SECURITIES AND EXCHANGE COMMISSION
                                         
                             Washington, D.C.  20549
                                         
                                    FORM 10-Q
                                         
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                                         
                                     OF 1934
                                         
                                         
                       For the Quarter Ended March 31, 1998
                                         
                                         
                                   No. 0-15786             
                             (Commission File Number)
                                         
                                         
                              COMMUNITY BANKS, INC.                       
              (Exact Name of Registrant as Specified in its Charter)
                                         
   
          PENNSYLVANIA                                       23-2251762       
    (State of Incorporation)                          (IRS Employer ID Number)
   
          
          150 Market Street, Millersburg, PA                 17061         
      (Address of Principal Executive Offices)              (Zip Code)
                                         
                                         
                                  (717) 692-4781           
                         (Registrant's Telephone Number)
                                         
                                         
   
   
   Indicate by check mark whether the registrant (1) has filed all reports 
   required to be filed by Sections 12, 13, or 15 (d) of the Securities
   Exchange Act of 1934 during the preceding 12 months (or for such shorter
   period that the registrant was required to file such reports) and (2) has
   been subject to such filing requirements for the past 90 days.
   
   
                                                   Yes  X     No     
   
                Number of Shares Outstanding as of March 31, 1998.
                                         
      CAPITAL STOCK-COMMON                                    4,365,708      
       (Title of Class)                                 (Outstanding Shares)
   
   
   
   
   
   
     
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                   Index 10-Q
                                        
     
     Part I
     
     Financial Information.............................................1
     
     Consolidated Balance Sheets.......................................2
     
     Consolidated Statements of Income.................................3
     
     Consolidated Statements of Changes in Stockholders' Equity........4
     
     Consolidated Statements of Cash Flows.............................5
     
     Notes to Consolidated Financial Statements........................6-9
     
     Management's Discussion and Analysis of Financial
        Condition and Results of Operation............................10-13
     
     
     
     Part II
     
     Other information and Signatures..................................14
     
     
     
     
     
     
     
     
     
     
     
                         PART I - FINANCIAL INFORMATION
                                        
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                        
     The following financial information sets forth the operations of
     Community Banks, Inc. and Subsidiaries for the three month periods
     ending March 31, 1998 and 1997.
     
     
     In the opinion of management, the following Consolidated Balance
     Sheets and related Consolidated Statements of Income 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-
     
     




   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED BALANCE SHEETS
   (unaudited)
   (dollars in thousands except per share data)
   
                                              
                                                March 31,         December 31,
                                                  1998                1997    
                                               
                                   
   ASSETS                     
   
   Cash and due from banks...................     $ 21,764         $ 28,015
   Interest-bearing time deposits in other 
      banks..................................        2,040            2,406
   Investment securities, available for sale
      (market value).........................      217,094          219,284
   Fed funds sold............................       10,950            2,100
   Loans.....................................      455,752          456,460
   Less:  Unearned income....................      (11,313)         (12,429)
          Allowance for loan losses..........       (6,350)          (6,270)
          Net loans..........................      438,089          437,761 
   Premises and equipment, net...............       14,082           13,963
   Goodwill..................................          846              906
   Other real estate owned...................          906              866
   Loans held for sale.......................        3,497            2,641
   Accrued interest receivable and other         
      assets.................................       11,895           11,520
    
      Total assets...........................     $721,163         $719,462 
                                                  ========         ========
   
   LIABILITIES
   
   Deposits:
      Demand.................................     $ 44,295         $ 44,181
      Savings................................      233,760          226,377
      Time...................................      245,931          248,998
      Time in denominations of $100,000 or
       more..................................       34,355           30,199  
      Total deposits.........................      558,341          549,755
   Short-term borrowings.....................        2,641           10,540 
   Long-term debt............................       77,269           77,280
   Accrued interest payable and other 
      liabilities............................        7,743            7,874
      
      Total liabilities......................      645,994          645,449
   
   
   STOCKHOLDERS' EQUITY
   
   Preferred stock, no par value; 500,000
      shares authorized; no shares issued
      and outstanding........................        ---              ---
   Common stock-$5.00 par value; 5,000,000
      shares authorized; 4,409,000 and
      4,405,000 shares issued in 1998 and
      1997, respectively.....................       22,046           22,026
   Surplus...................................       28,876           28,647
   Retained earnings.........................       22,582           21,219
   Other accumulated comprehensive income,
    net of tax of $1,433,000 and $1,668,000,
     respectively............................        2,781            3,237  
   Less:  Treasury stock of 44,000 shares at
      cost...................................       (1,116)          (1,116) 
      Total stockholders' equity.............       75,169           74,013 
      Total liabilities and stockholders'
       equity................................     $721,163         $719,462
                                                  ========         ========
   
   
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
                                    
   All periods reflect the combined data of Community Banks, Inc. and the
   Peoples State Bank.
                                     -2-
   


   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF INCOME
   (unaudited)
   (dollars in thousands except per share data)
   
   
                                                        Three Months Ended
                                                             March 31,    
                                                          1998       1997 
                                                                            
   Interest income:
   Interest and fees on loans.................         $ 9,911     $ 9,197
   Interest and dividends on investment 
    securities:
       Taxable................................           2,632       2,683
       Exempt from federal income tax.........             761         430
   Fed funds interest.........................             124          77
   Other interest income......................              28          19
        Total interest income.................          13,456      12,406
   
   Interest expense:
   Interest on deposits:  
        Savings...............................           1,350       1,383
        Time..................................           3,277       3,268
        Time in denominations of $100,000 or
         more.................................             443         391
   Interest on short-term borrowings and
    long-term debt............................             829         558
   Fed funds purchased and repo interest......             336         201
        Total interest expense................           6,235       5,801
        Net interest income...................           7,221       6,605
   Provision for loan losses..................             193         390
        Net interest income after provision 
         for loan losses......................           7,028       6,215
   Other income:
        Trust department income...............              77          71
        Service charges on deposit accounts...             331         299
        Other service charges, commissions
         and fees.............................             172         142
        Investment security gains ............             270         373
        Income on insurance premiums..........             131         144
        Gains on mortgage sales...............             142          40
        Other income..........................             134         123
             Total other income...............           1,257       1,192
   
   Other expenses:
        Salaries and employee benefits........           2,512       2,237
     
        Net occupancy expense.................             775         723
        Operating expense of insurance
          subsidiary..........................             119         130
        Other operating expense...............           1,526       1,305
             Total other expense..............           4,932       4,395
             Income before income taxes.......           3,353       3,012
   Provision for income taxes.................             976         909
   
             Net income.......................         $ 2,377     $ 2,103
                                                       =======     =======      
   Earnings per share: 
      Basic...................................         $   .36      $  .32
      Diluted.................................         $   .35      $  .32
   Dividends paid per share...................         $   .14      $  .12
   
   Per share data has been adjusted to reflect stock dividends and splits.
   
   
   The accompanying notes are an integral part of the consolidated financial 
   statements.
                                      
   All periods reflect the combined data of Community Banks, Inc. and The 
   Peoples State Bank.
   
                                         -3-      

<TABLE>
   
   Community Banks, Inc. and Subsidiaries
   Consolidated Statements of Changes in Stockholders' Equity
   (Dollars in thousands except per share data)
   
<CAPTION>   
    
                                                           Three Month Periods Ended March 31
                                                                                
                                                                                 Accumulated
                                                                                    Other
                                            Common                   Retained    Comprehensive   Treasury    Total
                                            Stock      Surplus       Earnings       Income        Stock      Equity
   
 <S>                                      <C>         <C>            <C>          <C>          <C>         <C>         
   Balance, January 1, 1997..............  $20,954     $21,624        $21,756      $   166      $  (421)    $64,079 
      Comprehensive income:
         Net income......................                               2,103                                 2,103
         Change in unrealized gain (loss)
          on securities, net of tax of
           $544,000......................                                           (1,056)                  (1,056)
          Total comprehensive income.....                                                                     1,047
   Cash dividends........................                                (753)                                 (753)
   5% stock dividend.....................      723       3,905         (4,628)
   Issuance of additional shares.........      198       1,863            (57)                                2,004
   
   Balance, March 31, 1997...............  $21,875     $27,392        $18,421      $  (890)     $  (421)    $66,377          
                                           =======     =======        =======      =======      =======     =======  
   
   Balance, January 1, 1998..............  $22,026     $28,647        $21,219      $ 3,237      $(1,116)    $74,013  
      Comprehensive income:
         Net income......................                               2,377                                 2,377
         Change in unrealized gain (loss)
          on securities, net of tax of
           $235,000......................                                             (456)                    (456)
          Total comprehensive income.....                                                                     1,921  
   Cash dividends........................                                (923)                                 (923)
   Issuance of additional shares.........       20         229            (91)                                  158
   
   Balance, March 31, 1998                 $22,046     $28,876        $22,582      $ 2,781      $(1,116)    $75,169
                                           =======     =======        =======      =======      =======     =======  
   
   
   
   
   Per share data for all periods has been restated to reflect stock 
   dividends and splits.
   
   
   The accompanying notes are an integral part of the consolidated 
   financial statements.
   
   
   All periods reflect the combined data of Community Banks, Inc. and 
   The Peoples State Bank.
   
   
   
   
   
   
   
   
   
   
                                                      -4-
   
   </TABLE>
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF CASH FLOWS
   (unaudited)
   (dollars in thousands)
   
                                                          Three Months Ended
                                                               March 31,    
                                                            1998       1997   
   
   
   Operating Activities:
      Net income......................................   $ 2,377      $ 2,103 
      Adjustments to reconcile net income to net
       cash provided by operating activities:
         Provision for loan losses....................       193          390
         Provision for depreciation and amortization..       388          385
         Amortization of goodwill.....................        60           60
         Investment security gains....................      (270)        (373)
         Loans originated for sale....................    (8,395)         (89) 
         Proceeds from sale of loans..................     7,681        1,563
         Gains on mortgage sales......................      (142)         (40)
         Increase in other assets.....................      (736)      (1,239)
         Increase in accrued interest payable and
          other liabilities...........................       105          188 
           Net cash provided by operating activities..     1,261        2,948  
   
   Investing Activities:
      Net decrease in interest-bearing time                    
       deposits in other banks........................       366          836
      Proceeds from sales of investment           
       securities.....................................       396        8,931
      Proceeds from maturities of investment 
       securities.....................................    31,577        6,087
      Purchases of investment securities..............   (30,205)     (21,463) 
      Net increase in total loans.....................      (200)      (5,498)
      Purchases of premises and equipment.............      (507)        (948)
           Net cash used by investing activities......     1,427      (12,055)
   
   Financing Activities:
      Net increase in total deposits..................     8,586       13,107  
      Net decrease in short-term borrowings...........    (7,899)     (12,235)
      Proceeds from issuance of long-term debt........     3,000       10,000
      Repayment of long-term debt.....................    (3,011)      (5,005)
      Cash dividends..................................      (923)        (753)
      Purchases of treasury stock.....................       ---          ---
      Proceeds from issuance of common stock..........       158        2,004   
           Net cash provided (used) by financing 
            activities................................       (89)       7,118
       
           Increase (decrease) in cash and cash
            equivalents...............................     2,599       (1,989)
            
            
   Cash and cash equivalents at beginning of period...    30,115       23,699
   Cash and cash equivalents at end of period.........   $32,714      $21,710 
                                                         =======      =======
   
   
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
   
   
   All periods reflect the combined data of Community Banks, Inc. and The
   Peoples State Bank.  
   
   
                                      -5-      
   
   
   
   
   
   
                                           
   Community Banks, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (unaudited)
   (dollars in thousands)
                                          
   
   1.  Accounting Policies
             The information contained in this report is unaudited and is
   subject to future adjustments. However, in the opinion of management, the
   information reflects all adjustments necessary for a fair statement of
   results for the three month periods ended March 31, 1998 and 1997.
   
             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 page 9 of the 1997 Annual Report to shareholders.  
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                   -6-
   
   
   
   
   
   
   2.  Investment Securities
            The amortized cost and estimated market values of investment
   securities at March 31, 1998 and December 31, 1997, were as follows:
   
                                                         March 31,
                                                           1998   
                                                           
                                                                                
                                                                  Estimated
                                                Amortized           Fair
                                                  Cost              Value  
   
   U.S. Treasury securities and obligations
    of U.S. government corporations and
     agencies...............................    $ 51,368          $ 51,544
   Mortgage-backed U.S. government 
    agencies................................      92,400            92,979
   Obligations of states and political
    subdivisions............................      61,737            63,059
   Corporate securities.....................       1,099             1,119  
   Equity securities........................       6,276             8,393 
         Total..............................    $212,880          $217,094 
                                                ========          ======== 
   
                                                       December 31,
                                                           1997    
                                                                          
   U.S. Treasury securities and obligations 
    of U.S. government corporations and
     agencies...............................    $ 66,940          $ 67,389
   Mortgage-backed U.S. government 
    agencies................................      84,568            85,137
   Obligations of states and political
    subdivisions............................      55,248            56,633
   Corporate securities.....................       1,244             1,278   
   Equity securities........................       6,379             8,847
         Total..............................    $214,379          $219,284
                                                ========          ======== 
                                        
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                       -7-           
   
                                       





                                      

   
<TABLE>   
   
   
   3.  Allowance for loan losses
            Changes in the allowance for loan losses are as follows:
<CAPTION>   
                                         Three months ended    Year Ended    Three Months ended
                                               March 31,       December 31,      March 31,
                                                1998               1997             1997      
    
<S>                                          <C>                  <C>            <C>                             
   Balance, January 1..................       $6,270               $5,561         $5,561
   Provision for loan losses...........          193                1,317            390
   Loan charge-offs....................         (279)              (1,466)          (266)
   Recoveries..........................          166                  858            240
   
   Balance, March 31, 1998, December 
    31, 1997, and March 31, 1997.......       $6,350               $6,270         $5,925
                                              ======               ======         ======
   
                           NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
   
                                              March 31,          December 31,      March 31,
                                                1998                 1997            1997    
   
   Loans past due 90 days or more
    and still accruing interest:
      Commercial, financial and 
       agricultural...................           $331               $   53           ---
      Mortgages.......................            413                  405          $631
      Personal installment............            230                   72           198
      Other...........................             15                   21             4
                                                  989                  551           833
   
   Loans on which accrual of interest
    has been discontinued:
      Commercial, financial and
       agricultural....................           637                  926           782 
      Mortgages........................         3,381                3,388         3,845
      Other............................           363                  300           282
                                                4,381                4,614         4,909
    
   Other real estate...................           906                  866           762
      Total............................        $6,276               $6,031        $6,504
                                               ======               ======        ======
   
   (a)  The determination to discontinue the accrual of interest on 
        nonperforming loans is made on the individual case basis. Such 
        factors as the character and size of the loan, quality of the 
        collateral and the historical creditworthiness of the borrower and/or 
        guarantors are considered by management in assessing the 
        collectibility of such amounts.  
   
   Impaired Loans
        At March 31, 1998 and December 31, 1997 the Corporation recorded no 
   investment in impaired loans or related valuation allowance. For the three 
   month periods ended March 31, 1998 and 1997 the average balance of 
   impaired loans was negligible. In addition, the Corporation recognized 
   no interest on impaired loans on the cash basis for the three month
   periods ended March 31, 1998 and 1997.
   
   
   
   
   
   
                                           -8-
   
   </TABLE>
   
   
   
   
   
   
   
   
   
   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 $575,000 and $282,000
   and $6,365,000 and $5,407,000 for income taxes and interest, respectively,
   for each of the three month periods ended March 31, 1998 and 1997.
   
            Excluded from the consolidated statements of cash flows for the
   periods ended March 31, 1998 and 1997 was the effect of certain non-cash
   activities. The company acquired real estate through foreclosure totalling
   $321,000 and $116,000, respectively. The company also recorded a decrease in
   deferred tax liabilities of $235,000 in 1998. A decrease in deferred tax
   liabilities of $85,000 and an increase in deferred tax assets of $458,000
   were recognized in 1997. These variations related to the effects of changes
   in the net unrealized gain (loss) on investment securities available for
   sale.
   
   <TABLE>
   5.  Earnings Per Share:
   
            The following table sets forth the calculation of Basic and Diluted
   Earnings Per Share for the periods indicated:
   <CAPTION>
                                                                    Three Months Ended March 31,          
                                                               1998                         1997          
                                                                   Per-Share                    Per-Share
                                                     Income  Shares  Amount   Income   Shares     Amount  
                                                               (in thousands except per share data)
   <S>                                              <C>      <C>     <C>        <C>       <C>      <C>   
   Basic EPS:
   Income available to common stockholders...        $2,377   6,538   $.36       $2,103    6,521    $.32  
   Effect of Dilutive Securities:                                     ====                          ====     
   Incentive stock options outstanding.......                   173                          154
   Diluted EPS:
   Income available to common stockholders
      & assumed conversion...................        $2,377   6,711   $.35       $2,103    6,675    $.32
                                                     ======   =====   ====       ======    =====    ====
   
   Per share data has been adjusted to reflect a three for two stock split 
payable May 8,1998.
   
   All periods reflect the combined data of Community Banks, Inc. and The 
Peoples State Bank.
   
        
   
   
   
   
   
   
   
   
   
   
   
</TABLE>   
   
   
   
   
     
                                                   -9-
   
   
   
   
   
   
   
   
   
   
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      



                                       



   
   
   
                    Community Banks, Inc. and Subsidiaries
                     Management's Discussion and Analysis
               of Financial Condition and Results of Operations
                                       
   Results of Operations
                                       
        Net interest income after provision for loan losses for the first
   three months of 1998 was $813,000 or 13.1% greater than 1997. Total
   interest income for the first three months increased $1,050,000 or 8.5%
   while total interest expense increased $434,000 or 7.5% over the
   comparable period of 1997. The amount of net interest income and total
   interest income are dependent upon many factors including the volume of
   earning assets and interest bearing liabilities, the level of and
   changes in interest rates and levels of non-performing assets. The cost
   of interest bearing liabilities changes with the amount of funds
   necessary to support earning assets, the rates paid to attract and
   maintain deposits, rates paid on borrowed funds and the level of
   non-interest bearing demand deposits and equity capital. The increases
   in net interest income and total interest income were impacted by an
   increase in average earning assets of approximately $59,456,000 or 9.7%
   while average interest bearing liabilities increased  $43,445,000 or
   8.0% for the first three months of 1998 over the comparable period of
   1997. Impacting the increase in average earning assets were increases in
   average loan balances of 8.4%. The average yields realized on earning
   assets for the first three months approximated 8.4% in 1998 and 1997.
   The average costs of interest-bearing liabilities approximated 4.3%. Net
   interest margins, on a tax equivalent basis for the first three months
   approximated 4.6% and 4.5% in 1998 and 1997, respectively. The provision
   for loan losses charged to income decreased 50.5% in 1998. Total loans
   past due 90 days and still accruing interest, non-performing loans, and
   other real estate approximated $6,276,000 and $6,504,000, respectively,
   as of March 31, 1998 and March 31, 1997. The balance of the allowance
   for loan losses increased from $5,925,000 at March 31, 1997 to
   $6,350,000 at March 31, 1998.   
   
        Total other income for the first three months of 1998 was $65,000
   or 5.5% more than total other income for the first three months of 1997.
   Affecting this change were security gains of $270,000 and $373,000 
   recognized in 1998 and 1997, respectively. Gains recognized on mortgage
   sales totalled $142,000 and $40,000 in 1998 and 1997, respectively.
   Loans held for sale are comprised for the most part of fixed-rate real
   estate and education loans extended specifically for resale. Demand for
   these products has been greater in 1998 than 1997. Loans held for sale
   as of March 31, 1998 totalled $3,497,000. The market value of these
   loans approximated book value at that time.
   
        Total other expenses for the first three months of 1998 increased
   $537,000 or 12.2%. Contributing factors were increases of $275,000 or
   12.3% in salaries and employee benefits, $52,000 or 7.2% in net
   occupancy expense, and $221,000 or 16.9% in other operating expense.
   These increases were affected by the opening of new banking offices and
   the recognition of certain retirement plan obligations.
   
        The provision for income taxes increased $67,000  or 7.4% for the
   first three months of 1998 in comparison to the first three months of
   1997. Affecting this change was an increase in the relative amount of
   tax-free income in 1998. The effective tax rates approximated 29.1% and
   30.2% for the respective periods.  
   
        The previously described factors contributed to a net increase of
   $274,000 or 13.0% in net income for the three month period ended March
   31, 1998.
   
        
                                   -10-
   
   
   
   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.
                                     
                                                         Increase (Decrease)
                                         Balance                since
                                      March 31, 1998        December 31, 1997 
                                              (dollars in thousands)
                                         
   
                                                            Amount         %
   Funding Sources:
   
   Deposits and borrowed funds:
   
    Non-interest bearing............    $ 44,295           $   113        .3%
    Interest bearing................     514,046             8,472       1.7  
       Total deposits...............     558,341             8,586       1.6
   
    Borrowed funds..................      79,910            (7,910)     (9.0)
   Other liabilities................       7,743              (131)     (1.7)
   Shareholders' equity.............      75,169             1,156       1.6  
   
      Total sources.................    $721,163           $ 1,701        .2% 
                                        ========           =======      ==== 
   
   Funding uses:
   
   Interest earning assets:
   
    Short-term investments..........    $ 12,990           $ 8,484     188.3%
    Investment securities...........     217,094            (2,190)     (1.0)
    Loans, net of unearned income...     444,439               408        .1
                                    
      Total interest earning assets.     674,523             6,702       1.0 
   
   Cash and due from banks..........      21,764            (6,251)    (22.3)
   Other assets.....................      24,876             1,250       5.3
   
      Total uses....................    $721,163           $ 1,701        .2%
                                        ========           =======     =====  
   
   
    
      
   
   
   
               
   
   
                                     -11-       
   
   
   Management's Discussion, Continued
   
   
   
   
        As of March 31, 1998 cash and due from banks was $6,251,000 or
   22.3% less than it was at December 31, 1997. Interest-bearing time
   deposits in other banks and investment securities decreased $2,556,000
   or 1.2% while fed funds sold increased $8,850,000. The approximate
   market value of debt securities was $2,097,000 greater than amortized
   cost at March 31, 1998. The approximate market value of debt securities
   was $2,437,000 greater than amortized cost at December 31, 1997.
   Securities to be held for indefinite periods of time and not intended to
   be held to maturity or on a long-term basis are classified as available
   for sale and carried at market value. Securities held for indefinite
   periods of time include securities that management intends to use as
   part of its asset/liability management strategy and that may be sold in
   response to changes in interest rates, resultant prepayment risk and
   other factors related to interest rate and resultant prepayment risk
   changes. At March 31, 1998 and December 31, 1997, management classified
   investment securities with amortized costs and market values of
   $212,880,000 and $217,094,000, and $214,379,000 and $219,284,000,
   respectively, as available for sale. Net loans increased $328,000 or
   0.1% from December 31, 1997 to March 31, 1998. Affecting this change
   were decreases in real estate loans of $477,000 and consumer loans of
   $1,731,000. Commercial loans increased $3,106,000 during the period. The
   allowance for loan losses approximated 1.43% and 1.41% of net loans at
   March 31, 1998 and December 31, 1997. Much of the increase in net
   premises and equipment of $119,000 related to new banking offices.
   Goodwill continues to be amortized at an annualized rate of $240,000. As
   previously noted, Community Banks, Inc. sells only fixed-rate real
   estate and education loans specifically designated for resale on the
   secondary market and at March 31, 1998 and December 31, 1997 these loans
   totalled $3,497,000 and $2,641,000, respectively. Affecting the increase
   of $375,000 in accrued interest receivable and other assets was an
   increase in prepaid expenses. These factors contributed to an increase
   of $1,701,000 or 0.2% in total assets from December 31, 1997 to March
   31, 1998. 
     
        Total deposits increased $8,586,000 or 1.6% from December 31, 1997
   to March 31, 1998. Most of the increase can be attributed to increases
   in savings deposits and time deposits greater than $100,000. It is
   management's philosophy to generally maintain competitive but not
   overly-aggressive interest rates relative to interest-bearing
   liabilities. 
        
        Management decreased short-term borrowings in 1998 in an attempt to
   better balance rate sensitive assets and liabilities. At March 31, 1998
   long-term debt totalling $77,269,000 included borrowings from the
   Federal Home Loan Bank of Pittsburgh of $56,000,000 and repurchase
   agreements totalling $20,000,000 at a weighted average interest rate of
   5.77%.  
                
        Based on a one year interval, rate sensitive assets to rate
   sensitive liabilities approximated 105% as of March 31, 1998.
   
   
   
   
   
   
    
                                     -12-
   
   
   
   Management's Discussion, Continued 
   
        As of March 31, 1998 the Corporation had risk-based capital in
   excess of the fully implemented regulatory requirements, and tier 1 plus
   tier 2 capital approximated 16% of risk-weighted assets.  
   
   Liquidity 
        
        Liquidity is the ratio of net liquid assets to net liabilities. The
   primary functions of asset/liability management are the assurance of
   adequate liquidity and maintenance of an appropriate balance between
   interest-sensitive earning assets and interest-bearing liabilities.
   Liquidity management refers to the ability to meet the cash flow
   requirements of depositors and borrowers.
        
        A continuous review of net liquid assets is conducted to assure
   appropriate cash flow to meet needs and obligations in a timely manner.
   There was an adequate relationship of liquid assets to short-term
   liabilities at March 31, 1998
   
   Forward Outlook
        
        Management is unaware of any regulatory recommendations which, if
   implemented, would have a material effect on the liquidity, capital
   resources, or operations of CBI. Adequate loan demand is anticipated for
   the remainder of 1998 and management will continue to carefully evaluate
   this demand based on the creditworthiness of the borrower and the
   relative strength of the economy in the Corporation's market.     
   
        The Corporation is anticipating the maintenance of a favorable net
   interest margin throughout the remainder of 1998.
   
   Other Events
   
        On March 31, 1998, Community Banks, Inc. (Community) completed its
   merger of The Peoples State Bank (Peoples). Peoples has six banking
   offices which are located in York and Adams Counties, Pennsylvania.
   Community issued 1,325,330 shares of common stock for all of the
   outstanding common stock of Peoples. This transaction was accounted for
   as a pooling of interests and combined unaudited financial information
   is as follows:
   
                                     Quarter Ended March 31, 1997
                              (dollars in thousands except per share data)
                            
                               Community         Peoples         Combined 
                             
                                  
   Interest income............  $8,127            $4,279          $12,406
   Interest expense...........   3,435             2,366            5,801
   Net interest income........   4,692             1,913            6,605
   Loan loss provision........     240               150              390
   Other income...............     957               235            1,192
   Other expense..............   3,134             1,261            4,395
   Income before taxes........   2,275               737            3,012
   Taxes......................     651               258              909
                                                                         
   Net income.................  $1,624            $  479          $ 2,103
                                ========================================= 
   
   Earnings per common share:
   
      Basic                     $  .36            $  .23          $   .32
      Diluted                   $  .35            $  .23          $   .32
   
   Per share data has been adjusted to reflect a three for two stock split
   payable May 8, 1998.
   
                                    -13-
    
   
   
   
   
   
            

    
    
    
    
    
    
    
    
                      COMMUNITY BANKS, INC. and SUBSIDIARIES
                                          
                     PART II - OTHER INFORMATION AND SIGNATURES
    
    
    
    Item 6.  Exhibits and Reports on Form 8-K
    
             (a)  Exhibits - none
    
             (b)  Registrant was not required to file any reports
                  on  Form 8-K during the quarter ending March 31, 1998.
    
             
                                          
                                          
                                          
                                     SIGNATURES
    
    Pursuant to the requirements of the Securities Exchange Act of 1934, the
    Registrant has duly caused this report to be signed on its behalf by the
    undersigned thereunto duly authorized.
    
                                                COMMUNITY BANKS, INC.
                                                (Registrant)
    
    
    Date    May 11, 1998                        /S/ Eddie L. Dunklebarger   
                                                    Eddie L. Dunklebarger
                                                          President       
                                                  (Chief Executive Officer)
                                              
    
    
    Date    May 11, 1998                       /S/  Terry L. Burrows        
                                                    Terry L. Burrows
                                                 Executive Vice-President
                                                 (Chief Financial Officer)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                       -14-