  and $126,000 or
7.5% in other operating expense. These increases were affected by the opening of
new  banking  offices  and  the  employment  of  additional  lending  and  trust
personnel.

The provision for income taxes increased  $143,000 or 16.6% for the three months
of 2000 in comparison to the first three months of 1999.  Affecting  this change
was a  decrease  in the  amount  of  tax-free  income  recognized  in 2000.  The
effective tax rates approximated 24.5% and 24.4% for the respective periods.

The previously  described  factors  contributed to a net increase of $419,000 or
15.6% in net income for the three month period ended March 31, 2000.


                                      -11-



<PAGE>



Management's Discussion, Continued

Financial Condition

The  Corporation's  financial  condition  can be examined in terms of developing
trends in its  sources  and uses of funds.  These  trends are the result of both
external environmental factors, such as changing economic conditions, regulatory
changes and competition, and internal environmental factors such as Management's
evaluation as to the best use of funds under these changing conditions.

<TABLE>
<S>                                                                   <C>                    <C>
                                                                                               Increase (Decrease)
                                                                            Balance             Since
                                                                        March 31, 2000         December 31, 1999
                                                                       ----------------       ---------------------
                                                                                (dollars in thousands)

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

Deposits and borrowed funds:

Non-interest bearing............................................             $ 62,391         $ 7,061          12.8%
Interest-bearing................................................              676,079          37,973           6.0
                                                                            ---------        --------          -----
  Total deposits................................................              738,470          45,034           6.5

Borrowed funds..................................................              196,530          (3,808)         (1.9)
Other liabilities...............................................                7,171             202           2.9
Shareholders' equity............................................               72,901           1,820           2.6
                                                                            ---------        --------          -----
Total sources...................................................           $1,015,072         $43,248           4.5%
                                                                            =========        ========          =====
Funding uses:

Interest earning assets:

Short-term investments..........................................              $ 9,842          $6,003         156.4%
Investment securities...........................................              333,195          21,120           6.8
Loans, net of unearned income...................................              607,967          14,648           2.5
                                                                            ---------        --------          -----

 Total interest earning assets..................................              951,004          41,771           4.6

Cash and due from banks.........................................               29,050             (44)         (0.2)
Other assets....................................................               35,018           1,521           4.5

 Total uses.....................................................           $1,015,072         $43,248           4.5%
                                                                            =========        ========          =====
</TABLE>

                                              -12-



<PAGE>



Management's Discussion, Continued

As of March 31, 2000 cash and due from banks was $44,000 or .2% less than it was
at  December  31,  1999.  Interest-bearing  time  deposits  in other  banks  and
investment  securities  increased  $20,228,000  or 6.4%  while  fed  funds  sold
increased  $6,895,000.  The  approximate  market  value of debt  securities  was
$15,959,000  less than amortized cost at March 31, 2000. The approximate  market
value of debt  securities was  $17,357,000  less than amortized cost at December
31, 1999.  Securities to be held for indefinite periods of time and not intended
to be held to maturity or on a long-term  basis are  classified as available for
sale and carried at market value. Securities held for indefinite periods of time
include securities that management intends to use as part of its asset/liability
management  strategy  and that may be sold in  response  to changes in  interest
rates,  resultant prepayment risk and other factors related to interest rate and
resultant  prepayment  risk  changes.  At March 31, 2000 and  December 31, 1999,
management  classified  investment  securities  with amortized  costs and market
values of $348,984,000  and  $333,195,000  and  $328,763,000  and  $312,075,000,
respectively,  as available for sale.  Net loans  increased  $14,718,000 or 2.5%
from December 31, 1999 to March 31, 2000.  Affecting  this change were increases
in real estate loans of  $8,754,000  or 2.3%,  consumer  loans of  $2,920,000 or
2.8%, and commercial  loans of $2,456,000 or 2.4%. The allowance for loan losses
approximated  1.26% and 1.27% of net loans at March 31,  2000 and  December  31,
1999, respectively.  Goodwill continues to be amortized at an annualized rate of
$240,000. As previously noted,  Community Banks, Inc. sells only fixed-rate real
estate and education loans  specifically  designated for resale on the secondary
market  and at  March  31,  2000 and  December  31,  1999  these  loans  totaled
$3,804,000 and $4,004,000, respectively. Affecting the increase of $1,056,000 in
accrued  interest  receivable and other assets were increases in bank owned life
insurance  of  $2,459,000  and deferred tax assets  associated  with  unrealized
securities  losses of  $315,000.  These  factors  contributed  to an increase of
$43,248,000 or 4.5% in total assets from December 31, 1999 to March 31, 2000.

Total deposits increased $45,034,000 or 6.5% from December 31, 1999 to March 31,
2000.  Contributing  to this increase  were  increases of $7,061,000 or 12.8% in
demand deposits, $16,103,000 or 6.0% in savings deposits and $21,870,000 or 5.9%
in total time  deposits.  New  certificate  of  deposit  products  affected  the
significant increase in time deposits.

At March 31, 2000 long-term debt totaling  $192,000,000 included borrowings from
the  Federal  Home  Loan  Bank of  Pittsburgh  of  $182,000,000  and  repurchase
agreements totaling $10,000,000 at a weighted average interest rate of 5.39%.

Based on a one year interval,  the relationship of rate sensitive assets to rate
sensitive liabilities approximated 92% as of March 31, 2000.

As of March 31, 2000 the  Corporation  had  risk-based  capital in excess of the
fully  implemented  regulatory  requirements,  and  tier 1 plus  tier 2  capital
approximated 12% of risk-weighted assets.

Liquidity

Liquidity  is the ratio of net liquid  assets to net  liabilities.  The  primary
functions of asset/liability  management are the assurance of adequate liquidity
and  maintenance of an appropriate  balance between  interest-sensitive  earning
assets and  interest-bearing  liabilities.  Liquidity  management  refers to the
ability to meet the cash flow requirements of depositors and borrowers.

                                        -13-


<PAGE>



Management's Discussion, Continued

A continuous review of net liquid assets is conducted to assure appropriate cash
flow to meet needs and  obligations  in a timely  manner.  There was an adequate
relationship of liquid assets to short-term liabilities at March 31, 2000.

Forward Outlook

Management is unaware of any regulatory  recommendations  which, if implemented,
would have a material effect of the liquidity,  capital resources, or operations
of Community Banks,  Inc.  Adequate loan demand is anticipated for the remainder
of 2000 and management will continue to carefully  evaluate this demand based on
the creditworthiness of the borrower and relative strength of the economy in the
Corporation's market.

The  Corporation  is  anticipating  the  maintenance of a favorable net interest
margin throughout the remainder of 2000.

Other Events

On March 31, 1998, Community Banks Inc. (Community)  completed its merger of The
Peoples State Bank  (Peoples).  Peoples had six banking  offices located in York
and Adams Counties,  Pennsylvania.  Community  issued 1,325,330 shares of common
stock for all the  outstanding  common  stock of Peoples.  The  transaction  was
accounted  for as a  pooling  of  interests  and  combined  unaudited  financial
information is included in this report.






















                                    -14-


<PAGE>



               COMMUNITY BANKS, INC. and SUBSIDIARIES
               PART II - OTHER INFORMATION AND SIGNATURES

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

       (a) Exhibits - none

       (b) Registrant was not required to file any reports on
           Form 8-K during the quarter ending March 31, 2000.


                              SIGNATURES

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

                         COMMUNITY BANKS, INC.
                            (Registrant)



Date       May 10, 2000                      /S/ Eddie L. Dunklebarger
     --------------------------              -------------------------
                                               Eddie L. Dunklebarger
                                                     President
                                             (Chief Executive Officer)







Date       May 10, 2000                      /S/ Terry L. Burrows
     ---------------------------             ------------------------
                                                 Terry L. Burrows
                                             Executive Vice-President
                                             (Chief Financial Officer)












                                        -15-