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, 1999
                                         
                                         
                                   No. 0-15786             
                             (Commission File Number)
                                         
                                         
                              COMMUNITY BANKS, INC.                       
              (Exact Name of Registrant as Specified in its Charter)
                                         
   
          PENNSYLVANIA                                       23-2251762       
    (State of Incorporation)                          (IRS Employer ID Number)
   
          
          150 Market Street, Millersburg, PA                 17061         
      (Address of Principal Executive Offices)              (Zip Code)
                                         
                                         
                                  (717) 692-4781           
                         (Registrant's Telephone Number)
                                         
                                         
   
   
   Indicate by check mark whether the registrant (1) has filed all reports 
   required to be filed by Sections 12, 13, or 15 (d) of the Securities
   Exchange Act of 1934 during the preceding 12 months (or for such shorter
   period that the registrant was required to file such reports) and (2) has
   been subject to such filing requirements for the past 90 days.
   
   
                                                   Yes  X     No     
   
                Number of Shares Outstanding as of March 31, 1999.
                                         
      CAPITAL STOCK-COMMON                                    6,845,746      
       (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............................10-15
     
     
     
     Part II
     
     Other information and Signatures..................................16
     
     
     
     
     
     
     
     
     
                         PART I - FINANCIAL INFORMATION
                                        
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                        
     The following financial information sets forth the operations of
     Community Banks, Inc. and Subsidiaries (CTY) for the three month
     periods ending March 31, 1999 and 1998.
     
     
     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.
     
                                        
     
     




   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED BALANCE SHEETS
   (unaudited)
   (dollars in thousands except per share data)
   
                                              
                                                March 31,       December 31,
                                                  1999              1998    
                                               
                                   
   ASSETS                     
   
   Cash and due from banks...................     $ 22,074         $ 25,036
   Interest-bearing time deposits in other 
      banks..................................        2,034            1,258
   Investment securities, available for sale
      (market value).........................      315,858          292,542
   Fed funds sold............................        6,755            2,208
   Loans.....................................      533,138          512,280
   Less:  Unearned income....................       (8,830)         (10,018)
          Allowance for loan losses..........       (7,111)          (6,954)
          Net loans..........................      517,197          495,308 
   Premises and equipment, net...............       14,285           14,203
   Goodwill..................................          605              665
   Other real estate owned...................          629              625
   Loans held for sale.......................        3,541            3,319
   Accrued interest receivable and other         
      assets.................................       15,821           16,510
    
      Total assets...........................     $898,799         $851,674 
                                                  ========         ========
   
   LIABILITIES
   
   Deposits:
      Demand.................................     $ 52,934         $ 50,038
      Savings................................      259,631          254,316
      Time...................................      293,210          265,884
      Time in denominations of $100,000 or
       more..................................       35,574           25,667  
      Total deposits.........................      641,349          595,905
   Short-term borrowings.....................        9,181            7,910 
   Long-term debt............................      161,000          161,000
   Accrued interest payable and other 
      liabilities............................        8,117            7,983
      
      Total liabilities......................      819,647          772,798
   
   
   STOCKHOLDERS' EQUITY
   
   Preferred stock, no par value; 500,000
      shares authorized; no shares issued
      and outstanding........................        ---              ---
   Common stock-$5.00 par value; 20,000,000
      shares authorized; 6,971,000 and
      6,631,000 shares issued in 1999 and
      1998, respectively.....................       34,855           33,157
   Surplus...................................       24,093           17,989
   Retained earnings.........................       20,889           27,023
   Other accumulated comprehensive income,
    net of tax of $958,000 and $1,437,000,
     respectively............................        1,780            2,789  
   Less:  Treasury stock of 125,000 and 
      105,000 shares at cost.................       (2,465)          (2,082) 
      Total stockholders' equity.............       79,152           78,876 
      Total liabilities and stockholders'
       equity................................     $898,799         $851,674
                                                  ========         ========
   
   
   
   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.
                                     
   


   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF INCOME
   (unaudited)
   (dollars in thousands except per share data)
   
                                                        Three Months Ended      
                                                             March 31,          
                                                          1999       1998       
   Interest income:
   Interest and fees on loans.................         $10,934     $ 9,911      
   Interest and dividends on investment 
    securities:
       Taxable................................           3,266       2,632      
       Exempt from federal income tax.........           1,164         761      
   Fed funds interest.........................              94         124      
   Other interest income......................              21          28      
        Total interest income.................          15,479      13,456      
   
   Interest expense:
   Interest on deposits:  
        Savings...............................           1,325       1,350      
        Time..................................           3,579       3,277      
        Time in denominations of $100,000 or
         more.................................             431         443      
   Interest on short-term borrowings and
    long-term debt............................           1,843         829      
   Fed funds purchased and repo interest......             345         336     
        Total interest expense................           7,523       6,235     
        Net interest income...................           7,956       7,221     
   Provision for loan losses..................             276         193     
        Net interest income after provision 
         for loan losses......................           7,680       7,028      
   Other income:
        Trust department income...............              75          77     
        Service charges on deposit accounts...             411         331     
        Other service charges, commissions
         and fees.............................             214         172     
        Investment security gains ............             153         270     
        Income on insurance premiums..........             222         131     
        Gains on mortgage sales...............             276         142     
        Other income..........................             107         134     
             Total other income...............           1,458       1,257     
   
   Other expenses:
        Salaries and employee benefits........           2,925       2,512      
        Net occupancy expense.................             826         775      
   Operating expense of insurance
          subsidiary..........................             168         119      
        Other operating expense...............           1,673       1,526      
             Total other expense..............           5,592       4,932      
             Income before income taxes.......           3,546       3,353      
   Provision for income taxes.................             864         976      
   
             Net income.......................         $ 2,682     $ 2,377      
                                                       =======     =======     
   Earnings per share: 
      Basic...................................         $   .39     $   .35     
      Diluted.................................         $   .38     $   .33   
   Dividends paid per share...................         $   .15     $   .13   
   
   Per share data has been adjusted to reflect stock dividends and splits.
   A 5% stock dividend is payable April 15, 1999.
   
   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.
   
                                               
   <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, 1998..............  $22,028     $28,645        $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) and reclassification
            adjustment of $270...........                                             (456)                    (456)
          Total comprehensive income.....                                                                    (1,921)
   Cash dividends........................                                (923)                                 (923)
   Issuance of additional shares.........       18         231            (91)                                  158
   
   Balance, March 31, 1998...............  $22,046     $28,876        $22,582      $ 2,781     $ (1,116)    $75,169
                                           =======     =======        =======      =======      =======     =======  
   
   Balance, January 1, 1999..............  $33,157     $17,989        $27,023      $ 2,789      $(2,082)    $78,876  
      Comprehensive income:
         Net income......................                               2,682                                 2,682
         Change in unrealized gain (loss)
          on securities, net of tax of
            $(543) and reclassification
             adjustment of $153..........                                            (1,009)                 (1,009)
          Total comprehensive income.....                                                                     1,673  
   Cash dividends........................                              (1,043)                               (1,043)
   5% stock dividend.....................    1,660       6,062         (7,722)                                  
   Purchase of treasury stock............                                                          (463)       (463)
   Issuance of additional shares.........       38          42            (51)                       80         109
   
   Balance, March 31, 1999...............  $34,855     $24,093        $20,889      $ 1,780      $(2,465)    $79,152
                                           =======     =======        =======      =======      =======     =======  
   
   
   
   
   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.
</TABLE>   
                                                      
   
   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF CASH FLOWS
   (unaudited)
   (dollars in thousands)
                                                         Three Months Ended
                                                              March 31,     
                                                            1999       1998   
   
   
   Operating Activities:
      Net income......................................   $ 2,682      $ 2,377
      Adjustments to reconcile net income to net
       cash provided by operating activities:
         Provision for loan losses....................       276          193
         Provision for depreciation and amortization..       388          388
         Amortization of goodwill.....................        60           60
         Investment security gains....................      (153)        (270)
         Loans originated for sale....................   (12,191)      (8,395) 
         Proceeds from sale of loans..................    12,245        7,681
         Gains on mortgage sales......................      (276)       (142)
         Decrease (increase) in other assets..........       685        (736)
         Increase in accrued interest payable 
          and other liabilities.......................       613          105 
           Net cash provided by operating activities..     4,329        1,261
   
   Investing Activities:
      Net increase (decrease) in interest-bearing time                    
       deposits in other banks........................      (776)         366
      Proceeds from sales of investment           
       securities.....................................     3,575          396
      Proceeds from maturities of investment 
       securities.....................................     9,753       31,577
      Purchases of investment securities..............   (37,979)     (30,205) 
      Net increase in total loans.....................   (22,165)        (200)
      Purchases of premises and equipment.............    (  470)        (507)
           Net cash used by investing activities......   (48,062)       1,427
   
   Financing Activities:
      Net increase in total deposits..................    45,444        8,586  
      Net increase (decrease) in short-term borrowings     1,271       (7,899)
      Proceeds from issuance of long-term debt........      --          3,000
      Repayment of long-term debt.....................      --         (3,011)
      Cash dividends..................................    (1,043)        (923)
      Purchases of treasury stock.....................      (463)         --
      Proceeds from issuance of common stock..........       109          158 
           Net cash provided by financing 
            activities................................    45,318          (89) 
       
           Increase in cash and cash equivalents......     1,585        2,599
                     
            
   Cash and cash equivalents at beginning of period...    27,244       30,115
   Cash and cash equivalents at end of period.........   $28,829      $32,714 
                                                         =======      =======
   
   
   
   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.  
                                            
   
                                           
   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, 1999 and 1998.
   
             The accounting policies of Community Banks, Inc. and subsidiaries,
   as applied in the consolidated interim financial statements presented herein,
   are substantially the same as those followed on an annual basis as presented
   on pages 10 and 11 of the 1998 Annual Report to shareholders.  
   
             Statement of Financial Accounting Standards (SFAS) 133, "Accounting
   for Derivative Instruments and Hedging Activities" establishes standards for
   recording derivative financial instruments on the balance sheet at their fair
   value. This Statement requires changes in the fair value of derivatives be
   recorded each period in current earnings or other comprehensive income,
   depending on whether a derivative is designated as part of a hedge
   transaction and, if it is, the type of hedge transaction. Management
   anticipates that the adoption of SFAS 133 will not have a significant effect
   on the Corporation's financial condition or results of operations.
   
                                   
   
   
   
   2.  Investment Securities
            The amortized cost and estimated market values of investment
   securities at March 31, 1999 and December 31, 1998, were as follows:
   
                                                         March 31,
                                                           1999   
   
                                                                        
                                                                  Estimated
                                                Amortized           Fair
                                                  Cost              Value  
   
   U.S. Treasury securities and obligations
    of U.S. government corporations and
     agencies...............................    $106,388          $106,279
   Mortgage-backed U.S. government 
    agencies................................      76,696            76,479
   Obligations of states and political
    subdivisions............................      87,337            88,815
   Corporate securities.....................      29,061            29,312  
   Equity securities........................      13,638            14,973 
         Total..............................    $313,120          $315,858 
                                                ========          ======== 
   
                                                       December 31,
                                                           1998    
                                                                          
   U.S. Treasury securities and obligations 
    of U.S. government corporations and
     agencies...............................    $ 78,800          $ 79,449
   Mortgage-backed U.S. government 
    agencies................................      82,887            83,260
   Obligations of states and political
    subdivisions............................      85,771            87,676
   Corporate securities.....................      27,574            27,459   
   Equity securities........................      13,284            14,698
         Total..............................    $288,316          $292,542
                                                ========          ======== 
     
   
                                                
<TABLE>   
                                       
   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,
                                                1999               1998             1998      
    
<S>                                          <C>                  <C>            <C>     
   Balance, January 1..................       $6,954               $6,270         $6,270
   Provision for loan losses...........          276                1,464            193
   Loan charge-offs....................         (223)              (1,258)          (279)
   Recoveries..........................          104                  478            166
   
   Balance, March 31, 1999, December 
    31, 1998, and March 31, 1998.......       $7,111               $6,954         $6,350
                                              ======               ======         ======
   
                           NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
   
                                              March 31,           December 31,     March 31,
                                                1999                 1998            1998    
   
   Loans past due 90 days or more
    and still accruing interest:
      Commercial, financial and 
       agricultural...................            ---               $   47          $331
      Mortgages.......................           $451                  353           413
      Personal installment............            133                   34           230
      Other...........................             14                    7            15
                                                  598                  441           989
   
   Loans renegotiated with borrowers..            250                  298          NONE    
   Loans on which accrual of interest
    has been discontinued:
      Commercial, financial and
       agricultural....................         1,031                  866           637 
      Mortgages........................         2,208                2,282         3,381
      Other............................           227                  282           363
                                                3,466                3,430         4,381
    
   Other real estate...................           629                  625           906
      Total............................        $4,943               $4,744        $6,276
                                               ======               ======        ======
   
   (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, 1999 and December 31, 1998 the Corporation recorded no investment in
   impaired loans or related valuation allowance. For the three month periods ended March 31,
   1999 and 1998 the average balance of impaired loans was negligible. In addition, the
   Corporation recognized no interest on impaired loans on the cash basis for the three month
   periods ended March 13, 1999 and 1998.
   </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 $680,000 and $575,000
   and $7,224,000 and $6,365,000 for income taxes and interest, respectively,
   for each of the three month periods ended March 31, 1999 and 1998.
   
            Excluded from the consolidated statements of cash flows for the
   periods ended March 31, 1999 and 1998 was the effect of certain non-cash
   activities. The company acquired real estate through foreclosure totalling
   $303,000 and $321,000, respectively. The company also recorded decreases in
   deferred tax liabilities of $479,000 and $235,000 in 1999 and 1998,
   respectively. 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 tables set forth the calculation of Basic and Diluted
   Earnings Per Share for the periods indicated:
   <CAPTION>
                                                                 Three Months Ended March 31,              
                                                               1999                         1998          
                                                                   Per-Share                    Per-Share
                                                     Income  Shares  Amount   Income   Shares     Amount  
                                                               (in thousands except per share data)
   <S>                                              <C>      <C>     <C>        <C>       <C>      <C>   
   Basic EPS:
   Income available to common stockholders...        $2,682   6,846   $.39       $2,377    6,865    $.35  
   Effect of Dilutive Securities:                                     ====                          ====     
   Incentive stock options outstanding.......                   152                          242
   Diluted EPS:
   Income available to common stockholders
      & assumed conversion...................        $2,682   6,998   $.38       $2,377    7,107    $.33
                                                     ======   =====   ====       ======    =====    ====
   
   
   
                                                    
   
   
   Per share data has been adjusted to reflect a 5% stock dividend payable April 15, 1999.
   
   All periods reflect the combined data of Community Banks, Inc. and The Peoples State Bank.
   
        
   
    
                                                   
                                                                  
                                                Community Banks Inc. and Subsidiaries
                              Management's Discussion of Financial Condition and Results of Operations
                                                                  
                                                                  
                                Average Balances, Effective Interest Differential and Interest Yields

               Income and Rates on a Tax Equivalent Basis(b) for the Three months ended March 31, 1999, 1998, and 1997
                                                      (dollars in thousands)  


                                            March 31,                        March 31,                        March 31,             
                                              1999                             1998                             1997                
                                
                                                                
                                                          Average                           Average                          Average
                                             Interest     Rates                Interest     Rates               Interest     Rates
                                 Average     Income/      Earned/  Average     Income/      Earned/  Average    Income/      Earned/
                                Balance (c)  Expense(a)  Paid(a)  Balance (c)  Expense(a)  Paid(a)  Balance(c)  Expense(a)  Paid(a)
            

Assets:
   Cash and due from banks...... $ 21,662                         $ 19,126                          $ 17,678
   Earning Assets:
      Interest-bearing deposits 
         in other banks.........    1,517    $     21      5.61%     3,102     $    28      3.66%      1,898    $    19      4.06%
      Investment securities:
         Taxable................  212,423       3,266      6.24    158,297       2,632      6.74     160,222      2,683      6.79
         Tax-exempt(b)             81,032       1,791      8.96     53,788       1,153      8.69      31,093        652      8.50 
Total investment 
         securities.............  293,455                          212,085                           191,315
      Federal funds sold........    8,307          94      4.59      8,637         124      5.82       5,765         77      5.42
      Loans, net of unearned
         income(b)..............  519,267      10,975      8.57    446,793       9,961      9.04     413,213      9,219      9.05
         Total Earning Assets...  822,546     $16,147      7.96    670,617     $13,898      8.40     612,191    $12,650      8.38
      Allowance for loan losses.   (7,054)                          (6,336)                           (5,745)              
      Premises, equipment and
         other assets...........   32,348                           28,333                            25,490
         Total assets........... $869,502                         $711,740                          $649,614 
                                 ========                         ========                          ========
Liabilities:
   Demand deposits..............   47,605                           40,988                            34,836
   Interest-bearing liabilities:
      Savings deposits..........  255,043       1,325     2.11%    230,881       1,350      2.37%    218,438      1,383      2.57%
      Time deposits:
         $100,000 or greater....   33,421                           32,059                            29,093 
         Other..................  279,600                          245,993                           244,395
      Total time deposits.......  313,021       4,010     5.20     278,052       3,720      5.43     273,488      3,659      6.07
      Total time and savings
         deposits...............  568,064                          508,933                           491,926
      Short-term borrowings.....    5,463          57     4.23       4,458          48      4.37       7,594         95      5.07 
      Long-term debt............  161,000       2,131     5.37      75,292       1,117      6.02      45,729        664      5.89
         Total interest-bearing
            liabilities.........  734,527      $7,523     4.15     588,683      $6,235      4.30     545,249      5,801      4.31   
      Accrued interest, taxes and
         other liabilities......    8,002                            7,246                             4,638                       
         Total liabilities......  790,134                          636,917                           584,723 
      Stockholders' equity......   79,368                           74,823                            64,891
         Total liabilities and
            stockholders' equity $869,502                         $711,740                          $649,614 
                                 ========                         ========                          ========
Interest income to earning
   assets.......................                          7.96                              8.40                             8.38
Interest expense to earning 
   assets.......................                          3.71                              3.77                             3.84
      Effective interest
         differential...........               $8,624     4.25%                $7,663       4.63%                $6,849      4.54%
                                               ======     ====                 ======       ====                 ======      ==== 
  
   (a) Amortization of net deferred fees included in interest income and rate calculation. (b) Interest income
on all tax-exempt securities and loans have been adjusted to tax equivalent basis utilizing a Federal tax rate
of 35% in 1999 and 34% in 1998 and 1997. (c) Averages are a combination of monthly and daily averages.

</TABLE>

                                       
   Management's Discussion, continued
                                       
                                       
   Results of Operations
                                       
         The most significant component of operating revenue is net
   interest income. Net interest income is the interest income generated by
   earning assets reduced by the interest expense applicable to
   interest-bearing liabilities. Appropriate management of this
   relationship in varying interest rate and economic environments is
   critical to the Corporation. 
         
         Net interest income after provision for loan losses for the first
   three months of 1999 was $652,000 or 9.3% greater than 1998. Total
   interest income for the first three months increased $2,023,000 or 15.0%
   while total interest expense increased $1,288,000 or 20.7% over the
   comparable period of 1998. The amount of net interest income and total
   interest income are dependent upon many factors including the volume of
   earning assets and interest bearing liabilities, the level of and
   changes in interest rates and levels of non-performing assets. The cost
   of interest bearing liabilities changes with the amount of funds
   necessary to support earning assets, the rates paid to attract and
   maintain deposits, rates paid on borrowed funds and the level of
   non-interest bearing demand deposits and equity capital. The increases
   in net interest income and total interest income were impacted by an
   increase in average earning assets of approximately $151,929,000 or
   22.7% while average interest bearing liabilities increased  $145,844,000
   or 24.8% for the first three months of 1999 over the comparable period
   of 1998. Impacting the increase in average earning assets in 1999 were
   increases in average taxable investment securities of $54,126,000 or
   34.2% and average tax-exempt investment securities of $27,244,000 or
   50.7%. Also affecting earning assets were increases in average loan
   balances of $72,474,000 or 16.2%. Affecting the increase in average
   interest bearing liabilities of $145,844,000 or 24.8% were increases in
   average savings deposits of $24,162,000 or 10.5%, time deposits less
   than $100,000 of $33,607,000 or 13.7%, and average long-term debt of
   $85,708,000 or 113.8%. The average yields realized on earning assets for
   the first three months approximated 8.0% and 8.4% in 1999 and 1998,
   respectively. The average costs of interest-bearing liabilities
   approximated 4.2% and 4.3%, respectively. Net interest margins, on a tax
   equivalent basis for the first three months approximated 4.2% and 4.6%
   in 1999 and 1998, respectively. The provision for loan losses charged to
   income increased $83,000 or 43.0% in 1999. Total loans past due 90 days
   and still accruing interest, non-performing loans, and other real estate
   approximated $4,943,000 and $6,276,000, respectively, as of March 31,
   1999 and 1998. The balance of the allowance for loan losses increased
   from $6,350,000 at March 31, 1998 to $7,111,000 at March 31, 1999.   
   
        Total other income for the first three months of 1999 was $201,000
   or 16.0% more than total other income for the first three months of
   1998. Affecting this change were increases in service charges on deposit
   accounts and other service charges, commissions, and fees of $122,000.
   Investment security gains declined $117,000 in 1999 while gains on
   mortgage sales increased $134,000. Insurance premium income increased
   $91,000 or 69.5%. Loans held for sale are comprised for the most part of
   fixed-rate real estate and education loans extended specifically for
   resale. Demand for these products has been greater in 1999 than 1998.
   Loans held for sale as of March 31, 1999 totalled $3,541,000. The market
   value of these loans approximated book value at that time.
   
        Total other expenses for the first three months of 1999 increased
   $660,000 or 13.4%. Contributing factors were increases of $413,000 or
   16.4% in salaries and employee benefits, $51,000 or 6.6% in net
   occupancy expense, and $147,000 or 9.6% in other operating expense.
   These increases were affected by the opening of new banking offices.
   
   
   Management's Discussion, Continued
   
   
   
        The provision for income taxes decreased $112,000  or 11.5% for the
   first three months of 1999 in comparison to the first three months of
   1998. Affecting this change was an increase in the amount of tax-free
   income recognized in 1999. The effective tax rates approximated 24.4%
   and 29.1% for the respective periods.  
   
        The previously described factors contributed to a net increase of
   $305,000 or 12.8% in net income for the three month period ended March
   31, 1999.
   
   
   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, 1999           December 31, 1998 
                                              (dollars in thousands)
                                         
   
                                                            Amount         %
   Funding Sources:
   
   Deposits and borrowed funds:
   
    Non-interest bearing............    $ 52,934           $ 2,896       5.8%
    Interest bearing................     588,415            42,548       7.8  
       Total deposits...............     641,349            45,444       7.6
   
    Borrowed funds..................     170,181             1,271        .8
   Other liabilities................       8,117               134       1.7
   Shareholders' equity.............      79,152               276        .3  
   
      Total sources.................    $898,799           $47,125       5.5% 
                                        ========           =======       === 
   
   Funding uses:
   
   Interest earning assets:
   
    Short-term investments..........    $  8,789           $ 5,323     153.6%
    Investment securities...........     315,858            23,316       8.0
    Loans, net of unearned income...     524,308            22,046       4.4
                                    
      Total interest earning assets.     848,955            50,685       6.3 
   
   Cash and due from banks..........      22,074            (2,962)    (11.8)
   Other assets.....................      27,770              (598)      2.1
   
      Total uses....................    $898,799           $47,125       5.5%
                                        ========           =======     =====  
      
                                            
   
   
   Management's Discussion, Continued
   
   
   
   
        As of March 31, 1999 cash and due from banks was $2,962,000 or
   11.8% less than it was at December 31, 1998. Interest-bearing time
   deposits in other banks and investment securities increased $24,092,000
   or 8.2% while fed funds sold increased $4,547,000. The approximate
   market value of debt securities was $1,403,000 greater than amortized
   cost at March 31, 1999. The approximate market value of debt securities
   was $2,812,000 greater than amortized cost at December 31, 1998.
   Securities to be held for indefinite periods of time and not intended to
   be held to maturity or on a long-term basis are classified as available
   for sale and carried at market value. Securities held for indefinite
   periods of time include securities that management intends to use as
   part of its asset/liability management strategy and that may be sold in
   response to changes in interest rates, resultant prepayment risk and
   other factors related to interest rate and resultant prepayment risk
   changes. At March 31, 1999 and December 31, 1998, management classified
   investment securities with amortized costs and market values of
   $313,120,000 and $315,858,000, and $288,316,000 and $292,542,000,
   respectively, as available for sale. Net loans increased $21,889,000 or
   4.4% from December 31, 1998 to March 31, 1999. Affecting this change
   were increases in real estate loans of $13,959,000 or 4.1%, consumer
   loans of $2,355,000 or 2.3%, and commercial loans of $3,000,000 or 4.7%.
   The allowance for loan losses approximated 1.36% and 1.38% of net loans
   at March 31, 1999 and December 31, 1998, respectively. Goodwill
   continues to be amortized at an annualized rate of $240,000. As
   previously noted, Community Banks, Inc. sells only fixed-rate real
   estate and education loans specifically designated for resale on the
   secondary market and at March 31, 1999 and December 31, 1998 these loans
   totalled $3,541,000 and $3,319,000, respectively. Affecting the decrease
   of $689,000 in accrued interest receivable and other assets was a
   decrease in receivables related to loan sales. These factors contributed
   to an increase of $47,125,000 or 5.5% in total assets from December 31,
   1998 to March 31, 1999. 
     
        Total deposits increased $45,444,000 or 7.6% from December 31, 1998
   to March 31, 1999. Contributing to this increase were increases of
   $5,315,000 or 2.1% in savings deposits and $37,233,000 or 12.8% in total
   time deposits. New certificate of deposit products affected the
   significant increase in time deposits. 
        
        At March 31, 1999 long-term debt totalling $161,000,000 included
   borrowings from the Federal Home Loan Bank of Pittsburgh of $141,000,000
   and repurchase agreements totalling $20,000,000 at a weighted average
   interest rate of 5.37%.  
                
        Based on a one year interval, rate sensitive assets to rate
   sensitive liabilities approximated 99 % as of March 31, 1999.
   
                                     
   
   
   
   Management's Discussion, Continued 
   
        As of March 31, 1999 the Corporation had risk-based capital in
   excess of the fully implemented regulatory requirements, and tier 1 plus
   tier 2 capital approximated 13% of risk-weighted assets.  
   
   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, 1999.
   
   Forward Outlook
        
        Management is unaware of any regulatory recommendations which, if
   implemented, would have a material effect on the liquidity, capital
   resources, or operations of Community Banks, Inc. Adequate loan demand
   is anticipated forthe remainder of 1999 and management will continue to 
   carefully evaluatethis demand based on the creditworthiness of the 
   borrower and therelative 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 included in this report.
   
                              
                        
   
   Management's Discussion, Continued
   
   
   Impact of The Year 2000 Issue
   
        The "Year 2000 Issue" is the result of the possibility that
   computer programs may be unable to properly recognize the year 2000.
   This could result in a system failure or miscalculations causing
   disruptions of operations, including among other things, a temporary
   inability to process transactions, send invoices, or engage in similar
   business activities.
   
        Based on an ongoing assessment, the Corporation has determined that
   it will need to modify or replace portions of its software and hardware
   so that its computer systems will properly utilize dates beyond December
   31, 1999. If such modifications and conversions are not made, or are not
   completed on a timely basis, the Year 2000 Issue could have an adverse
   impact on the operations of the Corporation. However, management
   presently believes that as a result of modifications to existing
   software and hardware and conversions to new software and hardware, the
   Year 2000 Issue will be mitigated.
   
        The Corporation's Year 2000 Action Plan has been categorized into
   five phases: Awareness, Assessment, Testing, Validation, and
   Implementation. The initial focus within those phases has been on
   vendors and systems that are related to mission critical business
   processes. Mission critical processes are defined as those areas of the
   business whose continued operations are required in order to provide
   basic banking services. Management is currently testing these mission
   critical processes and plans to complete implementation by May 31, 1999.
   In addition, all other business processes subject to Y2K remediation are
   expected to be completed prior to December 31, 1999.
   
        Community Banks, Inc. has initiated formal communications with all
   significant vendors and large commercial customers to determine the
   extent to which it is vulnerable to those third parties' failure to
   remediate their own Year 2000 Issue. To date, no material impact is
   anticipated based upon responses to these communications. The
   Corporation's estimated Year 2000 project costs include the costs and
   time associated with the impact of a third party's Year 2000 Issue, and
   are based on presently available information. For significant vendors,
   management will validate that they are Year 2000 compliant by December
   31, 1999, or make plans to switch to a new vendor or system that is
   compliant. For large commercial loan customers, management will take
   appropriate action based upon the customer's response.
   
         The Corporation will utilize both internal and external resources
   to reprogram or replace, and test software for Year 2000 modifications.
   Costs incurred to date as well as for the three months ended March 31,
   1999 for the Year 2000 project are generally considered normal operating
   costs by the Corporation. All Year 2000 conversion software and
   modifications are being delivered and executed by the Corporation's
   various software vendors with which the Corporation deals for its many
   different computer processing and transaction functions. The Corporation
   does not anticipate significant expense incurred or charged to the Year
   2000 Issue due to its many software, maintenance, and licensing
   agreements with its software vendors. The cost to complete the internal
   process is currently estimated to be less than $100,000.
   
        Management believes that the Corporation's existing alternative
   processing procedures will be available as a contingency alternative in
   the unanticipated event that the Year 2000 Issue results in significant
   disruption of normal business activities.    
   
   
                                      
   
                      COMMUNITY BANKS, INC. and SUBSIDIARIES
                                          
                     PART II - OTHER INFORMATION AND SIGNATURES
    
    
    Item 6.  Exhibits and Reports on Form 8-K/A1
    
             (a)  Exhibits - none
    
             (b)  Registrant was not required to file any reports
                  on  Form 8-K during the quarter ending March 31, 1999.
                    
     
    
                                       SIGNATURES
    
            Pursuant to the requirements of the Securities Exchange Act of
    1934, the Registrant has duly caused this report to be signed on its behalf
    by the undersigned thereunto duly authorized.
    
                                                COMMUNITY BANKS, INC.
                                                (Registrant)
    
    
    Date  May 13, 1999                         /S/ Eddie L. Dunklebarger   
                                                    Eddie L. Dunklebarger
                                                          President       
                                                  (Chief Executive Officer)
                                              
    
    
    Date  May 13, 1999                         /S/  Terry L. Burrows        
                                                    Terry L. Burrows
                                                 Executive Vice-President
                                                 (Chief Financial Officer)