UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2005

                                     0-15786
                                     -------
                            (Commission File Number)


                              COMMUNITY BANKS, INC.
                              ---------------------
             (Exact name of registrant as specified in its charter)


            PENNSYLVANIA                              23-2251762
        ----------------------           ---------------------------------------
       (State of incorporation)          (I.R.S. Employer Identification Number)

   750 East Park Dr., Harrisburg, PA                       17111
------------------------------------------              ----------
(Address of principal executive offices)                (Zip Code)

                                 (717) 920-1698
                                 --------------
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by  Sections  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports)  and (2) has been  subject to such  filing
requirements for the past 90 days.
Yes     X             No
   ------------         ------------

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


                Number of shares outstanding as of April 30, 2005

 CAPITAL STOCK-COMMON                                           12,370,000
 --------------------                                       ------------------
   (Title of Class)                                        (Outstanding Shares)






<PAGE>



                     COMMUNITY BANKS, INC. AND SUBSIDIARIES
                                    FORM 10-Q
                                      INDEX


<TABLE>
<CAPTION>

<S>                                                                                                             <C>
         PART I - Financial Information                                                                            Page

         Item 1.     Financial Statements

              Consolidated Interim Balance Sheets                                                                     3
              Consolidated Interim Statements of Income                                                               4
              Consolidated Interim Statements of Changes in Stockholders' Equity                                      5
              Consolidated Interim Statements of Cash Flows                                                           6
              Notes to Consolidated Interim Financial Statements                                                 7 - 10

         Item 2.     Management's Discussion and Analysis of Financial
                         Condition and Results of Operations                                                    11 - 18

         Item 3.     Quantitative and Qualitative Disclosures About Market Risk                                      19

         Item 4.     Controls and Procedures                                                                         20


         PART II - Other Information

         Item 1.     Legal Proceedings                                                                               21

         Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds                                     21

         Item 3.     Defaults Upon Senior Securities                                                                 21

         Item 4.     Submission of Matters to a Vote of Security Holders                                             21

         Item 5.     Other Information                                                                               21

         Item 6.     Exhibits                                                                                        21


         SIGNATURES                                                                                                  22

</TABLE>



                                       2
<PAGE>





                         PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>

Item 1.  Financial Statements
-----------------------------

Community Banks, Inc. and Subsidiaries
CONSOLIDATED INTERIM BALANCE SHEETS
(Dollars in thousands except per share data)

                                                                                March 31,                December 31,
                                                                                  2005                       2004
                                                                           --------------------       --------------------
      ASSETS                                                                   (Unaudited)

<S>                                                                        <C>                        <C>
      Cash and due from banks                                              $            38,030        $           43,486
      Federal funds sold                                                                56,669                       ---
                                                                           --------------------       --------------------
         Cash and cash equivalents                                                      94,699                    43,486
      Interest-bearing deposits in other banks                                             611                     1,787
      Investment securities, available for sale                                        590,545                   619,110
      Loans held for sale                                                                2,410                     1,505
      Loans, net of allowance for loan losses of $14,754 and $14,421                 1,231,150                 1,201,530
      Premises and equipment, net                                                       25,552                    25,517
      Accrued interest receivable and other assets                                      67,686                    61,864
                                                                           --------------------       --------------------
               Total assets                                                $         2,012,653        $        1,954,799
                                                                           ====================       ====================

      LIABILITIES

      Deposits
         Non-interest bearing                                              $           192,410        $          184,359
         Interest bearing                                                            1,155,840                 1,121,178
                                                                           --------------------       --------------------
               Total deposits                                                        1,348,250                 1,305,537
      Short-term borrowings                                                             38,217                    47,116
      Long-term debt                                                                   427,942                   404,662
      Subordinated debt                                                                 30,928                    30,928
      Accrued interest payable and other liabilities                                    15,558                    14,215
                                                                           --------------------       --------------------
               Total liabilities                                                     1,860,895                 1,802,458
                                                                           --------------------       --------------------

      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;  12,421,000 shares issued                                           62,103                    62,107
      Surplus                                                                           73,374                    73,304
      Retained Earnings                                                                 21,229                    18,134
      Accumulated other comprehensive income (loss),
        net of tax                                                                      (2,350)                    3,211
      Treasury stock; 109,000 and 185,000 shares, at cost                               (2,598)                   (4,415)
                                                                           --------------------       --------------------
              Total stockholders' equity                                               151,758                   152,341
                                                                           --------------------       --------------------
              Total liabilities and stockholders' equity                   $         2,012,653        $        1,954,799
                                                                           ====================       ====================
</TABLE>
The  accompanying  notes  are  an  integral  part  of the  consolidated  interim
financial statements.


                                       3
<PAGE>


<TABLE>
<CAPTION>

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

                                                                                        Three Months Ended
                                                                                            March 31,
                                                                                ---------------------------------
                                                                                     2005               2004
                                                                                ---------------------------------
<S>                                                                             <C>                 <C>
   INTEREST INCOME:
      Loans, including fees                                                     $      19,058       $     16,658
      Investment securities:
          Taxable                                                                       4,249              4,562
          Tax exempt                                                                    2,184              2,195
          Dividends                                                                       541                552
     Other                                                                                151                 13
                                                                                ---------------     -------------
          Total interest income                                                        26,183             23,980
                                                                                ---------------     -------------

   INTEREST EXPENSE:
      Deposits                                                                          6,060              5,458
      Short-term borrowings                                                               157                124
      Long-term debt                                                                    4,817              4,581
      Subordinated debt                                                                   459                378
                                                                                ---------------     -------------
          Total interest expense                                                       11,493             10,541
                                                                                ---------------     -------------
          Net interest income                                                          14,690             13,439
   Provision for loan losses                                                              550                850
                                                                                ---------------     -------------
          Net interest income after provision for loan losses                          14,140             12,589
                                                                                ---------------     -------------

   NON-INTEREST INCOME:
      Investment management and trust services                                            414                267
      Service charges on deposit accounts                                               1,793              1,405
      Other service charges, commissions and fees                                       1,010                902
      Investment security gains                                                            51              1,332
      Insurance premium income and commissions                                            902                654
      Mortgage banking activities                                                         515                627
      Earnings on investment in life insurance                                            399                365
      Other                                                                               126                 71
                                                                                ---------------     -------------
          Total non-interest income                                                     5,210              5,623
                                                                                ---------------     -------------

   NON-INTEREST EXPENSES:
      Salaries and employee benefits                                                    7,293              6,835
      Net occupancy                                                                     2,148              2,033
      Marketing expense                                                                   445                420
      Telecommunications expense                                                          304                317
      Other                                                                             2,469              2,278
                                                                                ---------------     -------------
          Total non-interest expenses                                                  12,659             11,883
                                                                                ---------------     -------------

          Income before income taxes                                                    6,691              6,329
   Income taxes                                                                         1,204              1,154
                                                                                ---------------     -------------
          Net income                                                            $       5,487       $      5,175
                                                                                ===============     =============

   CONSOLIDATED PER SHARE DATA:
      Basic earnings per share                                                  $        0.45       $       0.42
      Diluted earnings per share                                                $        0.44       $       0.41
      Dividends declared                                                        $        0.17       $       0.16
</TABLE>

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


                                       4
<PAGE>

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2005 and 2004
(Unaudited: Dollars in Thousands)


                                                                                            Accumulated
                                                                                               Other
                                     Outstanding        Common                   Retained  Comprehensive   Treasury         Total
                                       Shares            Stock       Surplus     Earnings   Income(Loss)    Stock          Equity
                                     ------------    ---------------------------------------------------------------    ------------
<S>                                     <C>          <C>          <C>         <C>          <C>          <C>              <C>
Balance, January 1, 2004                11,648       $   59,256   $   57,563  $    24,297  $    6,596   $    (4,306)     $  143,406
Comprehensive income:
    Net income                                                                      5,175                                     5,175
    Unrealized loss on securities,
        net of reclassification
        adjustment and tax effect                                                               4,008                         4,008
                                                                                                                        ------------
    Total comprehensive income                                                                                                9,183
Cash dividends                                                                     (1,989)                                   (1,989)
5% stock dividend                          592            2,954       15,127      (18,110)                                      (29)
Purchases of treasury
stock                                      (25)                                                                (747)           (747)
Exercise of common stock options
    and issuances under stock
    purchase plan                           63              (89)                   (1,400)                    2,020             531
Tax benefits from employee stock
    transactions                                                         149                                                    149
                                     ------------    ---------------------------------------------------------------    ------------

Balance, March 31, 2004                 12,278       $   62,121   $   72,839  $     7,973  $   10,604   $    (3,033)     $  150,504
                                     ============    ===============================================================    ============




Balance, January 1, 2005                12,236       $   62,107   $   73,304  $    18,134  $    3,211   $    (4,415)     $  152,341
Comprehensive income (loss):
    Net income                                                                      5,487                                     5,487
    Unrealized loss on securities,
      net of reclassification
      adjustment and tax effect                                                                (5,471)                       (5,471)
    Change in unfunded pension
      liability, net of tax                                                                       (90)                          (90)
                                                                                                                        ------------
    Total comprehensive income (loss)                                                                                           (74)
Cash dividends                                                                     (2,093)                                   (2,093)
Exercise of common stock options
    and issuances under stock
    purchase plan                           76               (4)                     (299)                    1,817           1,514
Tax benefits from employee stock
    transactions                                                          70                                                     70
                                     ------------    ---------------------------------------------------------------    ------------

Balance, March 31, 2005                 12,312       $   62,103   $   73,374  $    21,229  $    (2,350)  $   (2,598)     $  151,758
                                     ============    ===============================================================    ============
</TABLE>
The  accompanying  notes  are  an  integral  part  of the  consolidated  interim
financial statements.




                                       5
<PAGE>

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
                                                                                               Three Months Ended
                                                                                                   March 31,
                                                                                   -----------------------------------------
                                                                                         2005                    2004
                                                                                   -----------------------------------------
<S>                                                                                <C>                     <C>
    Operating Activities:
       Net income                                                                  $           5,487       $          5,175
    Adjustments to reconcile net income to net cash
      provided by operating activities:
       Provision for loan losses                                                                 550                    850
       Depreciation and amortization                                                             840                    815
       Net amortization of securities                                                            281                    296
       Realized gains on sales of available-for-sale securities, net                             (51)                (1,332)
       Loans originated for sale                                                              (1,974)                (5,492)
       Proceeds from sales of loans held for sale                                              1,115                  6,812
       Gains on loan sales                                                                       (47)                  (209)
       Earnings on investment in life insurance                                                 (399)                  (365)
       Net change in other assets                                                             (2,294)                  (206)
       Net change in accrued interest payable and other liabilities                            1,205                 (1,146)
       Tax benefits from employee stock transactions                                              70                    149
                                                                                   ------------------      -----------------
           Net cash provided by operating activities                                           4,783                  5,347
                                                                                   ------------------      -----------------

    Investing Activities:
       Net change in interest-bearing deposits in other banks                                  1,175                    764
       Activity in available-for-sale securities:
         Sales                                                                                14,678                 11,915
         Maturities, prepayments and calls                                                    16,773                 64,844
         Purchases                                                                           (11,722)              (137,404)
       Net increase in total loans                                                           (30,234)               (34,143)
       Investment in life insurance                                                              ---                 (5,000)
       Net additions to premises and equipment                                                  (755)                (1,528)
                                                                                   ------------------      -----------------
           Net cash used by investing activities                                             (10,085)              (100,552)
                                                                                   ------------------      -----------------

    Financing Activities:
       Net increase in deposits                                                               42,713                 51,725
       Net change in short-term borrowings                                                    (8,899)                37,243
       Proceeds from issuance of long-term debt                                               25,000                    ---
       Repayment of long-term debt                                                            (1,720)               (11,672)
       Cash dividends and cash paid in lieu of fractional shares                              (2,093)                (2,018)
       Purchases of treasury stock                                                               ---                   (747)
       Proceeds from issuance of common stock                                                  1,514                    531
                                                                                   ------------------      -----------------
           Net cash provided by financing activities                                          56,515                 75,062
                                                                                   ------------------      -----------------

           Net change in cash and cash equivalents                                            51,213                (20,143)

    Cash and cash equivalents at beginning of period                                          43,486                 59,887
                                                                                   ------------------      -----------------
    Cash and cash equivalents at end of period                                     $          94,699       $         39,744
                                                                                   ==================      =================
</TABLE>
The accompanying notes are an integral part of the consolidated interim
financial statements.


                                       6
<PAGE>

Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)


1.  Summary of Significant Accounting Policies
    ------------------------------------------

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

Operating results for the three months ended March 31, 2005, are not necessarily
indicative of the results that may be expected for the year ending  December 31,
2005.

For further information, refer to the audited consolidated financial statements,
and footnotes thereto,  included in the Annual Report on Form 10-K, for the year
ended December 31, 2004.

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

Statement  of Cash Flows - Cash and cash  equivalents  include cash and due from
banks and federal funds sold. In 2004,  $25 million of maturing  long-term  FHLB
advances were repaid through short-term borrowings with the FHLB.

Stock-Based  Compensation  - Community has a stock-based  compensation  plan and
accounts for this plan under the recognition  and measurement  principles of APB
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
No  stock-based  compensation  cost is reflected  in net income,  as all options
granted  under this plan had an exercise  price equal to the market value of the
underlying  common stock on the date of grant.  The following table  illustrates
the effect on net income and  earnings  per share if  Community  had applied the
fair value recognition  provisions of SFAS No. 123,  "Accounting for Stock-Based
Compensation,"  to  stock-based  compensation  (in  thousands,  except per share
data).
<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                             March 31,
                                                                       2005            2004
                                                                   ---------------------------

<S>                                                                <C>              <C>
         Net income, as reported                                   $    5,487      $    5,175
         Deduct:  Total stock-based compensation
           expense determined under fair value based
           method for all awards, net of related tax effect              (776)           (322)
                                                                   -----------     -----------

         Pro forma net income                                      $    4,711      $    4,853
                                                                   ===========     ===========

         Earnings per share:
           Basic - as reported                                     $     0.45      $     0.42
           Basic - pro forma                                       $     0.38      $     0.40

           Diluted - as reported                                   $     0.44      $     0.41
           Diluted - pro forma                                     $     0.37      $     0.38
</TABLE>


                                       7
<PAGE>

Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)
(Unaudited)


In late 2004, SFAS No. 123 was replaced by the issuance of Statement No. 123(R),
"Share-Based  Payment." Community is currently evaluating the various provisions
of SFAS 123(R) and the  optional  transition  methods  that may be applied  when
adopting this new accounting standard.  It is expected that Community will adopt
the  modified   prospective   method  on  January  1,  2006.  Total  stock-based
compensation  expense,  net of related tax effects,  for existing  option grants
will not have a material  impact on the  financial  statements  in years  beyond
2005. The impact of future option or stock grants is dependent upon the quantity
and nature of stock-based compensation Community decides to grant.


Earnings Per Share - Basic  earnings per share  represents  income  available to
common  stockholders  divided by the  weighted-average  number of common  shares
outstanding  during the period.  Diluted earnings per share reflects  additional
common  shares that would have been  outstanding  if dilutive  potential  common
shares had been issued,  as well as any  adjustment  to income that would result
from the  assumed  issuance.  Potential  common  shares  that may be  issued  by
Community relate solely to outstanding  stock options,  and are determined using
the  treasury  stock  method.  All share and per share  amounts are restated for
stock  splits  and stock  dividends  that  occur  prior to the  issuance  of the
financial statements.

Earnings  per share for the three  months  ended March 31 have been  computed as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
                                                             ---------------------------
                                                                 2005            2004
                                                             ------------    -----------
<S>                                                          <C>             <C>
        Net income                                           $     5,487     $    5,175
                                                             ============    ===========

        Weighted average shares outstanding  (basic)              12,292         12,271
        Effect of dilutive stock options                             272            382
                                                             ------------    -----------

        Weighted average shares outstanding  (diluted)            12,564         12,653
                                                             ============    ===========

        Per share information:
            Basic earnings per share                         $      0.45     $     0.42
            Diluted earnings per share                              0.44           0.41
</TABLE>



                                       8
<PAGE>

Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)
(Unaudited)


Comprehensive  Income (Loss) - The components of comprehensive income (loss) and
related  tax  effect for the three  months  ended  March 31 are as  follows  (in
thousands):
<TABLE>
<CAPTION>
                                                              2005              2004
                                                         --------------------------------
<S>                                                      <C>               <C>
              Unrealized holding gains (losses)
                   on available-for-sale securities      $     (8,366)     $      7,498
              Reclassification adjustments for
                    gains included in net income                  (51)           (1,332)
                                                         --------------    --------------
              Net unrealized gains (losses)                    (8,417)            6,166
              Tax effect                                        2,946            (2,158)
                                                         --------------    --------------

                    Net-of-tax amount                          (5,471)            4,008
                                                         --------------    --------------

              Unfunded pension liability                         (138)              ---
              Tax effect                                           48               ---
                                                         --------------    --------------

                   Net-of-tax amount                              (90)              ---
                                                         --------------    --------------
                                                         $     (5,561)     $      4,008
                                                         ==============    ==============
</TABLE>



The components of accumulated  other  comprehensive  income (loss),  included in
stockholders' equity, are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                              March 31,              December 31,
                                                                                2005                    2004
                                                                         ------------------------------------------
<S>                                                                      <C>                    <C>
               Net unrealized gain on
                    available-for-sale securities                        $            99        $         8,515
               Tax effect                                                            (35)                (2,980)
                                                                         -------------------    -------------------
                    Net-of-tax amount                                                 64                  5,535
                                                                         -------------------    -------------------

               Unfunded pension liability                                         (3,714)                (3,576)
               Tax effect                                                          1,300                  1,252
                                                                         -------------------    -------------------
                    Net-of-tax amount                                             (2,414)                (2,324)
                                                                         -------------------    -------------------

               Accumulated other comprehensive income (loss)             $        (2,350)       $         3,211
                                                                         ===================    ===================
</TABLE>

Recent Accounting Prouncements

SAB 107 - In March 2005, the SEC issued Staff Accounting  Bulletin No. 107 )"SAB
No.  107"),  "Share-Based  Payment",  providing  guidance  on  option  valuation
methods,   the  accounting  for  income  tax  effects  of  share-based   payment
arrangements  upon  adoption of SFAS No. 123 (R),  and the  disclosures  in MD&A
subsequent  to the  adoption.  Community  will  provide  SAB  No.  107  required
disclosures upon adoption of SFAS No. 123(R) on January 1, 2006.


Reclassifications  -  Certain  amounts  reported  in the  prior  year  have been
reclassified to conform with the 2005 presentation.  These reclassifications did
not impact the Corporation's financial condition or results of operations.



                                       9
<PAGE>
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)
(Unaudited)


2.  Allowance for loan losses:
    --------------------------

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

                                                          Three Months Ended          Year Ended           Three Months Ended
                                                              March 31,               December 31,              March 31,
                                                                 2005                    2004                     2004
                                                       -------------------------    ----------------     ------------------------

<S>                        <C>                           <C>                          <C>                    <C>
          Balance, January 1                             $         14,421             $      13,178          $        13,178
          Provision for loan losses                                   550                     3,100                      850
          Loan charge-offs                                           (460)                   (2,910)                    (450)
          Recoveries                                                  243                     1,053                      284
                                                       -------------------------    ----------------     ------------------------
          Balance, end of period                         $         14,754             $      14,421          $        13,862
                                                       =========================    ================     ========================
</TABLE>

The following table summarizes period-end risk elements (in thousands):
<TABLE>
<CAPTION>

                                                            March 31,             December 31,              March 31,
                                                              2005                    2004                    2004
                                                       --------------------      ----------------      ------------------

<S>                                                      <C>                       <C>                     <C>
          Non-accrual loans                              $        5,807            $       5,428           $       7,541
          Foreclosed real estate                                  1,935                    2,094                   2,057
                                                       --------------------      ----------------      ------------------
              Total non-performing assets                         7,742                    7,522                   9,598
          Accruing loans 90 days past due                           ---                      ---                      98
                                                       --------------------      ----------------      ------------------
              Total risk elements                        $        7,742            $       7,522           $       9,696
                                                       ====================      ================      ==================
</TABLE>

3.   Guarantees:
     -----------

Community does not issue any guarantees that would require liability recognition
or  disclosure,  other than its standby  letters of credit.  Standby  letters of
credit written are conditional  commitments issued by Community to guarantee the
performance  of a customer to a third party.  Generally,  all letters of credit,
when issued have  expiration  dates within one year. The credit risk involved in
issuing  letters of credit is essentially the same as those that are involved in
extending loan facilities to customers.  Community  generally  holds  collateral
and/or personal  guarantees  supporting these commitments.  Community had issued
$43.8  million  and $36.3  million of standby  letters of credit as of March 31,
2005 and December  31,  2004.  Management  believes  that the proceeds  obtained
through a liquidation of collateral and the  enforcement of guarantees  would be
sufficient to cover the potential  amount of future  payment  required under the
corresponding  guarantees.  The current  amount of the liability as of March 31,
2005 and December 31, 2004 for guarantees under standby letters of credit issued
is not material.


4.   Acquisitions:
     -------------

In November 2004,  Community and PennRock  Financial  Services Corp.  (PennRock)
announced the signing of a definitive  agreement pursuant to which Community and
PennRock will combine under Community's charter. PennRock, the parent company of
Blue Ball National Bank, is a financial holding company with  approximately $1.2
billion in assets. Under the terms of the definitive agreement, each shareholder
of PennRock  will  receive 1.4 shares of Community in exchange for each share of
PennRock  common stock.  Based upon  Community's  ten-day average share price of
$29.85 prior to the announcement, the total purchase price will approximate $340
million.  The transaction has received approval from various banking  regulators
and  is in the  process  of  meeting  the  various  requirements  necessary  for
shareholder  approval from both  organizations.  Pending these final  approvals,
consummation is expected to occur at or near the middle of 2005.


                                       10
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
--------------------------------------------------------------------------------
Results of Operations
---------------------


Overview

The purpose of this review is to provide  additional  information  necessary  to
fully understand the consolidated  financial condition and results of operations
of  Community.  Throughout  this review,  net  interest  income and the yield on
earning  assets  are  stated on a fully  taxable-equivalent  basis and  balances
represent average daily balances unless otherwise indicated. In addition, income
statement  comparisons  are based on the first three months of 2005  compared to
the same  period of 2004  unless  otherwise  indicated.  Per share and number of
share amounts reflect stock splits and dividends.

Forward-Looking Statements

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

Critical Accounting Policies

Management  believes  that  the  application  of  its  accounting  policies  and
procedures in the determination of the adequacy of the allowance for loan losses
(and the related provision for loan losses) and in the evaluation of "other than
temporary"  impairment  of  investment  securities  should be  considered  to be
critical  accounting  policies to ensure the fair  presentation  of  Community's
financial statements.

     o  Community  applies  a  systemic  methodology  in order to  estimate  the
allowance for loan losses. This methodology incorporates  management's judgments
about the credit  quality of the loan  portfolio  through a disciplined  process
that is consistently  applied. This process requires that a detailed analysis of
the loan portfolio be performed on a quarterly basis.  This analysis  includes a
specific  individual  loan  review  for any and all  loans  that  meet  specific
materiality  criteria.  Such  loans  are  evaluated  for  impairment  under  the
provisions  of  Statement  of  Financial  Accounting  Standards  (SFAS) No. 114,
"Accounting  by Creditors for  Impairment  of a Loan".  The portfolio is further
stratified   to  analyze   groups  of   homogenous   loans  with   similar  risk
characteristics.  Such loans are  evaluated  under the  provisions of SFAS No. 5
"Accounting for Contingencies". Management considers all known relevant internal
and external factors that may affect loan collectibility,  as well as particular
risks  indigenous to specific types of lending.  The process is further designed
to consolidate the aggregate loss estimates and to ensure that the allowance for
loan  losses is  recorded  in  accordance  with  generally  accepted  accounting
principles. The final results are reviewed and approved by executive management.
Results are  constantly  validated  by a review of trends  associated  with loan
volume,  delinquencies,  potential  concentrations,  or other  factors  that may
influence the methodology used to estimate the allowance for loan losses.

     o Investment securities are written down to their net realizable value when
there is an impairment in value that is considered to be "other than temporary."
The determination of whether or not other than temporary  impairment exists is a
matter of judgment. Management reviews these investment securities regularly for
possible  impairment  that is "other than  temporary" by analyzing the facts and
circumstances  of each  investment and the  expectations  for that  investment's
performance. "Other than temporary" impairment in the value of an investment may
be indicated by the length of time and the extent to which market value has been
less than cost;  the financial  condition and near term prospects of the issuer;
or the intent and ability of Community to retain its  investment for a period of
time sufficient to allow for any anticipated recovery in market value.


                                       11
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

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



SUMMARY OF FINANCIAL RESULTS
----------------------------

Community's  earnings per share for the first quarter of 2005 rose to $0.44,  an
increase  of over 7% from the prior  year's  first  quarter,  while  net  income
reached $5.5 million.  Results for the first quarter of 2004 reflected  earnings
per share of $0.41  and net  income of $5.2  million.  Previously-reported  2004
results had included $1.3 million of pretax gains from the sale of  investments,
primarily bank equity securities,  while 2005 results included only modest gains
from investment sales. Results in the first quarter of 2005 produced a return on
average assets of 1.12% and a return on average equity of 14.23%.

The  improvement  in  earnings  during the quarter  was  especially  significant
considering  the favorable  trends reported in many of the key measures vital to
achieving earnings  improvement.  Net interest income, the largest single source
of revenue in financial  institutions,  improved  nearly 9% when compared to the
first quarter of 2004. Net interest margin, a measure of the difference  between
interest   received  on  earning  assets  and  interest  paid  on  deposits  and
borrowings,  grew to 3.55%  from 3.40% a year  earlier,  a signal  that  pricing
compression may be subsiding.  Pricing  compression has been a major obstacle to
earnings improvement in the last several years as interest rates declined to the
lowest levels in over 40 years.  At the same time,  revenue  growth from service
and  fee  income  sources  continued  to  be  critical  to  Community's  revenue
diversification initiatives. Excluding gains from investment transactions, total
non-interest  income  grew by 20% from the first  quarter  of 2004 as  Community
continued to fully  integrate  financial  services  capabilities  from  non-bank
acquisitions. Non-interest expenses remained under control despite the influence
of core  banking  growth and the impact of acquired  businesses  on  Community's
expense  structure.  The efficiency  ratio,  expressed as the ratio of operating
expenses  to  tax-equivalent  revenues,  declined to 58.8%,  the third  straight
quarterly  decline in this important  ratio.  This return to an efficiency ratio
more consistent with  Community's  historical  trends suggests that expenses are
being well-managed, even with the effect of added expenses from volume increases
in both traditional and complementary financial services.

Growth  continued to be a hallmark of Community's  balance sheet trends as total
assets  exceeded  the $2 billion  mark at the end of the first  quarter of 2005.
Average loan and deposit growth reached 12% and 7%, respectively,  when compared
to the first  quarter  of 2004.  Importantly,  the growth in loans over the last
several years has been accompanied by steady  improvement in most of the metrics
critical  to  maintaining  the  highest  levels  of  asset  quality  in the loan
portfolio.  Total nonperforming assets to period end loans remained below 1%, at
..62%,  while net  charge-offs  to loans  were an almost  negligible  0.07% on an
annualized basis.  Additionally,  the coverage ratio of the allowance for credit
losses to non-accrual  loans was at 254%,  substantially the same as the 266% at
the end of 2004.




                                       12
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

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



RESULTS OF OPERATIONS
---------------------


Net Interest Income

The following table compares net interest income and net interest margin
components between the first three months of 2005 and 2004 (dollars in
thousands):
<TABLE>
<CAPTION>

                                                Net Interest Margin - Year to Date
      -------------------------------------------------------------------------------------------------------------------------

                                                          March 31, 2005                            March 31, 2004
      ------------------------------------    ---------------------------------------    --------------------------------------
                                                                FTE          Average                      FTE          Average
                                                             Interest         Rate                     Interest         Rate
                                                Average       Income/        Earned/       Average      Income/        Earned/
                                                Balance       Expense         Paid         Balance      Expense         Paid
      ------------------------------------    ---------------------------------------    --------------------------------------
      <S>                                     <C>           <C>                 <C>      <C>         <C>                  <C>
      Federal funds sold and interest-        $   24,022    $      151          2.55%    $    6,399  $       13           0.82%
            bearing deposits in banks
      Investment securities                      613,074         8,354          5.53%       671,746       8,699           5.21%
      Loans - commercial                         419,713         6,476          6.26%       393,786       5,581           5.70%
            - commercial real estate             362,149         5,593          6.26%       283,302       4,209           5.98%
            - residential real estate             91,326         1,501          6.67%        96,119       1,675           7.01%
            - consumer                           359,770         5,797          6.53%       332,001       5,426           6.57%
      ------------------------------------    ---------------------------------------    --------------------------------------
      Total earning assets                    $1,870,054    $   27,872          6.04%    $1,783,353  $   25,603           5.77%
      ------------------------------------    ---------------------------------------    --------------------------------------

      Deposits - savings and NOW accounts     $  501,945    $    1,313          1.06%    $  457,269  $      889           0.78%
               -  time                           641,767         4,747          3.00%       621,030       4,569           2.96%
      Short-term borrowings                       31,106           157          2.05%        52,020         124           0.96%
      Long-term debt                             425,318         4,817          4.59%       410,148       4,581           4.49%
      Subordinated debt                           30,928           459          6.02%        30,928         378           4.92%
      ------------------------------------    ---------------------------------------    --------------------------------------
      Total interest-bearing liabilities      $1,631,064    $   11,493          2.86%    $1,571,395  $   10,541           2.70%
      ------------------------------------    ----------------------------------------   --------------------------------------

      Interest income to earning assets                                         6.04%                                     5.77%
      Interest expense to paying
      liabilities                                                               2.86%                                     2.70%
      ------------------------------------    ---------------------------------------    --------------------------------------

      Interest spread                                                           3.18%                                     3.07%
      Impact of non-interest funds                                              0.37%                                     0.33%
      ------------------------------------    ---------------------------------------    --------------------------------------
      Net interest margin                                   $   16,379          3.55%                $   15,062           3.40%
      ------------------------------------    --------------=========================    ------------==========================
</TABLE>

Interest  income  totaled  $27.9  million  in 2005,  or 9.0% more than the $25.6
million  recorded in 2004.  From 2004 to 2005,  earning assets grew $87 million,
including  growth of $128 million in loans.  Loan growth  continued its trend of
recent  years of being  focused in the  commercial  and  commercial  real estate
categories  accompanied  by  continued  increases  in the  consumer  home equity
market.  Funding for loan growth came from  scheduled  runoff in the  investment
portfolio and by an $84 million  increase in total  deposits.  Growth in earning
assets was  complemented  by an  increase  of 27 basis  points in earning  asset
yields, from 5.77% in 2004 to 6.04% in 2005,  reflecting the trend of increasing
interest  rates begun in the third and fourth  quarters of 2004  pursuant to the
reversal of the Fed's accommodative monetary policy.




                                       13
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

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


Interest expense on deposits and borrowings increased from $10.5 million in 2004
to $11.5 million in 2005 as a result of increases in both average rates paid and
average  balances.  The  average  rate  paid  on  interest-bearing   liabilities
increased from 2.70% to 2.86%,  reflecting  the overall  increase in rates since
2004.  Community's popular Power Checking account offering,  which is responsive
to customer  preferences  for  liquidity  and  flexibility,  continued to be the
primary  driver in  interest-bearing  deposit growth as it increased $65 million
from 2004.  Short-term  borrowings  decreased  $21  million and  long-term  debt
increased $15 million from 2004.  Community has gradually reduced its dependence
on selected  short term funding  sources that are more sensitive to increases in
short term interest rates.  Long-term  borrowings have increased to mitigate the
impact of rising rates on funding costs.

As a result of rate trends and other  dynamics  specific  to its balance  sheet,
Community  reported  an increase  in net  interest  spread from 3.07% in 2004 to
3.18% in 2005, and an increase in net interest  margin from 3.40% to 3.55%.  The
increase in margin was also linked to the impact of increased  contribution from
non-interest funding sources, which increased from 0.33% to 0.37%.

Provision for Loan Losses

Community has experienced  ongoing  stability in its credit quality the last two
years, even as dramatic loan growth has occurred.  The provision for loan losses
decreased  from $850 thousand for the three months ended March 31, 2004, to $550
thousand for 2005 and the relationship of the allowance for loan losses to loans
declined  slightly  from 1.19% at December  31, 2004 to 1.18% at March 31, 2005.
The  provision and the level of the allowance  reflect  Community's  response to
changing  credit  quality  patterns and to risks inherent in both seasoned loans
and in incremental  additions to Community's growing portfolio.  Net charge-offs
during the first three  months of 2005 were $217  thousand,  or 0.07% of average
loans annualized,  compared to $166 thousand,  or .06% of average loans in 2004.
Non-accrual  loans  aggregated $5.8 million at March 31, 2005,  compared to $7.5
million a year earlier.  The ratio of the  allowance to  non-accrual  loans,  an
important  measure of credit  quality,  was 254% at March 31, 2005,  compared to
184% at March 31, 2004.


Non-Interest Income

Excluding investment securities gains,  non-interest income for the three months
ended March 31, 2005,  increased $868 thousand,  or 20%, from 2004.  Enhancement
and  expansion  of  traditional  fee-based  banking  services,  coupled with the
development  of new  financial  service  offerings,  have been the catalysts for
steady growth in this revenue source.

Investment  management and trust  services  increased 55%, from $267 thousand in
2004 to $414  thousand  in 2005,  primarily  reflecting  an  increase  in income
related to the sale of various retail investment products (annuities,  brokerage
services, mutual funds, etc.).

Revenue from service charges on deposit accounts increased 28%, to $1.8 million,
over 2004's $1.4 million,  principally due to increased  income from Community's
"OverdraftHonor"  service. Demand deposit customers can now avoid adverse credit
implications of an occasional overdraft situation and simultaneously  facilitate
timely   payment  of  overdraft   items.   Since  its   introduction   in  2003,
OverdraftHonor income has grown as consumers became aware of the benefits of the
service,  leading to increased utilization that was also influenced by increases
in the number of demand deposit accounts.

Other  service  charges  totaled $1.0 million for 2005,  an increase of 12% from
$902 thousand in 2004.  Other service  charges include letter of credit fees and
interchange fees from Community's ATM network and debit card  transactions.  The
most significant  volume of fees in this category  relates to interchange  fees,
but  approximately  one half of the  increase in total  income from 2004 is from
letter of credit fees, as issued  standby  letters of credit  increased from $36
million in 2004 to $44 million in 2005.


                                       14
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

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


Insurance  premiums  and  commissions  include  agency-based   commissions  from
commercial and personal lines,  fees from credit  insurance  related to consumer
lending,  and  the  revenue  from  title  insurance  and  settlement  activities
conducted through  Community's title insurance  subsidiary.  Income reported for
2005 totaled $902 thousand,  an increase of $248 thousand over the $654 thousand
reported  for  2004.  The  increase  was  primarily   related  to   agency-based
commissions.

Mortgage  banking income  decreased $112 thousand,  or 18%, to $515 thousand for
2005.  Mortgage  banking  activities  have been  adversely  impacted by a steady
decline in mortgage refinancing, which had experienced a dramatic upturn for two
or three years prior to 2004.

Investment security gains were a negligible $51 thousand for 2005, compared to
$1.3 million for 2004. The majority of gains in 2004 related to sales of equity
holdings in bank stocks.


Non-Interest Expenses

Total  non-interest  expenses  reached  $12.7 million for the three months ended
March 31, 2005, a 7% increase from the $11.9 million recorded in 2004.

Salaries and employee benefits totaled $7.3 million for 2005, represented 58% of
operating  costs,  and increased  $458  thousand,  or 7%,  compared to 2004. The
increase was affected by the annual merit  increase and increased  benefit costs
among other factors.

Occupancy expenses,  marketing expense,  telecommunications  expense,  and other
expenses all showed modest changes from 2004 to 2005. Expenses in prior quarters
were  influenced  by  additional   expenses  from  the  absorption  of  acquired
businesses. Such businesses, the last of which was acquired in October 2003, are
becoming fully  integrated,  resulting in more  efficient  delivery of financial
services.

Income Taxes

Income tax expense for 2005 totaled $1.2 million,  resulting in an effective tax
rate of 18.0%,  compared to 18.2% for 2004.  The  relative  mix of tax exempt to
taxable income  influences the effective income tax rate and remains the primary
reason for the  difference  between  the  effective  tax rate and the  statutory
federal tax rate for corporations.



                                       15
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

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



FINANCIAL CONDITION
-------------------

The average  balance  sheets for the three  months ended March 31, 2005 and 2004
were as follows (dollars in thousands):
<TABLE>
<CAPTION>

                                                                  March 31,                              Change
                                                      -----------------------------------    --------------------------------
                                                            2005              2004               Volume             %
           ------------------------------------------------------------------------------------------------------------------
           <S>                                        <C>               <C>                 <C>                     <C>
           Cash and due from banks                    $       37,994    $        36,065     $        1,929          5%
           Federal funds sold and other                       24,022              6,399             17,623        275%
           Investments                                       613,074            671,746            (58,672)        (9)%
           Loans held for sale                                 1,955              5,786             (3,831)       (66)%
           Loans                                           1,231,192          1,100,432            130,760         12%
           Allowance for loan losses                          14,533             13,484              1,049          8%
           ------------------------------------------------------------------------------------------------------------------
           Net loans                                       1,216,659          1,086,948            129,711         12%
           Goodwill and identifiable intangibles               5,029              4,756                273          6%
           Other assets                                       84,386             85,081               (695)        (1)%
           ------------------------------------------------------------------------------------------------------------------

           Total assets                               $    1,983,119    $     1,896,781     $       86,338          5%
           ==================================================================================================================

           Noninterest-bearing deposits               $      183,048    $       164,295     $       18,753         11%
           Interest-bearing deposits                       1,143,712          1,078,299             65,413          6%
           Short-term borrowings                              31,106             52,020            (20,914)       (40)%
           Long-term debt                                    425,318            410,148             15,170          4%
           Subordinated debt                                  30,928             30,928                ---        ---
           Other liabilities                                  12,612             13,783             (1,171)        (9)%
           ------------------------------------------------------------------------------------------------------------------

           Total liabilities                               1,826,724          1,749,473             77,251          4%
           ------------------------------------------------------------------------------------------------------------------

           Stockholders' equity                              156,395            147,308              9,087          6%
           ------------------------------------------------------------------------------------------------------------------

           Total liabilities and stockholders' equity $    1,983,119    $     1,896,781     $       86,338          5%
           ==================================================================================================================
</TABLE>




Average  loans reached $1.2 billion for the three months ended March 31, 2005, a
12%  increase  over the $1.1  billion of average  loans  recorded  for the three
months  ended March 31,  2004.  The  following  table  provides a summary of the
changes in the various categories of loans (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                   Change
                                                          2005              2004           Amount            %
               ------------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>               <C>                  <C>
               Commercial                           $        419,713  $       393,786   $      25,927        7%
               Commercial real estate                        362,149          283,302          78,847       28%
               Residential real estate                        91,326           97,784          (6,458)      (7)%
               Consumer                                      358,004          325,560          32,444       10%
               ------------------------------------------------------------------------------------------------------
                    Total                           $      1,231,192  $     1,100,432   $     130,760       12%
               ======================================================================================================
</TABLE>


                                       16
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

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

Community has consistently made efforts to position itself to ensure its ability
to  compete  with  large  and  small  competitors  alike  and has  improved  its
visibility  within  its  core  markets,   particularly  in  the  commercial  and
commercial  real estate  sectors.  The  addition  of  experienced  lenders  with
long-term  ties to the  business  communities  in  these  markets  has  enhanced
Community's   profile   and   increased   its  access  to   commercial   lending
opportunities.  As a result,  Community  increased its commercial and commercial
real estate portfolios by nearly $105 million on an aggregate basis.  Commercial
lending  activity  continues  to  be  driven  almost  exclusively  by  in-market
transactions.

Significant  growth,  totalling $32 million,  also occurred in consumer lending,
particularly in home equity lending.  During 2004, promotions for revolving home
equity lines of credit with preferential terms generated  substantial  increases
in consumer  lending  opportunities  and  expansion  of customer  relationships.
Increases  in the  volume of home  equity  loans with  specific  terms were also
noted.

Residential  real estate lending,  primarily loans to  single-family  creditors,
continues  its  decline as a result of the  accessibility  of  secondary  market
liquidity through mortgage banking activities. Community-based banks continue to
provide a  convenient  avenue for  consumers to access  funding for  residential
lending,  but most fixed-rate,  conforming  mortgages continue to be sold in the
secondary  market.  This strategy has reduced the interest rate risk  associated
with consumer  preferences for long-term,  fixed rate lending,  and continues to
provide valuable liquidity for other forms of relationship lending.


Deposit  balances remain the primary source of funding and Community  recognized
growth of nearly 7%, as indicated by the following  summary of average  balances
for the three months ended March 31 (dollars in thousands):

<TABLE>
<CAPTION>

                                                                                                  Change
                                                           2005             2004           Amount           %
                    ------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>              <C>                 <C>
                    Demand                            $       183,048  $       164,295  $     18,753        11%
                    Savings & NOW accounts                    501,945          457,269        44,676        10%
                    Time                                      528,686          501,571        27,115         5%
                    Time $100,000 or more                     113,081          119,459        (6,378)       (5)%
                    ------------------------------------------------------------------------------------------------
                                                      $     1,326,760  $     1,242,594  $     84,166         7%
                    ================================================================================================
</TABLE>


Deposit growth occurred primarily in savings and NOW deposits; more specifically
Community's Power Checking  account,  which utilizes  characteristics  of both a
money market and checking  account.  Balances grew steadily  throughout 2004. At
the same time,  longer term time deposit trends were stable.  More recent trends
continue to reflect  consumer  preferences  for  liquidity,  though  activity in
longer term certificates of deposit has begun to emerge.



                                       17
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

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

Capital

Regulators  have  established  standards for the monitoring  and  maintenance of
appropriate  levels of capital for financial  institutions.  Regulatory  capital
guidelines are based on a risk-based supervisory approach that has been designed
to ensure effective  management of capital levels and associated  business risk.
The following table provides the risk-based  capital  positions of Community and
its  banking  subsidiary,  Community  Banks,  at March 31,  2005,  along  with a
comparison to the various current regulatory capital requirements:

<TABLE>
<CAPTION>

                                                                        March 31,        Regulatory         "Well
                                                                          2005            Minimum       Capitalized"
                                                                    ---------------------------------------------------
<S>                                                                        <C>               <C>
                   Leverage ratio
                   --------------
                       Community Banks, Inc.                               8.9%              4%              n/a
                       Community Banks                                     8.4%              4%              5%

                   Tier 1 capital ratio
                   --------------------
                       Community Banks, Inc.                              11.6%              4%              n/a
                       Community Banks                                    10.9%              4%              6%

                   Total risk-based capital ratio
                   ------------------------------
                       Community Banks, Inc.                              12.5%              8%              n/a
                       Community Banks                                    11.9%              8%              10%
</TABLE>

At March 31,  2005,  total  stockholders'  equity  reflected  accumulated  other
comprehensive  loss of $2.4 million compared to accumulated other  comprehensive
income of $3.2 million at December 31, 2004.  This decrease can be attributed to
the change in the unrealized gain on investment  securities  available for sale,
net of taxes.







                                       18
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

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

Market  risk,  the  exposure  to economic  loss that arises from  changes in the
values of certain financial  instruments  pursuant to factors arising out of the
various categories of market risk, can include a number of categories, including
interest rate risk, foreign currency risk,  exchange rate risk,  commodity price
risk, etc. For domestic, community-based banks, the vast majority of market risk
is related to interest rate risk.

The following  table  provides a measure of interest rate  sensitivity  for each
category of interest  earning assets and interest  bearing  liabilities at March
31, 2005.
<TABLE>
<CAPTION>

           Interest Rate Sensitivity
           -----------------------------------------------------------------------------------------------------------------
                                                    1-90          90-180         180-365         1 year or
           Dollars in thousands                     days           days           days             more            Total
           -----------------------------------------------------------------------------------------------------------------

           Assets
<S>                                             <C>            <C>            <C>             <C>            <C>
           Federal funds sold                   $      56,669  $         ---  $         ---   $         ---  $      56,669
           Interest-bearing deposits in other
               banks                                      611            ---            ---             ---            611
           Loans held for sale                            ---            ---            ---           1,919          1,919
           Investment securities                      103,208         24,036         29,520         433,781        590,545
           Loans((1))                                 477,089         61,243         99,941         607,631      1,245,904
           -----------------------------------------------------------------------------------------------------------------
           Earning assets                             637,577         85,279        129,461       1,043,331      1,895,648
           Non-earning assets                             492            ---            ---         116,513        117,005
           -----------------------------------------------------------------------------------------------------------------
           Total assets                         $     638,069  $      85,279  $     129,461   $   1,159,844  $   2,012,653
           -----------------------------------------------------------------------------------------------------------------
           Liabilities
           Savings                              $     207,269  $         ---  $         ---   $     299,976  $     507,245
           Time                                        71,213         67,211        101,318         295,916        535,658
           Time in denominations of $100,000
               or more                                 19,495         13,625         21,026          58,791        112,937
           Short-term borrowings                       38,217            ---            ---             ---         38,217
           Long-term debt                              11,732          1,744         28,526         385,940        427,942
           Subordinated debt                           23,196            ---            ---           7,732         30,928
           -----------------------------------------------------------------------------------------------------------------
           Interest bearing liabilities               371,122         82,580        150,870       1,048,355      1,652,927
           Other liabilities and equity                 5,856          5,856         11,712         336,302        359,726
           -----------------------------------------------------------------------------------------------------------------
           Total liabilities and equity         $     376,978  $      88,436  $     162,582   $   1,384,657  $   2,012,653
           -----------------------------------------------------------------------------------------------------------------
</TABLE>
    (1) Includes non-accrual loans.

<TABLE>
<CAPTION>

        Interest Sensitivity GAP
        ---------------------------------------------------------------------------------------------------
                                                  1-90           90-180         180-365       1 year or
        Dollars in thousands                      days            days            days           more
        ---------------------------------------------------------------------------------------------------

<S>                                          <C>             <C>             <C>             <C>
        Periodic                             $     261,091   $      (3,157)  $    (33,121)   $   (224,813)
        Cumulative                                                 257,934        224,813             ---
        Cumulative GAP as a percentage
            of total assets                         12.97%          12.82%         11.17%              0%
</TABLE>


The 11.2%  positive  GAP between  interest-earning  assets and  interest-bearing
liabilities  maturing  or  repricing  within  one year at March  31,  2005,  was
comparable to the 10.3% GAP at December 31, 2004.


                                       19
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

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

Under the  supervision  and with the  participation  of Community's  management,
including its Chief Executive Officer and Chief Financial Officer, Community has
evaluated the  effectiveness  of its  disclosure  controls and  procedures as of
March 31, 2005.  Based upon this  evaluation,  the Chief  Executive  Officer and
Chief Financial Officer have concluded that Community's  disclosure controls and
procedures  are  adequate  and  effective  to ensure that  material  information
relating to Community and its consolidated subsidiaries is made known to them by
others  within  those  entities,  particularly  during  the period in which this
quarterly  report was prepared.  There have not been any changes in  Community's
internal  control  over  financial  reporting  (as such term is defined in Rules
13a-15(f)  and  15d-15(f)  under the Exchange Act) during the most recent fiscal
quarter that have materially  affected,  or are reasonably  likely to materially
affect, Community's internal control over financial reporting.

Because of inherent limitations,  our disclosure controls and procedures may not
prevent or detect misstatements.  A control system, no matter how well conceived
and operated,  can provide only  reasonable,  not absolute,  assurance  that the
objectives of the control system are met. Because of the inherent limitations in
all control systems,  no evaluation of controls can provide  absolute  assurance
that all control issues and instances of fraud, if any, have been detected.



                                       20
<PAGE>



COMMUNITY BANKS, INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION



Item 1 - Legal Proceedings
--------------------------

Various actions and proceedings are presently pending to which Community and/or
one or more of its subsidiaries is a party. These actions and proceedings arise
out of routine operations and, in management's opinion, will not have a material
adverse effect on Community's consolidated financial position or results of
operations.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------

No shares were purchased during the first quarter of 2005 as part of Community's
Share Repurchase Program.

Item 3 - Defaults Upon Senior Securities
----------------------------------------

          Not applicable.

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

          Not applicable.

Item 5 - Other Information
--------------------------

          Not applicable.

Item 6 - Exhibits
-----------------


          2    Merger agreement  between PennRock  Financial  Services Corp. and
               Community  Banks,  Inc.,  dated  November 16, 2004, not including
               schedules.  Community  will furnish the omitted  schedules to the
               Securities and Exchange Commission upon request. (Incorporated by
               reference to Exhibit 10.1 to  Community's  Current Report on Form
               8-K, filed with the Commission on November 22, 2004)
          3.1  Amended Articles of  Incorporation  (Incorporated by reference to
               filed on May 13, 2002)
          3.2  Amended  By-Laws  (Incorporated  by  reference  to  Exhibit  3.2,
               attached  to  Community's  Quarterly  Report on Form 10-Q for the
               quarter  ended March 31, 2003,  filed with the  Commission on May
               15, 2003)
          4    Instruments  defining the rights of the holders of trust  capital
               securities  sold by  Community  in December  2002 and in December
               2003 are not attached,  as the amount of such  securities is less
               than  10%  of  the  consolidated  assets  of  Community  and  its
               subsidiaries,  and  the  securities  have  not  been  registered.
               Community agrees to provide copies of such instruments to the SEC
               upon request.
          31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
          31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
          32.1 Section 1350 Certification (Chief Executive Officer)
          32.2 Section 1350 Certification (Chief Financial Officer)



                                       21
<PAGE>




                                   SIGNATURES

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

                              COMMUNITY BANKS, INC.
                                  (Registrant)

Date      May 10, 2005                           /s/ Eddie L. Dunklebarger
    ---------------------------                  -------------------------------
                                                     Eddie L. Dunklebarger
                                                     Chairman and President
                                                    (Chief Executive Officer)

Date      May 10, 2005                           /s/ Donald F. Holt
    ---------------------------                  -------------------------------
                                                     Donald F. Holt
                                                     Executive Vice President
                                                    (Chief Financial Officer)


                                       22