SECURITIES AND EXCHANGE COMMISSION

                                       Washington, D.C.  20549

                                     FORM 10-Q

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

                                      OF 1934


                    For the Quarter Ended September 30, 1999


                                    No. 0-15786
                             (Commission File Number)


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


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


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


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




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


                                          Yes  X     No

                Number of Shares Outstanding as of September 30, 1999.

   CAPITAL STOCK-COMMON                                       6,819,167
    (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....................................10-15



Part II

Other information and Signatures............................................16















<PAGE>




                        PART I - FINANCIAL INFORMATION

                    COMMUNITY BANKS, INC. and SUBSIDIARIES


The  following  financial  information  sets forth the  operations  of Community
Banks,  Inc. and  Subsidiaries  (CTY) for the three month and nine month periods
ending September 30, 1999 and 1998.


In the opinion of  management,  the following  Consolidated  Balance  Sheets and
related Consolidated  Statements of Income, Changes in Stockholder's 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>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands except per share data)

                                                    September 30,       December 31,
                                                        1999               1998
<S>                                                   <C>                 <C>
ASSETS

Cash and due from banks......................        $  24,668           $  25,036
Interest-bearing time deposits in other
   banks.....................................            2,992               1,258
Investment securities, available for sale
   (market value)............................          316,219             292,542
Fed funds sold...............................               --               2,208
Loans........................................          575,374             512,280
Less:  Unearned income.......................           (6,754)            (10,018)
       Allowance for loan losses.............           (7,365)             (6,954)
       Net loans.............................          561,255             495,308
Premises and equipment, net..................           15,337              14,203
Goodwill.....................................              485                 665
Other real estate owned......................              336                 625
Loans held for sale..........................            3,385               3,319
Accrued interest receivable and other
   assets....................................           23,704              16,510
                                                     ---------           ---------

   Total assets..............................        $ 948,381           $ 851,674
                                                     =========           =========
LIABILITIES

Deposits:
   Demand....................................        $  57,568           $  50,038
   Savings...................................          277,158             254,316
   Time......................................          322,084             265,884
   Time in denominations of $100,000 or
    more.....................................           36,219              25,667
                                                     ---------           ---------
   Total deposits............................          693,029             595,905
Short-term borrowings........................           13,159               7,910
Long-term debt...............................          161,000             161,000
Accrued interest payable and other
   liabilities...............................            7,295               7,983
                                                     ---------           ---------

   Total liabilities.........................          874,483             772,798
                                                     ---------           ---------

STOCKHOLDERS' EQUITY

Preferred stock, no par value; 500,000
   shares authorized; no shares issued
   and outstanding...........................              ---                 ---
Common stock-$5.00 par value; 20,000,000
   shares authorized; 6,976,000 and
   6,631,000 shares issued in 1999 and
   1998, respectively........................           34,878              33,157
Surplus......................................           24,259              17,989
Retained earnings............................           24,373              27,023
Other accumulated comprehensive income,
 net of tax of $(3,460,000) and $1,437,000,
  respectively...............................           (6,425)              2,789
Less:  Treasury stock of 156,000 and
   105,000 shares at cost....................           (3,187)             (2,082)
   Total stockholders' equity................           73,898              78,876
                                                      --------            --------
   Total liabilities and stockholders'
   equity....................................         $948,381            $851,674
                                                      ========            ========
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

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

                                      -2-



<PAGE>



Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands except per share data)
<TABLE>
                                                      Three Months Ended             Nine Months Ended
                                                         September 30,                 September 30,
                                                      ------------------             -----------------
                                                      1999          1998             1999         1998
                                                     --------------------           -------------------
<S>                                                   <C>        <C>               <C>          <C>
Interest income:
Interest and fees on loans.....................       $11,747    $10,453           $33,837      $30,482
Interest and dividends on investment
 securities:
    Taxable....................................         3,843      2,900            10,811        8,086
    Exempt from federal income tax.............         1,123      1,014             3,550        2,665
Fed funds interest.............................            29        161               179          402
Other interest income..........................            22         14                54           65
                                                      -------    -------           -------      -------
     Total interest income.....................        16,764     14,542            48,431       41,700
                                                      -------    -------           -------      -------

Interest expense:
Interest on deposits:
     Savings...................................         1,400      1,417             4,064        4,121
     Time......................................         3,976      3,388            11,355        9,938
     Time in demonimations of $100,000 or
      more.....................................           475        356             1,394        1,210
Interest on short-term borrowings and
 long-term debt................................         1,884      1,427             5,592        3,202
Fed funds purchased and repo interest..........           381        329             1,073        1,011
                                                      -------     ------           -------      -------
     Total interest expense....................         8,116      6,917            23,478       19,482
                                                      -------     ------           -------      -------
     Net interest income.......................         8,648      7,625            24,953       22,218
Provision for loan losses......................           220        487               787          911
                                                      -------     ------           -------      -------
     Net interest income after provision
      for loan losses..........................         8,428      7,138            24,166       21,307
                                                      -------     ------           -------      -------
Other income:
      Trust department income..................           162         79               349          237
     Service charges on deposit accounts.......           566        416             1,461        1,145
     Other service charges, commissions
      and fees.................................           298        196               758          561
     Investment security gains ................             3        224               127          567
     Income on insurance premiums..............           157        172               559          449
     Gains on loan sales.......................            94        131               508          415
      Other income.............................           153        108               467          337
                                                      -------     ------           -------      -------
          Total other income...................         1,433      1,326             4,229        3,711
                                                      -------     ------           -------      -------

Other expenses:
     Salaries and employee benefits............         3,155      2,610             9,093        7,651
     Net occupancy expense.....................           836        821             2,470        2,383
Operating expense of insurance
       subsidiary..............................           135         87               406          343
     Other operating expense...................         1,759      1,502             5,050        4,460
                                                      -------     ------           -------      -------
          Total other expense..................         5,885      5,020            17,019       14,837
                                                      -------     ------           -------      -------
          Income before income taxes...........         3,976      3,444            11,376       10,181
Provision for income taxes.....................           869        868             2,668        2,764
                                                      -------     ------           -------      -------

          Net income...........................       $ 3,107    $ 2,576           $ 8,708      $ 7,417
                                                      =======     ======           =======      =======
Earnings per share:
   Basic.......................................       $   .45    $   .37           $  1.27      $  1.08
   Diluted ....................................       $   .45    $   .37           $  1.25      $  1.06
Dividends paid per share.......................       $   .16    $   .15           $   .47      $   .44
</TABLE>

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

                                                                        -3-

<PAGE>



Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands except per share data)

<TABLE>
                                                               Nine Month Periods Ended September 30

                                                                                 Accumulated
                                                                                   Other
                                            Common                  Retained    Comprehensive     Treasury      Total
                                            Stock      Surplus      Earnings       Income           Stock       Equity
                                           ---------------------------------------------------------------------------
<S>                                        <C>         <C>          <C>           <C>             <C>          <C>

Balance, January 1, 1998................   $22,026     $28,647      $21,219       $ 3,237         $(1,116)     $74,013
   Comprehensive income:
      Net income........................                              7,417                                      7,417
      Change in unrealized gain (loss)
        on securities, net of tax of
        $370 and reclassification
        adjustment of $567..............                                              719                          719
                                                                                                               -------
       Total comprehensive income.......                                                                         8,136
Cash dividends..........................                             (3,059)                                    (3,059)
3 for 2 stock split.....................    11,024     (11,024)
Purchase of treasury stock..............                                                             (901)        (901)
Issuance of additional shares...........       106         363         (143)                                       326
                                           -------     -------       -------      -------         -------      -------

Balance,  September 30,  1998...........   $33,156     $17,986       $25,434      $ 3,956        $ (2,017)     $78,515
                                           =======     =======       =======      =======        ========      =======

Balance, January 1, 1999................   $33,157     $17,989       $27,023      $ 2,789        $ (2,082)     $78,876
   Comprehensive income:
      Net income........................                               8,708                                     8,708
      Change in unrealized gain (loss)
        on securities, net of tax of
        $(4,961) and reclassification
        adjustment of $127..............                                           (9,214)                      (9,214)
      Total comprehensive income........                                                                          (506)
Cash dividends..........................                              (3,254)                                   (3,254)
5% stock dividend.......................     1,616       6,080        (7,696)
Purchases of treasury stock.............                                                           (1,484)      (1,484)
Issuance of additional shares...........       105         190          (408)                         379          266
                                           -------     -------       -------      -------        --------     --------

Balance, September 30, 1999.............   $34,878     $24,259       $24,373      $(6,425)       $ (3,187)     $73,898
                                           =======     =======       =======      =======        ========      =======

</TABLE>
Per share data for all periods has been restated to reflect stock  dividends and
splits.

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

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

                                                                   -4-

<PAGE>


<TABLE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
                                                                Nine Months Ended
                                                                  September 30,
                                                                -----------------
                                                                 1999       1998
                                                                -----------------

<S>                                                              <C>        <C>
Operating Activities:
   Net income.........................................       $  8,708   $  7,417
Adjustments to reconcile net income to net
    cash provided by operating activities:
      Provision for loan losses.......................            787        911
      Provision for depreciation and amortization.....          1,227      1,211
      Amortization of goodwill........................            180        181
      Investment security gains.......................           (127)      (567)
      Loans originated for sale.......................        (25,913)   (21,390)
      Proceeds from sale of loans.....................         26,355     23,700
      Gains on mortgage sales.........................           (508)      (415)
      Increase in other assets........................         (2,955)    (2,577)
      Increase in accrued interest payable
       and other liabilities..........................            749        418
                                                            ---------  ---------
        Net cash provided by operating activities.....          8,503      8,889
                                                            ---------  ---------

Investing Activities:
   Net increase (decrease) in interest-bearing time
    deposits in other banks...........................         (1,734)     1,287
   Proceeds from sales of investment
    securities........................................         37,513     11,565
   Proceeds from maturities of investment
    securities........................................         24,070     71,974
   Purchases of investment securities.................        (99,244)  (128,888)
   Net increase in total loans........................        (67,224)   (38,465)
   Purchases of premises and equipment................         (2,361)    (1,664)
                                                            ---------  ---------
        Net cash used by investing activities.........       (108,980)   (84,191)
                                                            ---------  ---------

Financing Activities:
   Net increase in total deposits.....................         97,124     34,894
   Net increase (decrease) in short-term borrowing....          5,249     (8,269)
   Proceeds from issuance of long-term debt...........             --     51,731
   Repayment of long-term debt........................             --     (3,011)
   Cash dividends.....................................         (3,254)    (3,059)
   Purchases of treasury stock........................         (1,484)      (901)
   Proceeds from issuance of common stock.............            266        326
        Net cash provided by financing
         activities...................................         97,901     71,711
                                                            ---------  ---------

        Increase in cash and cash equivalents.........         (2,576)    (3,591)

Cash and cash equivalents at beginning of period......         27,244     30,115
                                                            ---------  ---------
Cash and cash equivalents at end of period............      $  24,668  $  26,524
                                                            =========  =========
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.  All periods reflect the combined data of Community  Banks,  Inc.and
The Peoples State Bank.

                                                  -5-


<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 and nine month periods ended September 30, 1999 and 1998.

          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 1998 Annual Report to shareholders.

          Statement of Financial  Accounting  Standards (SFAS) 133,  "Accounting
for Derivative  Instruments and Hedging  Activities"  establishes  standards for
recording  derivative  financial  instruments on the balance sheet at their fair
value.  This  Statement  requires  changes in the fair value of  derivatives  be
recorded  each  period  in  current  earnings  or  other  comprehensive  income,
depending on whether a derivative is  designated as part of a hedge  transaction
and, if it is, the type of hedge  transaction.  Management  anticipates that the
adoption  of SFAS 133 will not have a  significant  effect on the  Corporation's
financial condition or results of operations.





















                                             -6-


<PAGE>


2.  Investment Securities
     The amortized cost and estimated market values of investment  securities at
     September 30, 1999 and December 31, 1998, were as follows:

                                                                 September 30,
                                                                     1999
                                                                     ----
<TABLE>
                                                                                Estimated
                                                     Amortized                    Fair
                                                       Cost                      Value
                                                     ---------                  ---------
<S>                                                  <C>                        <C>
U.S. Treasury securities and obligations
  of U.S. government corporations and
  agencies....................................       $132,647                   $126,559
Mortgage-backed U.S. government
  agencies....................................         64,232                     62,302
Obligations of states and political
  subdivsions.................................         83,078                     79,458
Corporate securities..........................         31,729                     32,478

Equity securities.............................         14,418                     15,422
                                                     --------                   --------
      Total...................................       $326,104                   $316,219
                                                     ========                   ========


                                                                  December 31,
                                                                     1998
                                                                     ----
U.S. Treasury securities and obligations
  of U.S. government corporations and
  agencies....................................       $ 78,800                   $ 79,449
Mortgage-backed U.S. government
  agencies....................................         82,887                     83,260
Obligations of states and political
  subdivisions................................         85,771                     87,676
Corporate securities..........................         27,574                     27,459
Equity securities.............................         13,284                     14,698
                                                     --------                   --------
      Total...................................       $288,316                   $292,542
                                                     ========                   ========
</TABLE>










                                             -7-


<PAGE>



3.  Allowance for loan losses
         Changes in the allowance for loan losses are as follows:
<TABLE>
                                             Nine months ended          Year Ended           Nine Months ended
                                               September 30,            December 31,           September 30,
                                                   1999                    1998                     1998
                                             ------------------        -------------         -----------------
<S>                                          <C>                          <C>                  <C>
Balance, January 1........................        $6,954                   $6,270                   $6,270
Provision for loan losses.................           787                    1,464                      911
Loan charge-offs..........................          (742)                  (1,258)                    (793)
Recoveries................................           366                      478                      391
                                                  ------                   ------                   ------

Balance, September 30, 1999, December 31,
 1998, and September 30, 1998.............        $7,365                   $6,954                   $6,779
                                                  ======                   ======                   ======

                                              NONPERFORMING LOANS (a) AND OTHER REAL ESTATE

                                               September 30,            December 31,            September 30,
                                                   1999                    1998                     1998
                                               -------------            ------------            -------------
Loans past due 90 days or more
   and still accruing interest:
   Commercial, financial and agricultural.        $   10                   $   47                      ---
   Mortgages..............................           565                      353                   $  497
   Personal installment...................           163                       34                      271
   Other..................................            25                        7                       20
                                                  ------                   ------                   ------
                                                     763                      441                      788
                                                  ------                   ------                   ------

Loans renegotiated with borrowers.........           253                      248                      247
                                                  ------                   ------                   ------
Loans on which accrual of interest
 has been discontinued:
   Commercial, financial and agricultural.           464                      866                      916
   Mortgages..............................         2,525                    2,282                    2,763
   Other..................................           280                      282                      335
                                                  ------                   ------                   ------
                                                   3,269                    3,430                    4,014
                                                  ------                   ------                   ------

Other real estate.........................           336                      625                      672
                                                  ------                   ------                   ------
   Total..................................        $4,621                   $4,744                   $5,721
                                                  ======                   ======                   ======
</TABLE>
(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  September  30,  1999 and  December  31,  1998 the  Corporation  recorded  no
investment in impairedloans or related valuation  allowance.  For the nine month
periods ended  September 30, 1999 and 1998 the average balance of impaired loans
was negligible.  In addition, the Corporation recognized no interest on impaired
loans on the cash basis for the nine month periods ended  September 30, 1999 and
1998.

                                                                           -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  $3,075,000  and  $3,485,000  and
$23,325,000  and $19,608,000  for income taxes and interest,  respectively,  for
each of the nine month periods ended September 30, 1999 and 1998.

         Excluded from the consolidated statements of cash flows for the periods
ended September 30, 1999 and 1998 was the effect of certain non-cash activities.
The company  acquired real estate  through  foreclosure  totalling  $490,000 and
$652,000,  respectively.  The company  also  recorded  increases in deferred tax
assets of $3,460,000 and a decrease in deferred tax liabilities of $1,437,000 in
1999.  An increase in deferred tax  liabilities  of $370,000 was  recognized  in
1998. These  variations  related to the effects of changes in the net unrealized
gain (loss) on investment securites available for sale.
        Earnings Per Share:

         The  following  tables set forth the  calculation  of Basic and Diluted
Earnings Per Share for the periods indicated:
<TABLE>
                                                            Three Months Ended September 30,
                                                          1999                          1998
                                                       Per-Share                      Per-Share
                                                 Income  Shares   Amount        Income   Shares  Amount
                                                 ------------------------------------------------------
                                                          (in thousands except per share data)
<S>                                               <C>     <C>     <C>           <C>      <C>     <C>
Basic EPS:
Income available to common stockholders.        $3,107    6,833   $ .45         $2,576   6,880    $ .37
Effect of Dilutive Securities:                                    =====                           =====
Incentive stock options outstanding.......                  117                            145
                                                          -----                          -----
Diluted EPS:
Income available to common stockholders
   & assumed conversion...................       $3,107   6,950   $ .45         $2,576   7,025    $ .37
                                                 ======   =====   =====         ======   =====    =====


                                                             Nine Months Ended September 30,
                                                          1999                          1998
                                                       Per-Share                      Per-Share
                                                 Income  Shares   Amount        Income   Shares  Amount
                                                 ------------------------------------------------------
                                                          (in thousands except per share data)

Basic EPS:
Income available to common stockholders...      $8,708    6,840   $1.27         $7,417   6,874    $1.08
 Effect of Dilutive Securities:                                   =====                           =====
Incentive stock options outstanding.......                  152                            156
                                                          -----                          -----
Diluted EPS:
Income available to common stockholders
   & assumed conversion...................      $8,708    6,966   $1.25         $7,417   7,030    $1.06
                                                ======    =====   =====         ======   =====    =====


</TABLE>
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.

                                                                      -9-




<PAGE>
<TABLE>
                                           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 September 30, 1998, and 1997
                                                   (dollars in thousands)

                                        September 30,                     September 30,                   September 30,
                           -----------------------------------------------------------------------------------------------------
                                           1999                              1998                               1997
                           -----------------------------------------------------------------------------------------------------
                                                       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)
<S>                             <C>         <C>        <C>      <C>          <C>         <C>       <C>          <C>        <C>
Assets:
  Cash and due from banks....... $ 23,181                       $ 20,730                           $ 19,178
                                 --------                       --------                           --------
  Earning Assets:
    Interest-bearing deposits
        in other banks..........    2,011    $    22    4.34%      1,117      $    14     4.97%       1,434     $    19      5.26%
                                 --------                       --------                           --------
    Investment securities:
        Taxable.................  229,883      3,843    6.63     179,426        2,900     6.41      171,838       3,015      6.96
        Tax-exempt(b)              84,116      1,728    8.15      76,079        1,536     8.01       51,270       1,044      8.08
                                 --------                       --------                           --------
    Total investment securities.  313,999                        255,505                            223,108
                                 --------                       --------                           --------
      Federal funds sold........    2,304         29    4.99      11,780          161     5.42        7,139         103      5.73
                                 --------                       --------                           --------
      Loans, net of unearned
         income(b)..............  555,152      11,898   8.50     471,553       10,518     8.85      424,526       9,671      9.04
                                 --------    --------   ----    --------      -------     ----     --------     -------      ----
         Total Earning Assets...  873,466     $17,520   7.96     739,955      $15,129     8.11      656,207     $13,852      8.37
                                 --------    --------   ----    --------      -------     ----     --------     -------      ----
      Allowance for loan losses.   (7,375)                        (6,562)                            (6,050)
      Premises, equipment and
         other assets...........   38,557                         27,780                             26,925
                                 --------                       --------                           --------
         Total assets........... $927,829                       $781,903                           $696,260
                                 ========                       ========                           ========
Liabilities:
   Demand deposits..............   54,932                         44,071                             39,017
                                 --------                       --------                           --------
   Interest-bearing liabilities:
      Savings deposits..........  249,995       1,400   2.22%    249,737        1,417     2.25%     229,796       1,394      2.41%
                                 --------                       --------                           --------
      Time deposits:
         $100,000 or greater....   36,622                         28,601                             27,726
         Other..................  334,514                        248,632                            249,511
                                 --------                       --------                           --------
      Total time deposits.......  371,136       4,451   4.76     277,233        3,744     5.36      277,237       3,785      5.42
                                 --------                       --------                           --------
      Total time and savings
         deposits...............  621,131                        526,970                            507,033
      Short-term borrowings.....    7,965          85   4.23       3,671           47     5.08        5,470          72      5.22
      Long-term debt............  161,000       2,180   5.37     121,816        1,709     5.57       69,403       1,017      5.81
                                 --------     -------   ----     -------      -------     ----     --------     -------      ----
         Total interest-bearing
            liabilities.........  790.096      $8,116   4.08     652,457       $6,917     4.21      581,906       6,268      4.27
                                 --------     -------   ----    --------      -------     ----     --------     -------      ----
      Accrued interest, taxes
         and other liabilities..    7,995                          7,373                              5,245
                                 --------                       --------                           --------
         Total liabilities......  853,023                        703,901                            626,168
      Stockholders' equity......   74,806                         78,002                             70,092
                                 --------                       --------                           --------
         Total liabilities and
            stockholders' equity $927,829                       $781,903                           $696,260
                                 ========                       ========                           ========
Interest income to earning
   assets.......................                        7.96                              8.11                               8.37
Interest expense to earning
   assets.......................                        3.69                              3.71                               3.79
                                                        ----                              ----                               ----
     Effective interest
         differential...........               $9,404   4.27%                  $8,212     4.40%                  $7,584      4.58%
                                               ======   ====                   ======     ====                   ======      ====
</TABLE>
   (a)  Amortization  of net deferred fees included in interest  income and rate
calculation.  (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
1999 and 34% in 1998 and 1997.  (C)  Averages are a  combination  of monthly and
daily averages.

                                                                    -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 nine
months of 1999 was $2,859,000 or 13.4% greater than 1998.  Total interest income
for the first nine months  increased  $6,731,000  or 16.1% while total  interest
expense  increased  $3,996,000 or 20.5% over the comparable  period of 1998. The
amount of net interest  income and total interest income are dependent upon many
factors including the volume of earning assets and interest bearing liabilities,
the level of and changes in interest rates and levels of non-performing  assets.
The cost of  interest  bearing  liabilities  changes  with the  amount  of funds
necessary  to support  earning  assets,  the rates paid to attract and  maintain
deposits,  rates paid on borrowed  funds and the level of  non-interest  bearing
demand  deposits and equity  capital.  The increases in net interest  income and
total interest  income were impacted by an increase in average earning assets of
approximately  $150,841,000 or 21.5% while average interest bearing  liabilities
increased  $146,693,000  or 23.7%  for the  first  nine  months of 1999 over the
comparable  period of 1998.  Impacting the increase in average earning assets in
1999 were increases in average taxable  investment  securities of $55,542,000 or
33.7% and average tax-exempt investment securities of $21,844,000 or 32.9%. Also
affecting  earning assets were increases in average loan balances of $78,018,000
or 17.0%.  Affecting the increase in average interest  bearing  liabilities were
increases in average  savings  deposits of $24,645,000  or 10.2%,  time deposits
less than  $100,000  of  $51,524,000  or 21.1%,  and average  long-term  debt of
$65,161,000  or 68.0%.  The average  yields  realized on earning  assets for the
first nine months approximated 8.0% and 8.2% in 1999 and 1998, respectively. The
average  costs of  interest-bearing  liabilities  approximated  4.1%  and  4.2%,
respectively. Net interest margins, on a tax equivalent basis for the first nine
months approximated 4.3% and 4.5% in 1999 and 1998, respectively.  The provision
for loan losses  charged to income  decreased  $124,000 or 13.6% in 1999.  Total
loans past due 90 days and still accruing  interest,  non-performing  loans, and
other real estate approximated  $4,621,000 and $5,721,000,  respectively,  as of
September  30,  1999 and 1998.  The  balance of the  allowance  for loan  losses
increased  from  $6,779,000 at September 30, 1998 to $7,365,000 at September 30,
1999.

     Total other  income for the first nine months of 1999 was $518,000 or 14.0%
more than total other income for the first nine months of 1998.  Affecting  this
change  were  increases  in trust  department  income of  $112,000  or 47.3% and
increases  in service  charges on deposit  accounts and other  service  charges,
commissions,  and fees of $513,000 or 30.1%.  Investment security gains declined
$440,000 in 1999 while  gains on mortgage  sales  increased  $93,000.  Insurance
premium income  increased  $110,000 or 24.5%.  Loans held for sale are comprised
for the most  part of  fixed-rate  real  estate  and  education  loans  extended
specifically for resale. Demand for these products has been greater in 1999 than
1998.  Loans held for sale as of September  30, 1999  totalled  $3,385,000.  The
market value of these loans  approximated  book value at that time. The increase
in other income of $130,000 was affected by tax refunds.

     Total other expenses for the first nine months of 1999 increased $2,182,000
or 14.7%. Contributing factors were increases of $1,442,000 or 18.8% in salaries
and employee benefits, $87,000 or 3.7% in net occupancy expense, and $590,000 or
13.2% 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 decreased $96,000 or 3.5% for the first nine
months of 1999 in  comparison to the first nine months of 1998.  Affecting  this
change was an increase in the amount of tax-free income recognized in 1999.
The effective tax rates approximated 23.5% and 27.1% for the respective periods.

     The  previously   described  factors  contributed  to  a  net  increase  of
$1,291,000 or 17.4% in net income for the nine month period ended  September 30,
1999.



                                      -11-



<PAGE>



Management's Discussion, Continued
----------------------------------
            The significant changes and related causes which occurred during the
three month period ending  September  30, 1999 were  generally  consistent  with
those  described  for the nine month  period  ending  September  30,  1999.  Net
interest margins,  on a tax equivalent basis, for the third quarters of 1999 and
1998 were 4.3% and 4.4%,  respectively.  Net investment security gains of $3,000
and  $224,000   were   recognized  in  the  third  quarter  of  1999  and  1998,
respectively. Gains on loan sales were $94,000 and $131,000.

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>
                                                                 Increse (Decrease)
                                          Balance                          Since
                                     September 30, 1999          December 31, 1998
                                     ------------------          -----------------
                                                (dollars in thousands)


                                                                 Amount       %
                                                                 ------      ---
<S>                                       <C>                  <C>           <C>
Funding Sources:

Deposits and borrowed funds:

Non-interest bearing.............         $ 57,568              $  7,530     15.0%
Interest bearing.................          635,461                89,594     16.4
                                          --------              --------     ----
    Total deposits...............          693,029                97,124     16.3

Borrowed funds...................          174,159                 5,249      3.1
Other liabilities................            7,295                  (688)    (8.6)
Shareholder's equity.............           73,898                (4,978)    (6.3)
   Total sources.................         $948,381              $ 96,707     11.4%
                                          ========              ========     ====
Funding uses:

Interest earning assets:

Short-term investments...........         $  2,992              $   (474)   (13.7)
Investment securities............          316,219                23,677      8.1
Loans, net of unearned income....          572,005                66,424     13.1
                                          --------              --------     ----

   Total interest earning assets.          891,216                89,627     11.2

Cash and due from banks..........           24,668                  (368)    (1.5)
Other assets.....................           32,497                 7,448     29.7
                                          --------                ----------    ----

   Total uses....................         $948,381              $ 96,707     11.4%
                                          =======               ========     ====
</TABLE>
                                                           -12-



<PAGE>



Management's Discussion, Continued
----------------------------------


     As of September  30, 1999 cash and due from banks was $368,000 or 1.5% less
than it was at December 31, 1998.  Interest-bearing time deposits in other banks
and  investment  securities  increased  $25,411,000 or 8.6% while fed funds sold
decreased  $2,208,000.  The  approximate  market  value of debt  securities  was
$10,889,000  less than  amortized  cost at September 30, 1999.  The  approximate
market value of debt  securities was  $2,812,000  greater than amortized cost at
December 31, 1998.  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 September 30, 1999 and
December 31, 1998,  management  classified  investment securities with amortized
costs and market values of $326,104,000 and  $316,219,000,  and $288,316,000 and
$292,542,000,   respectively,   as  available  for  sale.  Net  loans  increased
$65,947,000  or 13.3% from  December 31, 1998 to September  30, 1999.  Affecting
this change were increases in real estate loans of $31,084,000 or 9.2%, consumer
loans of $11,398,000 or 12.7%, and commercial loans of $28,230,000 or 44.2%. The
allowance for loan losses approximated 1.30% and 1.38% of net loans at September
30, 1999 and December 31, 1998 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 September  30, 1999 and December 31,
1998 these loans totalled $3,385,000 and $3,319,000, respectively. Affecting the
increase of  $7,194,000  in accrued  interest  receivable  and other assets were
increases  in bank owned life  insurance of  $2,285,000  and deferred tax assets
associated  with  unrealized  securities  losses of  $3,460,000.  These  factors
contributed to an increase of $96,707,000 or 11.4% in total assets from December
31, 1998 to September 30, 1999.

     Total  deposits  increased  $97,124,000  or 16.3% from December 31, 1998 to
September 30, 1999.  Contributing  to this increase were increases of $7,530,000
or 15.0%  in  demand  deposits,  $22,842,000  or 9.0% in  savings  deposits  and
$66,752,000 or 22.9% in total time deposits. New certificate of deposit products
affected the significant increase in time deposits.

     At  September  30, 1999  long-term  debt  totalling  $161,000,000  included
borrowings  from the Federal Home Loan Bank of  Pittsburgh of  $141,000,000  and
repurchase  agreements totalling $20,000,000 at a weighted average interest rate
of 5.37%.

     Based on a one year  interval,  rate  sensitive  assets  to rate  sensitive
liabilities approximated 97% as of September 30, 1999.


     As of September 30, 1999 the Corporation  had risk-based  capital in excess
of the fully implemented regulatory requirements, and tier 1 plus tier 2 capital
approximated 13% of risk-weighted assets.


                                                 -13-


<PAGE>



Management's Discussion, Continued
----------------------------------
Liquidity

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

     A continuous review of net liquid assets is conducted to assure appropriate
cash  flow to meet  needs  and  obligations  in a timely  manner.  There  was an
adequate  relationship  of liquid assets to short-term  liabilities at September
30, 1999.

Forward Outlook

     Management  is  unaware  of  any  regulatory   recommendations   which,  if
implemented,  would have a material effect on the liquidity,  capital resources,
or operations of Community Banks, Inc..  Adequate loan demand is anticipated for
the remainder of 1999 and  management  will continue to carefully  evaluate this
demand based on the  creditworthiness  of the borrower and the relative strength
of the economy in the Corporation's market.

     The Corporation is anticipating the maintenance of a favorable net interest
margin throughout the remainder of 1999.

Other Events

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



















                                                 -14-


<PAGE>



Management's Discussion, Continued
----------------------------------

Impact of The Year 2000 Issue

     The "Year  2000  Issue"  is the  result of the  possibility  that  computer
programs may be unable to properly recognize the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations, including
among  other  things,  a  temporary  inability  to  process  transactions,  send
invoices, or engage in similar business activities.

     Based on an ongoing  assessment,  the  Corporation has modified or replaced
portions of its software and hardware so that its computer systems will properly
utilize dates beyond December 31, 1999.  Management presently believes that as a
result of modifications to existing software and hardware and conversions to new
software and hardware, the Year 2000 Issue has been mitigated.

     The  Corporation's  Year 2000  Action Plan has been  categorized  into five
phases: Awareness,  Assessment,  Testing,  Validation,  and Implementation.  The
initial focus within those phases was on vendors and systems that are related to
mission critical business  processes.  Mission critical processes are defined as
those areas of the business whose continued  operations are required in order to
provide basic banking services.  Management has completed all five phases of its
most mission  critical  processes.  In addition,  all other  business  processes
subject to Y2K  remediation  are expected to be completed  prior to December 31,
1999.

     Community  Banks,  Inc.  has  initiated  formal   communications  with  all
significant  vendors and large  commercial  customers to determine the extent to
which it is vulnerable to those third  parties'  failure to remediate  their own
Year 2000 Issue. To date, no material impact is anticipated based upon responses
to these  communications.  The  Corporation's  estimated Year 2000 project costs
include the costs and time  associated  with the impact of a third  party's Year
2000 Issue, and are based on presently  available  information.  For significant
vendors,  management will validate that they are Year 2000 compliant by December
31, 1999,  or make plans to switch to a new vendor or system that is  compliant.
For large  commercial loan customers,  management will take  appropriate  action
based upon the customer's response.

      The  Corporation  will  utilize both  internal  and external  resources to
reprogram  or replace,  and test  software  for Year 2000  modifications.  Costs
incurred to date as well as for the nine months ended September 30, 1999 for the
Year  2000  project  are  generally  considered  normal  operating  costs by the
Corporation.  All Year 2000  conversion  software  and  modifications  have been
delivered and executed by the Corporation's  various software vendors with which
the Corporation deals for its many different computer processing and transaction
functions.  The Corporation does not anticipate  significant expense incurred or
charged  to the Year  2000  Issue  due to its many  software,  maintenance,  and
licensing  agreements  with  its  software  vendors.  The cost to  complete  the
internal process is currently estimated to be less than $150,000.

     Management believes that the Corporation's  existing alternative processing
procedures will be available as a contingency  alternative in the  unanticipated
event  that the Year 2000  Issue  results in  significant  disruption  of normal
business activities.






                                                 -15-


<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 September 30, 1999.



                                      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  November 10, 1999                              /S/ Eddie L. Dunklebarger
    ---------------------------------                -------------------------
                                                       Eddie L. Dunklebarger
                                                             President
                                                     (Chief Executive Officer)



Date  November 10, 1999                              /S/  Terry L. Burrows
    ---------------------------------                ---------------------
                                                        Terry L. Burrows
                                                    Executive Vice-President
                                                    (Chief Financial Officer)














                                               -16-