SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q

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


                       For the Quarter Ended June 30, 2001

                                   No. 0-15786
                            ------------------------
                            (Commission File Number)

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


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

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

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


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

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

                Number of shares outstanding as of June 30, 2001


CAPITAL STOCK-COMMON                                                   8,809,000
--------------------                                        --------------------
(Title of Class)                                            (Outstanding Shares)


<PAGE>
                     COMMUNITY BANKS, INC. and SUBSIDIARIES

INDEX 10-Q


PART I

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

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

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

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

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

Notes to Consolidated Interim Financial Statements......................   6-10

Management's Discussion and Analysis of Financial
   Condition and Results of Operation...................................  11-17



PART II

Other Information and Signatures............................................ 18



<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 six month  periods
ending June 30, 2001 and 2000.

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




                                       1
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Balance Sheets
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<S>                                                                         <C>                       <C>
                                                                              June 30,                December 31,
                                                                                2001                      2000
                                                                            ------------              ------------
ASSETS

Cash and due from banks.....................................                $     38,987              $     42,166
Interest-bearing time deposits in other banks...............                       1,150                     2,568
Investment securities, available for sale
   (fair value).............................................                     444,553                   389,819
Federal funds sold..........................................                       9,703                     6,280
Loans.......................................................                     843,365                   818,858
Less: Unearned income.......................................                      (3,392)                   (3,984)
          Allowance for loan losses.........................                     (12,258)                  (10,328)
                                                                            ------------              ------------
          Net loans.........................................                     827,715                   804,546
Premises and equipment, net.................................                      21,544                    21,587
Goodwill....................................................                         228                       183
Other real estate owned.....................................                         550                       416
Loans held for sale.........................................                       4,149                     2,719
Accrued interest receivable and other assets................                      42,733                    38,429
                                                                            ------------              ------------
     Total assets...........................................                  $1,391,312                $1,308,713
                                                                            ============              ============
LIABILITIES

Deposits:
   Demand (non-interest bearing)............................                 $   153,088               $   155,796
   Savings..................................................                     292,206                   257,178
   Time.....................................................                     464,033                   426,573
   Time in denominations of $100 or more....................                      79,895                    79,694
                                                                            ------------              ------------
   Total deposits..........................................                      989,222                   919,241
Short-term borrowings.......................................                       7,009                    36,093
Long-term debt..............................................                     271,997                   239,613
Accrued interest payable and other liabilities..............                      12,156                     9,788
                                                                            ------------              ------------
   Total liabilities........................................                   1,280,384                 1,204,735
                                                                            ------------              ------------
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; 8,969,000 and 8,545,000
   shares issued in 2001 and 2000, respectively.............                      44,843                    42,726
Surplus.....................................................                      35,893                    29,155
Retained earnings...........................................                      31,443                    38,723
Accumulated other comprehensive income (loss),
   net of tax (benefit) of $938 and $(374),
     respectively...........................................                       1,742                      (694)
Less: Treasury stock of 160,000 and 300,000
   shares at cost, respectively.............................                      (2,993)                   (5,932)
                                                                            ------------              ------------
   Total stockholders' equity...............................                     110,928                   103,978
                                                                            ------------              ------------
  Total liabilities and stockholders' equity................                  $1,391,312                $1,308,713
                                                                            ============              ============
</TABLE>

All periods reflect the combined data of Community Banks, Inc. and The Glen Rock
State Bank.  The  accompanying  notes are an integral  part of the  consolidated
interim financial statements.

                                       2
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<S>                                                                     <C>             <C>                 <C>           <C>
                                                                           Three Months Ended                   Six Months Ended
                                                                                June 30,                            June 30,
                                                                           --------------------                --------------------
                                                                           2001            2000                2001            2000
                                                                           --------------------                --------------------
Interest
income:
Interest and fees on loans........................................       $17,673         $16,182              $35,380        $31,354
Interest and dividends on investment securities:
   Taxable........................................................         4,903           5,157                9,760         10,126
   Exempt from federal income tax.................................         1,723           1,124                3,198          2,244
Federal funds interest...........................................            205             123                  510            341
Other interest income.............................................            19              19                   51             32
                                                                         -------         -------              -------        -------
      Total interest income.......................................        24,523          22,605               48,899         44,097
                                                                         -------         -------              -------        -------
Interest expense:
Interest on deposits:
   Savings........................................................         1,817           1,866                3,715          3,668
   Time...........................................................         6,499           5,653               12,969         10,982
   Time in denominations of $100 or more..........................           926             790                2,052          1,530
Interest on short-term borrowings and long-term debt..............         3,824           3,190                7,522          5,979
Federal funds purchased and repo interest.........................           214             258                  423            571
                                                                         -------         -------              -------        -------
   Total interest expense........................................         13,280          11,757               26,681         22,730
                                                                         -------         -------              -------        -------
   Net interest income............................................        11,243          10,848               22,218         21,367
Provision for loan losses.........................................           871             525                2,444            886
                                                                         -------         -------              -------        -------
   Net interest income after provision for loan losses...........         10,372          10,323               19,774         20,481
                                                                         -------         -------              -------        -------
Other income:
   Income from fiduciary related activities.......................           176             159                  283            300
   Service charges on deposit accounts............................           830             696                1,589          1,316
   Other service charges, commissions and fees....................           523             419                  990            893
   Investment security gains......................................           366              50                  238            218
   Insurance premium income.......................................           386             394                  643            560
   Gains on loan sales............................................           378              93                  541            158
   Other income...................................................           249             227                  607            530
                                                                         -------         -------              -------        -------
      Total other income..........................................         2,908           2,038                4,891          3,975
                                                                         -------         -------              -------        -------
Other expenses:
   Salaries and employee benefits.................................         4,678           4,012                9,232          8,072
   Net occupancy expense..........................................         1,360           1,157                2,735          2,303
   Operating expense of insurance subsidiary......................           198             171                  337            258
   Merger and restructuring related expenses......................          (101)              -                1,798              -
   Other operating expense........................................         2,037           2,256                4,682          4,414
                                                                         -------         -------              -------        -------
      Total other expense.........................................         8,172           7,596               18,784         15,047
                                                                         -------         -------              -------        -------
      Income before income taxes..................................         5,108           4,765                5,881          9,409
Provision for income taxes........................................         1,077           1,228                1,042          2,382
                                                                         -------         -------              -------        -------
      Net income..................................................      $  4,031         $ 3,537             $  4,839        $ 7,027
                                                                         =======         =======              =======        =======

Earnings per share:
   Basic..........................................................    $      .46       $     .41           $      .55      $     .81
   Diluted........................................................    $      .45       $     .40           $      .54      $     .79
Dividends paid per share..........................................    $      .17       $     .15           $      .33      $     .30


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

                                       3
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Changes in Stockholders' Equity
(Dollars in thousands except per share data)
<TABLE>
 <S>                                       <C>          <C>         <C>              <C>                <C>             <C>
                                                                      Six Month Periods Ended June 30

                                                                                       Accumulated
                                                                                          Other
                                              Common                  Retained        Comprehensive         Treasury       Total
                                               Stock      Surplus     Earnings            Income              Stock        Equity
                                             --------------------------------------------------------------------------------------
Balance, January 1, 2000.................     $40,903     $24,259      $36,432           $(11,697)         $ (3,588)     $  86,309
   Comprehensive income:
      Net income.........................                                7,027                                               7,027
      Change in unrealized gain (loss)
      on securities, net of tax of $127..
        and reclassification adjustment
         of $218 ........................                                                     235                              235
     Total comprehensive income..........                                                                                    7,262
Cash dividends ($.30 per share)..........                               (2,542)                                             (2,542)
5% stock dividend (348,000 shares).......       1,740       4,612       (6,352)
Net increase in treasury stock
   (90,000 shares).......................                                                                    (1,531)        (1,531)
Issuance of additional shares
   (11,000 shares).......................          55         219                                                              274
                                             --------     -------      -------           --------          --------      ---------
Balance, June 30, 2000...................     $42,698     $29,090      $34,565           $(11,462)         $ (5,119)     $  89,772
                                             ========     =======      =======           ========          ========      =========

Balance, January 1, 2001.................     $42,726     $29,155      $38,723           $   (694)         $ (5,932)      $103,978
   Comprehensive income:
     Net income..........................                                4,839                                               4,839
    Change in unrealized gain (loss)
    on securities, net of tax of $1,312
     and reclassification adjustment
      of $238............................                                                   2,436                            2,436
                                                                                                                         ---------
     Total comprehensive income..........                                                                                    7,275
Cash dividends ($.33 per share)..........                               (2,869)                                             (2,869)
5% stock dividend (426,000 shares).......       2,130       6,773       (8,903)
Issuance of additional shares
   (2,000 shares of common stock
     canceled and 140,000 shares, net,
     of treasury stock reissued) ........         (13)        (35)        (347)                               2,939          2,544
                                             --------     -------      -------           --------          --------      ---------
Balance, June 30, 2001...................     $44,843     $35,893      $31,443           $   1,742         $ (2,993)      $110,928
                                             ========     =======      =======           ========          ========      =========

<FN>
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock State Bank.
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 interim financial statements.
</FN>
</TABLE>

                                       4
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<S>                                                                                 <C>                         <C>
                                                                                               Six Months Ended
                                                                                                   June 30,
                                                                                       -------------------------------------
                                                                                           2001                     2000
                                                                                       -------------------------------------
Operating Activities:
   Net income.....................................................                     $   4,839                  $  7,027
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for loan losses....................................                         2,444                       886
     Depreciation and amortization................................                         2,270                     1,853
     Net (increase) decrease in goodwill..........................                           (45)                      120
     Investment security gains....................................                          (238)                     (218)
     Loans originated for sale....................................                       (34,496)                  (10,454)
     Proceeds from sales of loans.................................                        33,607                    11,934
     Gains on loan sales..........................................                          (541)                     (158)
     Change in other assets, net..................................                        (4,515)                  (10,124)
     Increase in accrued interest payable and other
      liabilities, net............................................                         1,430                       632
                                                                                        --------                  --------
     Net cash provided by operating activities....................                         4,755                     1,498
                                                                                        --------                  --------
Investing Activities:
   Net (increase) decrease in interest-bearing time
    deposits in other banks.......................................                         1,418                       693
   Proceeds from sales of investment securities...................                        52,299                     5,520
   Proceeds from maturities of investment securities..............                        30,932                     8,042
   Purchases of investment securities.............................                      (135,024)                  (45,633)
   Net increase in total loans....................................                       (25,910)                  (67,693)
   Net increase in premises and equipment.........................                        (1,182)                   (2,978)
                                                                                        --------                  --------
      Net cash used by investing activities.......................                       (77,467)                 (102,049)
                                                                                        --------                  --------
Financing Activities:
   Net increase in total deposits.................................                        69,981                    73,716
   Net increase (decrease) in short-term borrowings...............                       (29,084)                   (1,576)
   Proceeds from issuance of long-term debt.......................                        33,048                   129,135
   Repayment of long-term debt....................................                          (664)                  (94,000)
   Cash dividends.................................................                        (2,869)                   (2,542)
   Purchases of treasury stock....................................                             -                    (1,531)
   Proceeds from issuance of common stock.........................                         2,544                       274
                                                                                        --------                  --------
      Net cash provided by financing activities...................                        72,956                   103,476
                                                                                        --------                  --------
     Increase in cash and cash equivalents........................                           244                     2,925

   Cash and cash equivalents at beginning of period...............                        48,446                    37,117
                                                                                        --------                  --------
   Cash and cash equivalents at end of period.....................                      $ 48,690                  $ 40,042
                                                                                        ========                  ========

<FN>
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock State Bank.
The accompanying notes are an integral part of the consolidated interim financial statements.
</FN>
</TABLE>


                                       5
<PAGE>


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


1.   Accounting Policies

     These   financial   statements   have  been  prepared  in  accordance  with
instructions  for Form 10-Q and therefore do not include certain  information or
footnotes  necessary for the  presentation  of financial  condition,  results of
operations,  stockholders'  equity,  and cash flows in conformity with generally
accepted  accounting  principles.  However,  in the opinion of  management,  the
consolidated  financial  statements  reflect all  adjustments  (which consist of
normal recurring  accruals) necessary for a fair presentation of the results for
the unaudited periods.

     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 2000 Annual Report to shareholders.



     Other Events

     On March 30, 2001,  Community Banks, Inc. (CTY) completed its merger of The
Glen Rock State Bank (GR). GR has five banking  offices  located in York County,
Pennsylvania.  CTY  issued  1,205,000  shares  of  common  stock  for all of the
outstanding  common stock of GR. This transaction was accounted for as a pooling
of interests and combined unaudited financial information is as follows:

<TABLE>
<S>                                                             <C>                   <C>                   <C>
                                                                              Quarter Ended June 30, 2000
                                                                              ---------------------------
                                                                      (dollars in thousands expect per share data)

                                                                   CTY                   GR                 Combined
                                                              -------------------------------------------------------
Interest income........................................         $19,345                $3,260               $22,605
Interest expense.......................................           9,922                 1,835                11,757
                                                              -------------------------------------------------------
Net interest income....................................           9,423                 1,425                10,848
Loan loss provision....................................             500                    25                   525
Other income...........................................           1,805                   233                 2,038
Other expense..........................................           6,465                 1,131                 7,596
                                                              -------------------------------------------------------
Income before taxes....................................           4,263                   502                 4,765
Taxes..................................................           1,091                   137                 1,228
                                                              -------------------------------------------------------
Net income.............................................        $  3,172               $   365              $  3,537
                                                              =======================================================

Earnings per common share:

Basic                                                        $      .40              $    .27            $      .41
Diluted                                                      $      .39              $    .27            $      .40
</TABLE>


Per share  data has been  adjusted  to  reflect a five  percent  stock  dividend
payable April 30, 2001.

                                       6

<PAGE>
Consolidated Interim Statements of Income

     Included  in the  Consolidated  Interim  Statements  of Income  for the six
months ended June 30, 2001 are merger and restructuring related charges totaling
$1.9  million.  The  following  summarizes  the  components  of the  merger  and
restructuring  expenses  charged to  operations  during  2001 and the  remaining
accrual balance at June 30, 2001.
<TABLE>
<S>                                                             <C>             <C>                <C>              <C>
                                                                                                                    Remaining
                                                                Original         Incurred            Accrual          Accrual
                                                                 Accrual          to-Date           Reversal        at 6/30/01
                                                                --------         --------           --------        ---------
Merger costs:
    Employee severance benefits                                 $   508          $   305            $  (51)            $152
    Legal and professional fees                                     287              236               (19)              32
    Conversion costs                                                220              164                 -               56
    Asset disposal                                                  107              107                 -                -
    Printing costs                                                   63               58                (5)               -
    Other                                                           174              134               (26)              14
Restructuring costs:
    Employee severance benefits
          (merger related)                                          540              540                 -                -
                                                                  -----            -----              ----              ---
                                                                 $1,899           $1,544             $(101)            $254
                                                                  =====            =====              ====              ===

</TABLE>


                                       7

<PAGE>

2.   Investment Securities

     The amortized  cost and estimated  fair values of investment  securities at
June 30, 2001 and December 31, 2000 were as follows:

<TABLE>
<S>                                                                                     <C>                       <C>
                                                                                                     June 30,
                                                                                                       2001
                                                                                                     --------
                                                                                                                   Estimated
                                                                                        Amortized                     Fair
                                                                                           Cost                       Value
                                                                                        ---------                  ---------
U.S. Treasury securities and obligations of
   U.S. government corporations and
   agencies..............................................................                $128,919                  $128,813
Mortgage-backed U.S. government agencies.................................                  73,577                    74,426
Obligations of states and political subdivisions.........................                 133,783                   135,490
Corporate securities.....................................................                  69,634                    69,005
Equity securities........................................................                  35,960                    36,819
                                                                                        ---------                  ---------
     Total...............................................................                $441,873                  $444,553
                                                                                        =========                  =========


                                                                                                    December 31,
                                                                                                       2000
                                                                                                    ------------
                                                                                                                   Estimated
                                                                                        Amortized                     Fair
                                                                                           Cost                       Value
                                                                                        ---------                  ---------
U.S. Treasury securities and obligations of
   U.S. government corporations and
   agencies..............................................................                $147,422                  $144,410
Mortgage-backed U.S. government agencies.................................                  74,685                    74,689
Obligations of states and political subdivisions.........................                 102,741                   104,173
Corporate securities.....................................................                  42,350                    42,498
Equity securities........................................................                  23,689                    24,049
                                                                                        ---------                  ---------
     Total...............................................................                $390,887                  $389,819
                                                                                        =========                  =========

</TABLE>

                                       8

<PAGE>

3.   Allowance for loan losses

     Changes in the allowance for loan losses are as follows:
<TABLE>
<S>                                                                   <C>                    <C>                <C>
                                                                      Six Months Ended      Year Ended          Six Months Ended
                                                                          June 30,          December 31,            June 30,
                                                                            2001               2000                   2000
                                                                      ----------------      -----------         ----------------
Balance, January 1...................................                      $10,328            $ 8,976               $8,976
Provision for loan losses............................                        2,444              2,863                  886
Loan charge-offs.....................................                         (733)            (1,925)                (575)
Recoveries...........................................                          219                414                  202
                                                                           -------            -------              -------
Balance, June 30, 2001, December 31,
 2000, and June 30, 2000.............................                      $12,258            $10,328               $9,489
                                                                           =======            =======              =======


                 NONPERFORMING LOANS (a) AND OTHER REAL ESTATE

                                                                          June 30,          December 31,            June 30,
                                                                            2001               2000                   2000
                                                                          -------           ------------            -------
Loans past due 90 days or more and still
 accruing interest:
     Commercial, financial and agricultural....................            $   317             $    8              $   734
     Mortgages................................................                 932                495                  381
     Personal installment......................................                105                 98                   64
     Other.....................................................                  -                 11                    -
                                                                           -------            -------              -------
                                                                             1,354                612                1,179
                                                                           -------            -------              -------
Loans renegotiated with borrowers..............................                  -                205                  236
                                                                           -------            -------              -------
Loans on which accrual of interest has been
 discontinued:
     Commercial, financial and agricultural....................              3,299              2,042                3,325
     Mortgages.................................................              5,516              3,445                3,542
     Other.....................................................                692                356                  385
                                                                           -------            -------              -------
                                                                             9,507              5,843                7,252
                                                                           -------            -------              -------
Other real estate..............................................                550                416                  568
                                                                           -------            -------              -------
     Total.....................................................            $11,411             $7,076               $9,235
                                                                           =======            =======              =======

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


Impaired Loans

     At June 30, 2001 and December 31, 2000,  the recorded  investment  in loans
for which  impairment has been  recognized  totaled  $7,249,000 and  $2,877,000,
respectively,  none of which related to loans  requiring a valuation  allowance.
For the six months  ended June 30,  2001,  the average  recorded  investment  in
impaired  loans   approximated   $6,138,000.   The  average   balance  for  2000
approximated $2,630,000. Interest recognized on impaired loans on the cash basis
for the six month periods ending June 30, 2001 and 2000 was not significant.


                                       9
<PAGE>

4.   Statement of Cash Flows

     Cash and cash equivalents include cash and due from banks and federal funds
sold.   The  company  made  cash  payments  of  $1,677,000  and  $2,425,000  and
$26,611,000  and $22,478,000  for income taxes and interest,  respectively,  for
each of the six month periods ended June 30, 2001 and 2000.

     Excluded  from the  consolidated  statements  of cash flows for the periods
ended June 30, 2001 and 2000 was the effect of certain non-cash activities.  The
company acquired real estate through foreclosure totaling $297,000 and $456,000,
respectively.  The company  also  recorded a decrease in deferred  tax assets of
$374,000  and an increase in deferred  tax  liabilities  of $938,000 in 2001.  A
decrease  in deferred  tax assets of  $126,000  was  recognized  in 2000.  These
variations  related to the effects of changes in net  unrealized  gain (loss) on
investment securities available for sale.

5.   Earnings Per Share:

     The  following  table  sets  forth the  calculations  of Basic and  Diluted
Earnings Per Share for the periods indicated:
<TABLE>
<S>                                                                  <C>        <C>     <C>             <C>       <C>      <C>
                                                                                      Three Months Ended June 30,
                                                                    ----------------------------------------------------------------
                                                                             2001                                    2000
                                                                    ----------------------------------------------------------------
                                                                                        Per-Share                          Per-Share
                                                                    Income     Shares    Amount         Income     Shares    Amount
                                                                    ----------------------------------------------------------------
                                                                                   (In thousands except per share data)
Basic EPS:
Income available to common stockholders.......................      $4,031      8,797      $.46         $3,537      8,702      $.41
Effect of Dilutive Securities: ...............................       =====                  ===          =====                  ===
Incentive stock options outstanding...........................                    191                                 109
                                                                                -----                               -----
Diluted EPS:
Income available to common stockholders &
   assumed conversion.........................................      $4,031      8,988      $.45         $3,537      8,811      $.40
                                                                     =====                  ===          =====                  ===


                                                                                      Three Months Ended June 30,
                                                                    ----------------------------------------------------------------
                                                                             2001                                    2000
                                                                    ----------------------------------------------------------------
                                                                                        Per-Share                          Per-Share
                                                                    Income     Shares    Amount         Income     Shares    Amount
                                                                    ----------------------------------------------------------------
                                                                                    (In thousands except per share data)
Basic EPS:
Income available to common stockholders.......................      $4,839      8,740      $.55         $7,027     8,726       $.81
Effect of Dilutive Securities: ...............................       =====                  ===          =====                  ===
Incentive stock options outstanding...........................                    161                                113
                                                                                -----                              -----
Diluted EPS:
Income available to common stockholders &
   assumed conversion.........................................      $4,839      8,901      $.54         $7,027      8,839      $.79
                                                                     =====                  ===          =====                  ===

</TABLE>

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

                                       10

<PAGE>
<TABLE>
<S>                               <C>           <C>         <C>        <C>        <C>         <C>       <C>      <C>       <C>
                     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 June 30, 2001, 2000, and 1999
                             (dollars in thousands)

                                               June 30,                          June 30,                     June 30,
                                   -------------------------------------------------------------------------------------------------
                                                 2001                              2000                         1999
                                   -------------------------------------------------------------------------------------------------
                                                 Average                           Average                        Average
                                                 Interest    Rates                 Interest    Rates             Interest    Rates
                                     Average      Income/    Earned/    Average     Income/    Earned/  Average   Income/    Earned/
                                    Balance(c)   Expense(a)  Paid (a)   Balance(c) Expense(a)  Paid (a) Balance(c)Expense(a) Paid(a)
                                   -------------------------------------------------------------------------------------------------
Assets:
   Cash and due from banks.....    $   33,775                          $  30,854                        $ 28,749
                                   ----------                         ----------                      ----------
   Earning Assets:
      Interest-bearing deposits
       in other banks..........         1,492     $   19      5.11%        1,668    $   19      4.58%      1,640  $   18      4.40%
                                   ----------                         ----------                      ----------
      Investment securities:
         Taxable...............       291,751      4,903      6.74       293,347     5,157      7.07     260,461   4,226      6.51
         Tax-exempt (b)........       138,873      2,651      7.66        91,570     1,729      7.59     104,049   2,098      8.09
                                   ----------                         ----------                      ----------
      Total investment
       securities..............       430,624                            384,917                         364,510
                                   ----------                         ----------                      ----------
      Federal funds sold.......        16,776        205      4.90         7,734       123      6.40       9,276     143      6.18
                                   ----------                         ----------                      ----------
      Loans, net of unearned
       income (b)..............       836,489     17,746      8.51       749,446    16,249      8.72     651,966  13,695      8.43
                                   ----------    -------      ----    ----------  --------      ----  ---------- -------      ----
       Total earning assets....     1,285,381    $25,524      7.96     1,143,765  $ 23,277      8.18   1,027,392 $20,180      7.88
                                   ----------    -------      ----    ----------  --------      ----  ---------- -------      ----
      Allowance for loan losses       (11,894)                            (9,317)                         (8,745)
      Premises, equipment, and.
         other assets..........        61,907                             53,179                          40,260
                                   ----------                         ----------                      ----------
         Total assets..........    $1,369,169                         $1,218,481                      $1,087,656
                                   ==========                         ==========                      ==========
Liabilities:
   Demand deposits.............       149,144                             70,266                          62,773
                                   ----------                         ----------                      ----------
   Interest-bearing liabilities:
      Savings deposits.........       285,403      1,817      2.55       331,717     1,866      2.26     327,403   1,671      2.05
                                   ----------                         ----------                      ----------
      Time deposits:
         $100 or greater.......        75,240                             57,313                          44,106
         Other.................       461,772                            416,509                         357,402
                                   ----------                         ----------                      ----------
      Total time deposits......       537,012      7,425      5.55       473,822     6,443      5.47     401,508   5,179      5.17
                                   ----------                         ----------                      ----------
      Total time and savings
         deposits..............       822,415                            805,539                         728,911
      Short-term borrowings....         6,589         62      3.77        10,386       117      4.53       5,271      56      4.26
      Long-term debt...........       272,358      3,976      5.86       234,114     3,331      5.72     186,625   2,489      5.35
                                   ----------    -------      ----    ----------  --------      ----  ---------- -------      ----
         Total interest-bearing
            liabilities........     1,101,362    $13,280      4.84     1,050,039   $11,757      4.50     920,807 $ 9,395      4.09
                                   ----------    -------      ----    ----------  --------      ----  ---------- -------      ----
      Accrued interest, taxes and
         other liabilities.....        10,143                              8,460                          10,027
                                   ----------                         ----------                      ----------
         Total liabilities.....     1,260,649                          1,128,765                         993,607
                                   ----------                         ----------                      ----------
      Stockholders' equity.....       108,520                             89,716                          94,049
                                   ----------                         ----------                      ----------
         Total liabilities and
            stockholders' equity   $1,369,169                         $1,218,481                      $1,087,656
                                   ==========                         ==========                      ==========
Interest income to earning
   assets......................                               7.96%                             8.18%                         7.88%
Interest expense to earning
   assets......................                               4.14                              4.13                          3.67

      Effective interest.......
         differential..........                  $12,244      3.82%                $11,520      4.05%            $10,785      4.21%
                                                 =======      ====                 =======      ====             =======      ====

</TABLE>

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

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


                                       11

<PAGE>

Management's Discussion, Continued

The following discussion  represents  management's  analysis of the consolidated
financial   condition  and  results  of  operations  of  Community  Banks,  Inc.
(Corporation)  and its four  wholly-owned  subsidiaries:  Community Banks,  N.A.
(CBNA); Peoples State Bank (PSB); Community Banks Investments,  Inc. (CBII); and
Community Banks Life Insurance Co. (CBLIC).

On March 30, 2001,  Community Banks, Inc.  completed its merger of The Glen Rock
State  Bank  (GR).  GR  has  five  banking   offices  located  in  York  County,
Pennsylvania.  The Corporation issued  approximately  1,205,000 shares of common
stock  for all of the  outstanding  common  stock of GR.  This  transaction  was
accounted  for as a  pooling  of  interests  and  combined  unaudited  financial
information is included in this report.

On June 27, 2001, the Corporation  purchased The Sentinel Agency,  Inc., a title
insurance  agency  located in  Harrisburg,  Pennsylvania.  The  acquisition  was
accounted   for  under  the   purchase   method  of   accounting   for  business
combinations..

RESULTS OF OPERATIONS

Net Interest Income:

Net interest income, the most significant source of operating revenue, increased
$851,000 or 4.0%  during the first six months of 2001  compared to the first six
months of 2000. Net interest  income for the second quarter of 2001 was $395,000
or 3.6% greater than the same period of 2000. Net interest  income is the income
which remains after deducting the interest expense  applicable to funds required
to support the earning assets from the total income generated by earning assets.
The ability to manage net interest  income in varied  economic  environments  is
critical  to the  success  of the  Corporation.  The  table on page 11  presents
average balances and taxable equivalent interest income and interest expense for
the three month  periods  ending June 30,  2001,  2000,  and 1999.  Net interest
income margin for the second  quarter of 2001 was 3.82% compared to 4.05% in the
second quarter of 2000 and 4.21% in the second quarter of 1999.  Interest income
to  earning  assets  decreased  from  8.18% in 2000 to  7.96% in 2001.  Interest
expense to earning assets increased from 4.13% to 4.14% during the same periods.

Total interest income on a tax equivalent basis increased  $2,247,000 or 9.7% in
the second  quarter of 2001,  compared to an increase of  $3,097,000 or 15.3% in
the second quarter of 2000. Interest and fees on loans on a tax equivalent basis
increased  $1,497,000 or 9.2% in the second quarter of 2001. As indicated by the
table the increase was primarily volume related as total average loans increased
$87,043,000  or  11.6%.  The  increase  of  $668,000  or 9.7% in tax  equivalent
interest and  dividends  on  investment  securities  was also  primarily  volume
related. The average balances of investment  securities increased $45,707,000 or
11.9% while the average balances of tax exempt securities increased  $47,303,000
or 51.7% in 2001. Interest and fees on loans on a tax equivalent basis increased
$2,554,000 or 18.6% in 2000. Most of this increase was volume related and caused
by an increase in average  balances of  $97,480,000  or 15.0%.  The  increase of
$562,000  or  8.9%  in tax  equivalent  interest  and  dividends  on  investment
securities  was volume and rate  related.  The average  balances  of  investment
securities increased $20,407,000 or 5.6% in 2000.

Total interest  expense  increased  $1,523,000 or 13.0% in the second quarter of
2001,  and  $2,362,000 or 25.1% in the second  quarter of 2000. A volume related
decrease  of  $49,000 or .03%  occurred  in  savings  interest  expense in 2001.
Significantly impacting this change was a conversion of a substantial portion of
NOW accounts to  non-interest  bearing  accounts.  The 2001 increase in interest
expense  was  impacted  by an  increase  of  $982,000  or 15.2% in time  deposit
interest  expense.  This increase in time deposit interest expense was primarily
volume driven as average balances  increased  $63,190,000 or 13.3% in comparison
to the second quarter of 2000. A volume and rate driven  increase of $590,000 or
17.1% in borrowed funds interest also affected total interest expense in 2001. A
significant  factor  affecting the increase in the second  quarter of 2000 was a
volume  related  increase of $1,264,000 or 24.4% in total time deposit  interest
expense.

Provision for Loan Losses:

The provision for loan losses  charged to income in the first six months of 2001


                                       12
<PAGE>


was  $2,444,000  compared  to  $886,000  in the  first six  months of 2000.  The
provision  for  loan  losses   charged  to  income  in  the  second  quarter  of
2001 was  $346,000  greater than the charge in the second  quarter of 2000.  Net
loan  charge-offs  were  $514,000  for the first six months of 2001  compared to
$373,000 for the comparable period of 2000. Net loan charge-offs as a percentage
of average net loans  approximated  .06% and .05% during the first six months of
2001 and 2000,  respectively.  Affecting  the increase in the provision for loan
losses in 2001 was an  increase  in total  nonperforming  loans  and other  real
estate of $2,176,000 or 23.6%.  A portion of the provision  charged to income in
2001 was associated with the growth of 11.6% in average net loans.


Other Income and Other Expenses:

Other income  exclusive  of security  gains  increased  $896,000 or 23.8% in the
first six  months of 2001  compared  to the same  period of 2000.  Other  income
exclusive of security gains increased $554,000 or 27.9% in the second quarter of
2001 in comparison to the same period of 2000. The increases in 2001 of $273,000
or 20.7% in service charges on deposit accounts  resulted from increased deposit
account  balances  and  related  ancillary  services  and  management's  renewed
emphasis on these functions.  Investment  security losses of $128,000 recognized
during  the first  quarter  of 2001 were more than  offset by gains of  $366,000
recognized in the second  quarter.  Gains and losses on debt  securities  result
from  the  Corporation's  investment  portfolio  and  balance  sheet  management
strategies  while equity security gains and losses  generally relate to holdings
of  other  financial  institutions.   Most  of  the  investment  security  gains
recognized  in  2000  were  associated  with  equity   securities  of  financial
institutions. Increases in insurance premiums income of $83,000 or 14.8% through
the first six  months of 2001 are a  reflection  of  consumer  loan  demand  and
additional  credit life and accident and health insurance  premiums  realized at
CBLIC. Gains on loan sales increased  dramatically in the second quarter of 2001
as a result of increased demand for fixed-rate real estate loans. The fair value
of loans held for sale  approximated  their carrying values at June 30, 2001 and
2000.  The  increase in other income in 2001 of $77,000 or 14.5% was impacted by
increases in life insurance policy premiums.

The increase in other  expenses  during the first half of 2001 of  $3,737,000 or
24.8% was significantly  impacted by merger and  restructuring  related expenses
associated  with the  acquisition  of The Glen Rock  State  Bank.  Increases  in
salaries and employee  benefits of $1,160,000 or 14.4% and occupancy  expense of
$432,000  or 18.8% were  affected  by the  openings in 2000 of three new banking
offices  and the hiring of new  personnel.  Occupancy  expense for the first six
months of 2001 was also impacted by the GR merger.  The table on page 7 provides
additional detail associated with the merger and restructuring  related expenses
recognized  during the first  quarter of 2001.  An accrual  reversal of $101,000
associated  with the merger and  restructuring  costs was recognized  during the
second  quarter  of  2001.  Most of this  amount  related  to the  unanticipated
retention of certain GR employees  and savings of legal and  professional  fees.
Other operating expense increased $268,000 or 6.1% in 2001 compared to the first
six  months of 2000.  Affecting  these  changes  were the  increases  in banking
facilities and additional marketing and business development initiatives.

Provision for Income Taxes:

An increase in the relationship of tax-free income to pre-tax income resulted in
a significant  reduction in the  Corporation's  effective tax rate for the first
half of 2001. Effective tax rates approximated 17.7% and 25.3% for the first six
months of 2001 and 2000, respectively.

Net Income:

The previously  described factors contributed to a decline in net income of $2.2
million or 31.1% for the six months  ended June 30,  2001  compared to the first
six  months  of 2000.  Net  income  for the three  months  ended  June 30,  2001
increased $494,000 or 14.0% over the same period of 2000.


                                       13

<PAGE>

Management's Discussion, Continued

FINANCIAL CONDITION

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

<TABLE>
<S>                                                                        <C>                      <C>                 <C>
                                                                                                          Increase (Decrease)
                                                                              Balance                            Since
                                                                           June 30, 2001                  December 31, 2000
                                                                           -------------                  -------------------
                                                                                        (dollars in thousands)
                                                                                                     Amount                 %
                                                                                                     ------                 -
Funding Sources:

Deposits and borrowed funds:

Non-interest bearing...........................................            $  153,088               $ (2,708)              (1.7)%
Interest-bearing...............................................               836,134                 72,689                9.5
                                                                           ----------               --------               ----
   Total deposits..............................................               989,222                 69,981                7.6

Borrowed funds.................................................               279,006                  3,300                1.2
Other liabilities..............................................                12,156                  2,368               24.2
Shareholders' equity...........................................               110,928                  6,950                6.7
                                                                           ----------               --------               ----
   Total sources...............................................            $1,391,312                $82,599                6.3 %
                                                                           ==========               ========               ====
Funding uses:

Interest earning assets:


Short-term investments.........................................          $     10,853               $  2,005               22.7 %
Investment securities..........................................               444,553                 54,734               14.0
Loans, net of unearned income..................................               844,122                 26,529                3.2
                                                                           ----------               --------               ----
   Total interest earning assets...............................             1,299,528                 83,268                6.8

Cash and due from banks........................................                38,987                 (3,179)              (7.5)
Other assets...................................................                52,797                  2,510                5.0
                                                                           ----------               --------               ----
   Total uses..................................................            $1,391,312                $82,599                6.3 %
                                                                           ==========               ========               ====

</TABLE>

                                       14

<PAGE>

Management's Discussion, Continued

Balance Sheet Data:

The Corporation's balance sheet continued to grow in 2001 with assets at June 30
reaching $1.4 billion,  an increase of $82.6 million or 6.3% over year-end 2000.
As indicated by the table on page 14,  deposits were the primary funding source,
while investments  represented most of the use of funds.  Average earning assets
(see page 11) for the  second  quarter  of 2001  were  $141.6  million  or 12.4%
greater  than average  earning  assets for the second  quarter of 2000.  Average
interest  bearing   liabilities   increased  $51.3  million  or  4.9%.   Average
non-interest bearing demand deposits increased $78.9 million or 112.3% for these
same periods.  Average earning assets approximated 93.9% of total assets for the
second  quarter of 2001 and 2000.  Changes in the  composition of earning assets
reflect   management's  attempt  to  respond  to  fluctuating  loan  demand  and
corresponding policies relating to liquidity and asset/liability management.

The  Corporation  actively  manages its  investment  portfolio  and  accordingly
classifies  all  investment  securities  as available  for sale.  Under  current
policy,  if management has the intent and the Corporation has the ability at the
time of purchase to hold securities until maturity, securities are classified as
held-to-maturity   investments  and  carried  at  amortized   historical   cost.
Securities to be held for indefinite periods of time and not intended to be held
to maturity  are  classified  as  available  for sale and carried at fair value.
Securities  held  for  indefinite   periods  of  time  include  securities  that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates,  resultant prepayment
risk and other factors  related to interest rate and resultant  prepayment  risk
changes.

At June  30,  2001 and  December  31,  2000,  management  classified  investment
securities with amortized costs and fair values of $441,873,000 and $444,553,000
and  $390,887,000  and  $389,819,000,   respectively,  as  available  for  sale.
Obligations  of  states  and  political  subdivisions  experienced  the  largest
increases in balances from year-end 2000 to June 30, 2001. Affecting the changes
in  unrealized  gains and  losses was a decline in  interest  rates in 2001.  No
securities  were  considered  held for  trading  purposes  at June 30,  2001 and
December 31, 2000.

At June 30, 2000 the net unrealized gain on investments  available for sale, net
of tax,  was  $1,742,000.  At December  31,  2000,  the net  unrealized  loss on
investments  available  for sale,  net of tax was  $694,000.  These amounts were
reflected in shareholders' equity accordingly.

Net loans increased $23,169,000 or 2.9% from December 31, 2000 to June 30, 2001.
During this period commercial loans increased $12,200,000 or 9.0% while personal
loans increased $9,275,000 or 8.3%

The allowance for loan losses  increased  $1,930,000 or 18.7% from year-end 2000
to June 30,  2001.  Total  non-performing  loans  approximated  $10,861,000  and
$6,660,000,   as  of  June  30,  2001  and  December  31,  2000,   respectively.
Contributing to the increase in non-performing  loans in 2001 was an increase of
$1,566,000 in  non-performing  commercial loans and an increase of $2,508,000 in
non-performing  mortgage loans. The ratio of nonaccrual loans, other real estate
owned,  restructured loans, and accruing loans contractually past due 90 days or
more to total  assets  approximated  .82% and .54% at June 30, 2001 and December
31, 2000,  respectively.  The allowance for loan losses to loans net of unearned
income  approximated  1.46% and 1.27% at June 30, 2001 and  December  31,  2000,
respectively.

The Corporation recognized  approximately $165,000 of goodwill during the second
quarter of 2001 associated with the acquisition of The Sentinel Agency, Inc.

The increase in the balance of loans held for sale at June 30, 2001  reflects an
increase in demand for fixed rate mortgage loans.  Accrued  interest  receivable
and other assets were affected by an increase in accounts receivable  associated
with loan sales.

Total deposits increased  $69,981,000 or 7.6% from December 31, 2000 to June 30,
2001.  Contributing  to this increase were  increases of $35,028,000 or 13.6% in
savings  deposits and  $37,661,000 or 7.4% in time deposits.  New certificate of
deposit products affected the increase in time deposits.

                                       15

<PAGE>

Management's Discussion, Continued

Management converted a significant portion of short-term borrowings to long-term
debt during the first quarter of 2001. At June 30, 2001  long-term debt totaling
$271,997,000  included  borrowings from the Federal Home Loan Bank of Pittsburgh
of $259,880,000  and repurchase  agreements  totaling  $12,117,000 at a weighted
average interest rate of 5.82%.

The  increase  of  $2,368,000  or 24.2% in accrued  interest  payable  and other
liabilities  during the first six months of 2001 was  affected by an increase in
interest-bearing deposits and liabilities associated with the acquisition of The
Sentinel Agency.

Stockholders' Equity:

Stockholders' equity increased $6,950,000 or 6.7% from December 31, 2000 to June
30, 2001. A portion of this  increase can be attributed to the change in the net
unrealized  gain (loss) on  investment  securities  available  for sale,  net of
taxes.  The  accumulated   other   comprehensive   income  (loss)  reflected  in
stockholder's  equity changed from  $(694,000) at year-end 2000 to $1,742,000 at
June 30, 2001.  Much of this change was a function of declines in interest rates
and corresponding  increases in fair values of debt securities.  The Corporation
reissued  approximately  140,000  shares of  treasury  stock  during  the second
quarter of 2001. At June 30, 2001 and December 31, 2000 treasury  shares totaled
160,000 and 300,000, respectively.

Liquidity:

Effective  liquidity  management ensures that the Corporation has the ability to
meet the cash needs of customers,  provide a cushion for unforseen  obligations,
and  take  advantage  of  market   opportunities.   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.  A continuous review of net liquid assets is
conducted to assure  appropriate  cash flow to meet needs and  obligations  in a
timely manner.

Typically, the Corporation's most significant funding requirement is loan demand
which is primarily funded through deposit growth.  Generally, any deposit growth
not used in funding  loan  demand is invested  in  short-term,  interest-bearing
deposits or longer term investments. These short-term investments as well as the
investment portfolio securities are a source of liquidity to fund loan demand.

For the six months ended June 30, 2001,  financing  activities  provided cash of
$72,956,000. Deposit growth and long-term debt accounted for the largest portion
of this funding source.

Net cash used in investing  activities totaled  $77,467,000.  The primary use of
funds in 2001 was the purchase of investment securities of $135,024,000.

Forward Outlook:

This document  contains  certain  forward-looking  statements.  These statements
which may relate to market  risks,  growth  strategies,  asset  quality,  income
growth,  organizational  structure,  and other financial  matters are subject to
various  uncertainties.  Accordingly,  actual results may differ materially from
estimates incorporated in such statements.

Effects on Inflation:

The constantly changing economic  environment affects all business  enterprises.
Changes in the economy,  however affect the banking  industry  differently  than
other  industries.  A bank's assets and  liabilities  are primarily  monetary in
nature and values are established without regard to future price changes.

Banks,  unlike  industrial  corporations  are not  required to provide for large
capital expenditures in the form of premises, equipment and inventory.  Interest
rate changes and the actions of the Federal  Reserve Board have a greater impact
on a bank's  operations  than do the effects of inflation.  Although  occasional
deviations may occur, it is management's policy to generally attempt to maintain
rate-sensitive assets at a level approximating rate-sensitive liabilities. Based
on a one-year  parameter,  this  relationship  approximated  107% as of June 30,
2001.

                                       16
<PAGE>

Management's Discussion, Continued

Management,  therefore,  anticipates  that any decline in  interest  rates could
negatively  impact earnings of the  Corporation.  Conversely,  management may be
able to increase  rates on certain  earning  assets more  rapidly  than those of
interest-bearing  liabilities if a significant  increase in interest rates would
occur.  This  may  result  in an  increase  in the net  interest  margin  of the
Corporation.

Recent Accounting Pronouncements:

On July 20, 2001, the Financial  Accounting Standards Board issued Statements of
Financial  Accounting  Standards No.141 (FAS 141),  Business  Combinations,  and
No.142 (FAS 142), Goodwill and Other Intangibles Assets.

FAS 141 supercedes  Accounting Principles Board Opinion No.16 (APB 16), Business
Combinations.  The most  significant  changes made by FAS 141 are: (1) requiring
that the purchase  method of  accounting  be used for all business  combinations
initiated  after June 30,  2001,  (2)  establishing  specific  criteria  for the
recognition of intangible  assets  separately  from goodwill,  and (3) requiring
unallocated  negative goodwill to be written off immediately as an extraordinary
gain.  Management has reviewed FAS 141 and has determined that the statement has
no effect on its current financial position or results of operations.

FAS 142 supercedes APB 17, Intangible  Assets.  FAS 142 primarily  addresses the
accounting for goodwill and intangible assets  subsequent to their  acquisition.
The most  significant  changes made by FAS 142 are: (1) goodwill and  indefinite
lived intangible assets will no longer be amortized, (2) goodwill will be tested
for  impairment at least  annually at the reporting  unit level,  (3) intangible
assets deemed to have an indefinite  life will be tested for impairment at least
annually, and (4) the amortization period of intangible assets with finite lives
will no longer be  limited to forty  years.  The  provisions  of FAS 142 will be
effective for fiscal years beginning after December 15, 2001. Management has not
yet  determined  the effect of adopting FAS 141, and is unable to anticipate its
effect on the Company's financial condition or results of operations.

                                       17
<PAGE>

                     COMMUNITY BANKS, INC. and SUBSIDIARIES

                   PART II - OTHER INFORMATION AND SIGNATURES

Item 4. Submission of Matters to Vote of Security Holders

     The annual meeting of shareholders of Community Banks, Inc. was held on May
1, 2001 for the purpose of considering and voting upon the following matters:

     1. To elect four (4) directors: Thomas W. Long, Donald L. Miller, Samuel E.
Cooper,  and Eddie L.  Dunklebarger,  to serve until the 2005 annual  meeting of
shareholders.  Each director received  affirmative  votes  representing at least
68.95% of the shares outstanding.

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

          (a) Exhibits - none

          (b)  Registrant  filed the  following  reports  on Form 8-K during the
          quarter ending June 30, 2001.

          Reports Dated March 30, 2001

          Registrant  reported  the  merger of The Glen Rock  State Bank of Glen
     Rock.  Incorporated  by  reference  in Form  8-K/A-1  were  the  Pro  Forma
     Unaudited  Consolidated Statement of Income for the year ended December 31,
     2000 and the Pro Forma Unaudited  Combined Balance Sheet as of December 31,
     2000.

          Report Dated April 30, 2001

          Registrant  announced  an  agreement  to purchase all the stock of The
     Sentinel  Agency,  Inc., a  Pennsylvania  corporation  engaged in the title
     insurance agency business.


                                   SIGNATURES

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

                             COMMUNITY BANKS, INC.
                                  (Registrant)

Date      August 10, 2001                             /S/ Eddie L. Dunklebarger
     -------------------------                        -------------------------
                                                        Eddie L. Dunklebarger
                                                             President
                                                      (Chief Executive Officer)

Date      August 10, 2001                             /S/ Terry L. Burrows
     -------------------------                        -------------------------
                                                        Terry L. Burrows
                                                       Executive Vice President
                                                       (Chief Financial Officer)

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