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, 2001

                                   No. 0-15786
                            (Commission File Number)

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


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

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

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


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

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


                Number of shares outstanding as of March 31, 2001


CAPITAL STOCK-COMMON                                           8,364,000
--------------------                              ------------------------------
 (Title of Class)                                     (Outstanding Shares)




<PAGE>



                     COMMUNITY BANKS, INC. and SUBSIDIARIES

                                   INDEX 10-Q


PART I

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

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

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

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

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

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

Management's Discussion and Analysis of Financial
   Condition and Results of Operation...................................  11-16



PART II

Other Information and Signatures............................................ 17



<PAGE>



                         PART I - FINANCIAL INFORMATION

                     COMMUNITY BANKS, INC. and SUBSIDIARIES


The  following  financial  information  sets forth the  operations  of Community
Banks, Inc. and Subsidiaries  (CTY) for the three month periods ending March 31,
2001 and 2000.

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








                                       1

<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands except per share data)
<TABLE>
<S>                                                                         <C>                       <C>
                                                                              March 31,               December 31,
                                                                                2001                      2000
                                                                            ------------              ------------
ASSETS

Cash and due from banks.....................................                $     36,773              $     42,166
Interest-bearing time deposits in other banks...............                       1,321                     2,568
Investment securities, available for sale
   (market value)...........................................                     414,623                   389,819
Fed funds sold..............................................                      32,514                     6,280
Loans.......................................................                     821,600                   818,858
Less: Unearned income.......................................                      (3,393)                  (3,984)
          Allowance for loan losses.........................                     (11,657)                  (10,328)
                                                                             -----------               -----------
          Net loans.........................................                     806,550                   804,546
Premises and equipment, net.................................                      21,288                    21,587
Goodwill....................................................                         123                       183
Other real estate owned.....................................                         447                       416
Loans held for sale.........................................                       6,572                     2,719
Accrued interest receivable and other assets................                      38,181                    38,429
                                                                             -----------               -----------
     Total assets...........................................                  $1,358,392                $1,308,713
                                                                             ===========               ===========
LIABILITIES

Deposits:
   Demand (non-interest bearing)............................                 $   146,849               $   155,796
   Savings..................................................                     276,503                   257,178
   Time.....................................................                     457,181                   426,573
   Time in denominations of $100 or more....................                      72,840                    79,694
                                                                             -----------               -----------
   Total deposits..........................................                      953,373                   919,241
Short-term borrowings.......................................                       5,673                    36,093
Long-term debt..............................................                     272,302                   239,613
Accrued interest payable and other liabilities..............                      19,371                     9,788
                                                                             -----------               -----------
   Total liabilities........................................                   1,250,719                 1,204,735
                                                                             -----------               -----------
STOCKHOLDERS' EQUITY

Preferred stock, no par value; 500,000 shares
   authorized; no shares issued and outstanding.............                         ---                       ---
Common stock-$5.00 par value; 20,000,000
   shares authorized; 8,969 and 8,545
   shares issued in 2001 and 2000, respectively.............                      44,845                    42,726
Surplus.....................................................                      35,928                    29,155
Retained earnings...........................................                      29,097                    38,723
Accumulated other comprehensive income (loss),
   net of tax (benefit) of $692 and $(374),
     respectively...........................................                       1,285                      (694)
Less: Treasury stock of 185,000 and 300,000
   shares at cost, respectively.............................                      (3,482)                   (5,932)
                                                                             -----------               -----------
   Total stockholders' equity...............................                     107,673                   103,978
                                                                             -----------               -----------
  Total liabilities and stockholders' equity................                  $1,358,392                $1,308,713
                                                                             ===========               ===========

<FN>
All periods reflect the combined data of Community Banks, Inc. and Glen Rock State Bank.
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                       2
<PAGE>


Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands except per share data)
<TABLE>
<S>                                                                     <C>             <C>
                                                                           Three Months Ended
                                                                               March  31,
                                                                           2001            2000
                                                                         -------         -------
Interest income:
Interest and fees on loans.........................................      $17,707         $15,172
Interest and dividends on investment securities:
   Taxable.........................................................        4,857           4,969
   Exempt from federal income tax..................................        1,475           1,120
Fed funds interest.................................................          305             218
Other interest income..............................................           32              13
                                                                         -------         -------
      Total interest income.........................................      24,376          21,492
                                                                         -------         -------
Interest expense:
Interest on deposits:
   Savings..........................................................       1,898           1,802
   Time.............................................................       6,470           5,329
   Time in denominations of $100 or more............................       1,126             740
Interest on short-term borrowings and long-term debt................       3,698           2,789
Fed funds purchased and repo interest...............................         209             313
                                                                         -------         -------
   Total interest expense.........................................        13,401          10,973
                                                                         -------         -------
   Net interest income..............................................      10,975          10,519
Provision for loan losses...........................................       1,573             361
                                                                         -------         -------
   Net interest income after provision for loan losses.............        9,402          10,158
                                                                         -------         -------
Other income:
   Income from fiduciary related activities.........................         107             141
   Service charges on deposit accounts..............................         759             620
   Other service charges, commissions and fees......................         467             474
   Investment security gains (losses)............................           (128)            168
   Insurance premium income........................................          257             166
   Gains on loan sales.............................................          163              65
   Other income....................................................          358             303
                                                                         -------         -------
      Total other income...........................................        1,983           1,937
                                                                         -------         -------
Other expenses:
   Salaries and employee benefits..................................        4,554           4,060
   Net occupancy expense...........................................        1,375           1,146
   Operating expense of insurance subsidiary.......................          139              87
   Merger and restructuring related expenses.......................        1,899             ---
   Other operating expense.........................................        2,645           2,158
                                                                         -------         -------
      Total other expense..........................................       10,612           7,451
                                                                         -------         -------
      Income before income taxes...................................          773           4,644
Provision (benefit) for income taxes...............................          (35)          1,154
                                                                         -------         -------
      Net income...................................................      $   808         $ 3,490
                                                                         =======         =======
Earnings per share:
   Basic............................................................     $   .09         $   .40
   Diluted..........................................................     $   .09         $   .39
Dividends paid per share............................................     $   .16         $   .15

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

                                      3

<PAGE>

Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except per share data)
<TABLE>
<S>                                          <C>        <C>        <C>            <C>                 <C>           <C>
                                                                   Three Month Periods Ended March 31

                                                                                        Accumulated
                                                                                          Other
                                              Common                  Retained         Comprehensive       Treasury         Total
                                               Stock      Surplus     Earnings            Income             Stock          Equity
                                             --------    ---------   ----------        -------------       --------       --------
Balance, January 1, 2000.................     $40,903     $24,259      $36,432           $(11,697)         $ (3,588)     $  86,309
   Comprehensive income:
      Net income.........................                                3,490                                               3,490
      Change in unrealized gain (loss)
      on securities, net of tax of $332
        and reclassification adjustment
         of $168 ........................                                                     617                              617
                                                                                                                         ---------
     Total comprehensive income..........                                                                                    4,107
Cash dividends ($.15 per share)..........                               (1,236)                                             (1,236)
5% stock dividend (348,000 shares).......       1,740       4,612       (6,352)
Net increase in treasury stock
   (51,000 shares).......................                                                                    (1,011)        (1,011)
Issuance of additional shares
   (7,000 shares)........................          37         192                                                              229
                                              -------     -------      -------           --------          --------      ---------
Balance, March 31, 2000..................     $42,680     $29,063      $32,334           $(11,080)         $ (4,599)     $  88,398
                                              =======     =======      =======           ========          ========      =========
Balance, January 1, 2001.................     $42,726     $29,155      $38,723          $    (694)         $ (5,932)      $103,978
   Comprehensive income:
     Net income..........................                                  808                                                 808
     Change in unrealized gain (loss)
      on securities, net of tax of $1,066
       and reclassification adjustment
        of $(128) .......................                                                   1,979                            1,979
                                                                                                                         ---------
     Total comprehensive income..........                                                                                    2,787
Cash dividends ($.16 per share)..........                               (1,372)                                             (1,372)
5% stock dividend (426,000 shares).......       2,130       6,773       (8,903)
Issuance of additional shares
   ( 2,000 shares of common stock
     and 115,000 shares, net, of
     treasury stock ) ...................         (11)                    (159)                               2,450          2,280
                                              -------     -------      -------           --------          --------      ---------
Balance, March 31, 2001..................     $44,845     $35,928      $29,097          $   1,285          $ (3,482)      $107,673
                                              =======     =======      =======           ========          ========      =========

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

                                       4


<PAGE>


Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<S>                                                                                   <C>                         <C>
                                                                                                Three Months Ended
                                                                                                     March 31,
                                                                                           2001                      2000
                                                                                         --------                  --------
Operating Activities:
   Net income.....................................................                     $     808                  $   3,490
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for loan losses....................................                         1,573                        361
     Depreciation and amortization................................                           221                         85
     Amortization of goodwill.....................................                            60                         60
     Investment security gains....................................                           128                       (168)
     Loans originated for sale....................................                       (11,400)                    (3,588)
     Proceeds from sale of loans..................................                         7,710                      3,853
     Gains on loan sales..........................................                          (163)                       (65)
     Change in other assets, net..................................                            48                     (3,199)
     Increase in accrued interest payable and other
      liabilities, net............................................                         8,891                        290
                                                                                       ----------                 ----------
     Net cash provided by operating activities....................                         7,876                      1,119
                                                                                       ----------                 ----------
Investing Activities:
   Net (increase) decrease in interest-bearing time
    deposits in other banks.......................................                         1,247                        556
   Proceeds from sales of investment securities...................                        20,418                      5,243
   Proceeds from maturities of investment securities..............                        10,780                      8,485
   Purchases of investment securities.............................                       (52,568)                   (32,933)
   Net increase in total loans....................................                        (3,782)                   (18,684)
   Net increase in premises and equipment.........................                          (439)                    (1,286)
                                                                                       ----------                 ----------
      Net cash used by investing activities.......................                       (24,344)                   (38,619)
                                                                                       ----------                 ----------
Financing Activities:
   Net increase in total deposits.................................                        34,132                     46,546
   Net increase (decrease) in short-term borrowings...............                       (30,420)                   (11,561)
   Proceeds from issuance of long-term debt.......................                        33,048                     40,986
   Repayment of long-term debt....................................                          (359)                   (26,950)
   Cash dividends.................................................                        (1,372)                    (1,236)
   Purchases of treasury stock....................................                           ---                     (1,011)
   Proceeds from issuance of common stock.........................                         2,280                        229
                                                                                       ----------                 ----------
      Net cash provided by financing activities...................                        37,309                     47,003
                                                                                       ----------                 ----------
     Increase in cash and cash equivalents........................                        20,841                      9,503

   Cash and cash equivalents at beginning of period...............                        48,446                     37,117
                                                                                       ----------                 ----------
   Cash and cash equivalents at end of period.....................                       $69,287                    $46,620
                                                                                       ==========                 ==========
<FN>
All periods reflect the combined data of Community Banks, Inc. and Glen Rock State Bank.
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>

                                       5

<PAGE>

Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands)


1.  Accounting Policies

     The  information  contained in this report is  unaudited  and is subject to
future  adjustments.  However,  in the opinion of  management,  the  information
reflects all adjustments necessary for a fair statement of results for the three
month periods ended March 31, 2001 and 2000.

     The  accounting  policies of Community  Banks,  Inc. and  subsidiaries,  as
applied in the consolidated  interim financial  statements presented herein, are
substantially  the same as those  followed on an annual  basis as  presented  on
pages 10 and 11 of the 2000 Annual Report to shareholders.



   Other Events

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

                                                                              Quarter Ended March 31, 2000
                                                                      (dollars in thousands expect per share data)

                                                                  CTY                    GR                Combined

Interest income........................................         $18,267                $3,225               $21,492
Interest expense.......................................           9,244                 1,729                10,973
                                                               ----------------------------------------------------
Net interest income....................................           9,023                 1,496                10,519
Loan loss provision....................................             316                    45                   361
Other income...........................................           1,719                   218                 1,937
Other expense..........................................           6,318                 1,133                 7,451
                                                               ----------------------------------------------------
Income before taxes....................................           4,108                   536                 4,644
Taxes..................................................           1,007                   147                 1,154
                                                               ----------------------------------------------------
Net income.............................................        $  3,101               $   389              $  3,490
 .....                                                          ====================================================

Earnings per common share:

    Basic                                                      $    .42               $   .29              $    .40
    Diluted                                                    $    .41               $   .29              $    .39

</TABLE>

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

                                       6


<PAGE>


   Consolidated Statements of Income

     Included  in the  Consolidated  Statements  of Income for the three  months
ended March 31, 2001 are merger and restructuring  related charges totaling $1.9
million.  The following  summarizes the components of the charges accrued during
the first quarter of 2001.


                                                                Expense
                                                         (dollars in thousands)

Merger costs:
   Employee severance benefits                                         $   508
   Legal and professional fees                                             287
   Conversion costs                                                        220
   Asset disposal                                                          107
   Printing costs                                                           63
   Other                                                                   174
Restructuring costs:
   Employee severance benefits
         (merger related)                                                  540
                                                                         -----
                                                                        $1,899
                                                                         =====


                                       7
<PAGE>
2.  Investment Securities

     The amortized  cost and estimated  fair values of investment  securities at
March 31, 2001 and December 31, 2000 were as follows:
<TABLE>
<S>                                                                                     <C>                     <C>

                                                                                                    March 31,
                                                                                                      2001
                                                                                                                 Estimated
                                                                                        Amortized                   Fair
                                                                                           Cost                     Value
U.S. Treasury securities and obligations of
   U.S. government corporations and
   agencies..............................................................                $146,113                  $146,095
Mortgage-backed U.S. government agencies.................................                  71,663                    72,338
Obligations of states and political subdivisions.........................                 128,964                   131,624
Corporate securities.....................................................                  43,979                    42,040
Equity securities........................................................                  21,927                    22,526
                                                                                         --------                  --------
     Total...............................................................                $412,646                  $414,623
                                                                                         ========                  ========




                                                                                                   December 31,
                                                                                                      2001
                                                                                                                 Estimated
                                                                                        Amortized                   Fair
                                                                                           Cost                     Value

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

</TABLE>
                                       8
<PAGE>

3.  Allowance for loan losses

     Changes in the allowance for loan losses are as follows:
<TABLE>
<S>                                                             <C>                     <C>                     <C>

                                                                 Three Months Ended          Year Ended          Three Months Ended
                                                                     March 31,               December 31,              March 31,
                                                                       2001                     2000                     2000
                                                                 ------------------          -----------         ------------------

Balance, January 1...................................                  $10,328               $  8,976                  $8,976
Provision for loan losses............................                    1,573                  2,863                     361
Loan charge-offs.....................................                     (347)                (1,925)                   (305)
Recoveries...........................................                      103                    414                     119
                                                                      ---------              ---------                --------
Balance, March 31, 2001, December 31,
 2000, and March 31, 2000............................                  $11,657                $10,328                  $9,151
                                                                      =========              =========                ========
</TABLE>



                 NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
<TABLE>
<S>                                                                   <C>                  <C>                    <C>

                                                                        March 31,            December 31,            March 31,
                                                                          2001                  2000                   2000
                                                                       -----------           ------------           -----------
Loans past due 90 days or more and still
 accruing interest:
     Commercial, financial and agricultural....................        $   367                $     8               $    29
     Mortgages................................................             340                    495                   653
     Personal installment......................................            113                     98                    69
     Other.....................................................            ---                     11                   ---
                                                                       --------               --------              --------
                                                                           820                   612                    751
                                                                       --------               --------              --------
Loans renegotiated with borrowers..............................            ---                    205                   238
                                                                       --------               --------              --------
Loans on which accrual of interest has been
 discontinued:
     Commercial, financial and agricultural....................          3,634                  2,042                 1,943
     Mortgages.................................................          3,352                  3,445                 3,172
     Other.....................................................            582                    356                   277
                                                                       --------               --------              --------
                                                                         7,568                  5,843                 5,392
                                                                       --------               --------              --------
Other real estate..............................................            447                    416                   480
                                                                       --------               --------              --------
     Total.....................................................         $8,835                 $7,076                $6,861
                                                                       ========               ========              ========

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

Impaired Loans

     At March 31, 2001 and December 31, 2000,  the recorded  investment in loans
for which  impairment has been  recognized  totaled  $5,027,000 and  $2,877,000,
respectively,  none of which related to loans  requiring a valuation  allowance.
For the three months ended March 31, 2001,  the average  recorded  investment in
impaired  loans   approximated   $3,952,000.   The  average   balance  for  2000
approximated $1,709,000. Interest recognized on impaired loans on the cash basis
for the three month periods ending March 31, 2001 and 2000 was not significant.

                                       9
<PAGE>
4.  Statement of Cash Flows

     Cash and cash equivalents include cash and due from banks and federal funds
sold. The company made cash payments of $862,000 and $1,005,000 and  $13,260,000
and  $10,989,000  for income taxes and interest,  respectively,  for each of the
three month periods ended March 31, 2001 and 2000.

     Excluded  from the  consolidated  statements  of cash flows for the periods
ended March 31, 2001 and 2000 was the effect of certain non-cash activities. The
company acquired real estate through foreclosure totaling $205,000 and $285,000,
respectively.  The company  also  recorded a decrease in deferred  tax assets of
$374,000  and an increase in deferred  tax  liabilities  of $692,000 in 2001.  A
decrease  in deferred  tax assets of  $332,000  was  recognized  in 2000.  These
variations  related to the effects of changes in net  unrealized  gain (loss) on
investment securities available for sale.

5.  Earnings Per Share:

     The  following  table  sets  forth the  calculations  of Basic and  Diluted
Earnings Per Share for the periods indicated:
<TABLE>
<S>                                                                 <C>         <C>     <C>         <C>         <C>     <C>
                                                                                Three Months Ended March 31,
                                                                            2001                                2000
                                                                    ----------------------------------------------------------------
                                                                                       Per-Share                          Per-Share
                                                                    Income      Shares   Amount      Income      Shares     Amount
                                                                    ----------------------------------------------------------------
(In thousands except per share data) Basic EPS:
Income available to common stockholders.......................       $808       8,685     $.09        $3,490      8,748      $.40
Effect of Dilutive Securities:                                       ====                 ====        ======                 ====
Incentive stock options outstanding...........................                    111                               114
                                                                                -----                             -----
Diluted EPS:
Income available to common stockholders &
   assumed conversion......................................           $808      8,796     $.09        $3,490      8,862      $.39
                                                                      ====                 ====        ======                 ====
<FN>
Per share data has been adjusted to reflect stock dividends and splits.
</FN>
</TABLE>

                                     10

<PAGE>

                     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, 2001, 2000, and 1999 (dollars in thousands)
<TABLE>
<S>                               <C>        <C>       <C>       <C>       <C>       <C>        <C>       <C>       <C>
                                             March 31,                  March 31,                       March 31,
                                 --------------------------------------------------------------------------------------------
                                               2001                       2000                            1999
                                 --------------------------------------------------------------------------------------------
                                                        Average                       Average                        Average
                                              Interest   Rates              Interest   Rates               Interest   Rates
                                   Average     Income/  Earned/   Average    Income/  Earned/   Average    Income/   Earned/
                                  Balance(c) Expense(a)  Paid (a) Balance(c)Expense(a)Paid (a) Balance(c) Expense(a)  Paid(a)
                                 --------------------------------------------------------------------------------------------
Assets:
   Cash and due from banks.....   $  33,646                       $  27,022                    $  28,017
                                  ---------                       ---------                    ---------
   Earning Assets:
      Interest-bearing deposits
       in other banks..........       2,427   $    32    5.35%        1,381  $    13   3.79%       1,517   $   21      5.61%
                                  ---------                       ---------                    ---------
      Investment securities:
         Taxable...............     276,440     4,857    7.13       279,207    4,969   7.16      245,056    3,742      6.19
         Tax-exempt (b)........     117,010     2,269    7.86        87,670    1,723   7.90       89,275    1,940      8.81
                                  ---------                       ---------                    ---------
      Total investment
       securities..............     393,450                         366,877                      334,331
                                  ---------                       ---------                    ---------
      Federal funds sold.......      24,713       305    5.01        15,831      218   5.54       10,586      137      5.25
                                  ---------                       ---------                    ---------
      Loans, net of unearned
       income (b)..............     813,122    17,814    8.88       716,982   15,239   8.55      636,555   13,338      8.50
                                  ---------   -------    ----     ---------   ------   ----    ---------  -------      ----
       Total earning assets....   1,233,712   $25,277    8.31     1,101,071  $22,162   8.10      982,989  $19,178      7.91
                                  ---------   -------    ----     ---------   ------   ----    ---------  -------      ----
      Allowance for loan losses    (10,718)                         (9,049)                      (8,722)
      Premises, equipment, and.
         other assets..........      60,134                          52,353                       39,375
                                  ---------                       ---------                    ---------
         Total assets..........  $1,316,774                      $1,171,397                   $1,041,659
                                 ==========                      ==========                   ==========
Liabilities:
   Demand deposits.............     142,915                          64,712                       57,274
   Interest-bearing liabilities:
      Savings deposits.........     267,765     1,898    2.87       297,002    1,802   2.44      303,169    1,590      2.13
                                  ---------                       ---------                    ---------
      Time deposits:
         $100 or greater.......      77,131                          54,162                       41,516
         Other.................     442,303                         431,499                      345,510
                                  ---------                       ---------                    ---------
      Total time deposits......     519,434     7,596    5.93       485,661    6,069   5.03      387,026    4,974      5.21
                                  ---------                       ---------                    ---------
      Total time and savings
         deposits..............     787,199                         782,663                      690,195
      Short-term borrowings....       5,779        46    3.23         2,824       40   5.70        5,463       57      4.23
      Long-term debt...........     264,771     3,861    5.91       225,841    3,062   5.45      184,541    2,429      5.34
                                  ---------   -------    ----     ---------   ------   ----    ---------  -------      ----
         Total interest-bearing
            liabilities........   1,057,749   $13,401    5.14     1,011,328  $10,973   4.36      880,199 $  9,050      4.17
                                  ---------   -------    ----     ---------   ------   ----    ---------  -------      ----
      Accrued interest, taxes and
         other liabilities.....       9,294                           7,962                        9,115
                                  ---------                       ---------                    ---------
         Total liabilities.....   1,209,958                       1,084,002                      946,588
      Stockholders' equity.....     106,816                          87,395                       95,071
                                  ---------                       ---------                    ---------
         Total liabilities and
            stockholders' equity $1,316,774                      $1,171,397                   $1,041,659
                                 ==========                      ==========                   ==========
Interest income to earning
   assets......................                          8.31%                         8.10%                            7.91%
Interest expense to earning
   assets......................                          4.41                          4.01                             3.73
                                                         ----                          ----                             ----
      Effective interest
         differential..........               $11,876    3.90%               $11,189   4.09%              $10,128       4.18%
                                              =======    ====                =======   ====               =======       ====
<FN>
(a)  Amortization  of net  deferred  fees  included in interest  income and rate
calculations.
(b) Interest  income on all tax-exempt  securities and loans have
been adjusted to a tax equivalent basis utilizing a Federal tax rate of 35%.
(c)Averages are a combination of monthly and daily averages.
</FN>
</TABLE>
                                       11

<PAGE>


Management's Discussion, Continued

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

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

RESULTS OF OPERATIONS

Net Interest Income:

     Net interest  income,  the most  significant  source of operating  revenue,
increased $456,000 or 4.3% during the first three months of 2001 compared to the
first three  months of 2000.  Net interest  income is the income  which  remains
after deducting the interest expense applicable to funds required to support the
earning assets from the total income generated by earning assets. The ability to
manage net interest  income in varied  economic  environments is critical to the
success of the  Corporation.  The table on page 11 presents average balances and
taxable  equivalent  interest  income and  interest  expense for the three month
periods ending March 31, 2001,  2000,  and 1999. Net interest  income margin for
2001 was 3.90% compared to 4.09% in 2000 and 4.18% in 1999.  Interest  income to
earning assets  increased from 8.10% in 2000 to 8.31% in 2001.  Interest expense
to  earning  assets  increased  from  4.01%  in  2000  to  4.41%  in  2001.  The
relationship of net interest income to total income approximated 84.7% and 84.4%
in 2001 and 2000, respectively.

     Total interest  income on a tax equivalent  basis  increased  $3,115,000 or
14.1% in the first three months of 2001,  compared to an increase of  $2,984,000
or 15.6% in 2000. Interest and fees on loans on a tax equivalent basis increased
$2,575,000  or 16.9% in 2001.  As  indicated  by the table the increase was both
volume and rate related as total average loans  increased  $96,140,000 or 13.4%.
The  increase  of  $434,000  or 6.5% in interest  and  dividends  on  investment
securities on a tax equivalent basis was primarily  volume related.  The average
balances  of  investment  securities  increased  $26,573,000  or 7.2%  while the
average  balances of taxable  securities  decreased  $2,767,000 or 1.0% in 2001.
Interest and fees on loans on a tax  equivalent  basis  increased  $1,901,000 or
14.3% in 2000.  Most of this  increase  was  volume  related  and  caused  by an
increase in average balances of $80,427,000 or 12.6%. The increase of $1,010,000
or 17.8% in interest and dividends on investment  securities was volume and rate
related. The average balances of investment  securities increased $32,546,000 or
9.7% in 2000.

     Total  interest  expense  increased  $2,428,000 or 22.1% in the first three
months of 2001,  and  $1,923,000  or 21.1% in 2000. A rate  related  increase of
$96,000 or 5.3%  occurred  in savings  interest  expense in 2001.  Significantly
affecting the 2001 increase in interest expense was an increase of $1,527,000 or
25.2% in time deposit  interest  expense.  The increase in time deposit interest
expense  was caused by  increased  rates and  volume.  A volume and rate  driven
increase of $805,000 or 26.0% in borrowed  funds  interest also  affected  total
interest expense in 2001. A significant factor affecting the 2000 increase was a
volume  related  increase of $1,095,000 or 22.0% in total time deposit  interest
expense.

Provision for Loan Losses:

     The provision  for loan losses  charged to income in the first three months
of 2001 was  $1,573,000  compared to $361,000 in the first three months of 2000.
Net loan  charge-offs  for 2001 were $244,000  compared to $186,000 in 2000. Net
loan charge-offs as a percentage of average net loans  approximated  .03% during
the first three months of 2001 and 2000. Affecting the increase in the provision
for loan losses in 2001 was an increase in total  nonperforming  loans and other
real estate of  $1,974,000 or 28.8%.  Most of this increase  related to one loan
relationship.  A  portion  of the  provision  charged  to  income  in  2001  was
associated with the growth of 13.4% in average net loans.

                                       12
<PAGE>

Management's Discussion, Continued

 Other Income and Other Expenses:

     Other income  exclusive of security  gains  increased  $342,000 or 19.3% in
2001.  The increases in 2001 of $139,000 or 22.4% in service  charges on deposit
accounts  resulted from increased deposit account balances and related ancillary
services  and  management's  renewed  emphasis  on these  functions.  Investment
security losses of $128,000 were recognized  during the first quarter of 2001 to
restructure  a portion of the portfolio and provide  potential  enhancements  to
future earnings.  Most of the investment  security gains recognized in 2000 were
associated  with  equity  securities  of  financial  institutions  held by CBII.
Increases in insurance  premiums  income of $91,000 or 54.8% are a reflection of
consumer  loan  demand  and  additional  credit  life and  accident  and  health
insurance  premiums realized at CBLIC.  Gains on loan sales increased $98,000 or
150.8% in 2001 as a result of increased demand for fixed-rate real estate loans.
The fair  value of loans held for sale  approximated  their  carrying  values at
March 31,  2001 and 2000.  The  increase  in other  income in 2001 of $55,000 or
18.2% was impacted by increases in life insurance policy premiums.

     The  increase  in  other  expenses  during  the  first  quarter  of 2001 of
$3,161,000  or 42.4% was  significantly  impacted  by merger  and  restructuring
related  expenses  associated  with the acquisition of the Glen Rock State Bank.
The 2001  increases in salaries  and employee  benefits of $494,000 or 12.2% and
occupancy  expense of $229,000 or 20.0% were affected by the openings in 2000 of
three new banking offices and the hiring of new personnel. Occupancy expense for
the first quarter of 2001 was also impacted by the GR merger.  The table on page
6 provides  additional  detail  associated  with the  merger  and  restructuring
related  expenses  recognized  during the first quarter of 2001. Other operating
expense  increased  $487,000 or 22.6% in 2001  compared to the first  quarter of
2000.  Affecting  these  changes were the  increases in banking  facilities  and
additional marketing and business development initiatives.

Provision for Income Taxes:

     The relationship of tax-free income to pre-tax income affects the provision
charged to income and  resulted in a benefit for the three month  period  ending
March 31, 2001. The effective tax rate approximated  24.8% for the first quarter
of 2000.

Net Income:

     The previously  described factors contributed to a decline in net income of
$2.7 million or 76.8% for the three months ended March 31, 2001  compared to the
first three months of 2000.  Core operating  earnings  increased 7.7% during the
same period. Core operating earnings exclude special charges (after tax) of $2.8
million in 2001 and security gains (after tax) of $.11 million in 2000.

     Included  in  special  charges  during  the first  quarter of 2001 were the
merger  and  restructuring  charges  of  $1.9  million  described  on page 6, an
additional loan loss provision of $1.0 million,  other asset write-downs of $.25
million,  investment  security  losses of $.13  million  and other  nonrecurring
accruals and charges.  Annual savings related to the work force reduction should
approximate  $.80 million of which 75% is projected to be recognized in 2001 and
100% in subsequent years.

     Diluted  earnings  per common  share (EPS) were $.09 and $.39 for the first
quarter of 2001 and 2000, respectively. Excluding special charges, CTY's diluted
EPS would have approximated $.41 and $.38 for the same periods.

                                       13

<PAGE>




Management's Discussion, Continued

FINANCIAL CONDITION

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

<TABLE>
<S>                                                                        <C>                     <C>                  <C>
                                                                                                     Increase (Decrease)
                                                                              Balance                       Since
                                                                           March 31, 2001            December 31, 2000
                                                                           --------------            ------------------
                                                                                       (dollars in thousands)


                                                                                                      Amount                 %
                                                                                                      ------                 -
Funding Sources:

Deposits and borrowed funds:

Non-interest bearing...........................................           $   146,849               $ (8,947)              (5.7)  %
Interest-bearing...............................................               806,524                 43,079                5.6
                                                                          -----------               --------               ----
   Total deposits..............................................               953,373                 34,132                3.7

Borrowed funds.................................................               277,975                  2,269                0.8
Other liabilities..............................................                19,371                  9,583               97.9
Shareholders' equity...........................................               107,673                  3,695                3.6
                                                                          -----------               --------               ----
   Total sources...............................................            $1,358,392                $49,679                3.8  %
                                                                          ===========               ========               ====
Funding uses:

Interest earning assets:

Short-term investments.........................................          $     33,835                $24,987              282.4  %
Investment securities..........................................               414,623                 24,804                6.4
Loans, net of unearned income..................................               824,779                  7,186                0.9
                                                                          -----------               --------               ----
   Total interest earning assets...............................             1,273,237                 56,977                4.7

Cash and due from banks........................................                36,773                 (5,393)             (12.8)
Other assets...................................................                48,382                 (1,905)              (3.8)
                                                                          -----------               --------               ----
   Total uses..................................................            $1,358,392                $49,679                3.8  %
                                                                          ===========               ========               ====


</TABLE>

                                       14



<PAGE>


Management's Discussion, Continued

 Balance Sheet Data:

     The  Corporation's  balance  sheet  continued  to grow in 2001 with  assets
reaching $1.4 billion,  an increase of $49.7 million or 3.8% over year-end 2000.
As indicated by the table on page 14,  deposits were the primary funding source,
while investments  represented most of the use of funds.  Average earning assets
(see page 10) for the first quarter of 2001 were $132.6 million or 12.0% greater
than average  earning  assets for the first  quarter of 2000.  Average  interest
bearing  liabilities  increased  $46.4  million  or 4.6%.  Average  non-interest
bearing  demand  deposits  increased  $78.2  million  or 120.8%  for these  same
periods.  Average  earning assets  approximated  93.7% and 94.0%,  respectively.
Changes in the  composition of earning assets  reflect  management's  attempt to
respond to  fluctuating  loan  demand and  corresponding  policies  relating  to
liquidity and asset/liability management.

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

     At March 31, 2001 and December 31, 2000,  management  classified investment
securities with amortized costs and fair values of $412,646,000 and $414,623,000
and  $390,887,000  and  $389,819,000,   respectively,  as  available  for  sale.
Obligations  of  states  and  political  subdivisions  experienced  the  largest
increases  in balances  from  year-end  2000 to March 31,  2001.  Affecting  the
changes in unrealized  gains and losses was a decline in interest rates in 2001.
No securities were  considered  held for trading  purposes at March 31, 2001 and
December 31, 2000.

     At March 31, 2000 the net  unrealized  gain on  investments  available  for
sale, net of tax, was $1,285,000.  At December 31, 2000, the net unrealized loss
on investments  available for sale, net of tax was $694,000.  These amounts were
reflected in shareholders' equity accordingly.

     Net loans increased  $2,004,000 or 0.2% from December 31, 2000 to March 31,
2001. Real estate related loans  increased,  while commercial and personal loans
decreased, during the first quarter of 2001.

     The allowance for loan losses  increased  $1,329,000 or 12.9% from year-end
2000 to March 31, 2001. Total non-performing  loans approximated  $8,388,000 and
$6,660,000,   as  of  March  31,  2001  and  December  31,  2000,  respectively.
Contributing to the increase in non-performing  loans in 2001 was an increase of
$1,592,000 in  non-performing  commercial  loans. The ratio of nonaccrual loans,
other real estate owned,  restructured  loans, and accruing loans  contractually
past due 90 days or more to total assets approximated .65% and .54% at March 31,
2001 and December 31, 2000, respectively. The allowance for loan losses to loans
net of  unearned  income  approximated  1.42% and  1.27% at March  31,  2001 and
December 31, 2000, respectively.

     The  increase  in the  balance  of loans  held for sale at March  31,  2001
reflects an increase in demand for fixed rate mortgage loans.

     Total  deposits  increased  $34,132,000  or 3.7% from  December 31, 2000 to
March 31, 2001.  Contributing  to this increase were increases of $19,325,000 or
7.5%  in  savings  deposits  and  $30,608,000  or 7.2%  in  time  deposits.  New
certificate of deposit products affected the increase in time deposits.

     Management  converted a  significant  portion of  short-term  borrowings to
long-term  debt during the first  quarter of 2001.  At March 31, 2001  long-term
debt totaling  $272,302,000  included borrowings from the Federal Home Loan Bank
of Pittsburgh of $259,820,000 and repurchase  agreements totaling $12,482,000 at
a weighted average interest rate of 5.82%.

                                       15
<PAGE>

     The increase of $9,583,000 or 97.9% in accrued  interest  payable and other
liabilities  during  the first  quarter of 2001 was  affected  by  purchases  of
securities for which  settlement had not occurred by March 31 and accrued merger
and restructuring related charges described on page 7.

Stockholders' Equity:

     Stockholders' equity increased $3,695,000 or 3.6% from December 31, 2000 to
March 31, 2001. A portion of this  increase can be  attributed  to the change in
the net unrealized gain (loss) on investment  securities available for sale, net
of taxes.  The  accumulated  other  comprehensive  income  (loss)  reflected  in
stockholder's  equity changed from  $(694,000) at year-end 2000 to $1,285,000 at
March 31, 2001. Much of this change was a function of declines in interest rates
and corresponding  increases in fair values of debt securities.  The Corporation
reissued approximately 115,000 shares of treasury stock during the first quarter
of 2001. At March 31, 2001 and December 31, 2000 treasury shares totaled 185,000
and 300,000, respectively.

 Liquidity:

     The  ability to meet the cash  needs of  customers,  provide a cushion  for
unforseen  obligations,  and take  advantage  of market  opportunities  requires
adequate liquidity. The primary functions of asset/liability  management are the
assurance  of adequate  liquidity  and  maintenance  of an  appropriate  balance
between  interest-sensitive  earning assets and interest-bearing  liabilities. A
continuous  review of net liquid assets is conducted to assure  appropriate cash
flow to meet needs and obligations in a timely manner.

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

     For the three months ended March 31, 2001,  financing  activities  provided
cash of $37,309,000. Deposit growth and long-term debt accounted for the largest
portion of this funding source.

     Net cash used in investing activities totaled $24,344,000.  The primary use
of funds in 2001 was the purchase of investment securities of $52,568,000.

Forward Outlook:

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

Effects on Inflation:

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

     Also, banks, unlike industrial corporations are not required to provide for
large capital  expenditures  in the form of premises,  equipment and  inventory.
Interest  rate  changes  and the  actions of the  Federal  Reserve  Board have a
greater impact on a bank's operations than do the effects of inflation. Although
occasional  deviations may occur, it is management's policy to generally attempt
to  maintain  rate-sensitive  assets  at a  level  approximating  rate-sensitive
liabilities.  Based on a one-year parameter, this relationship approximated 115%
as of March 31, 2001.

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

                                       16


<PAGE>


                     COMMUNITY BANKS, INC. and SUBSIDIARIES

                   PART II - OTHER INFORMATION AND SIGNATURES



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

          (a) Exhibits - none

          (b)   Registrant was not required to file any reports on Form 8-K
                during the quarter ending March 31, 2001.


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


Date          May 11, 2001                       /S/ Terry L. Burrows
     --------------------------                  -------------------------
                                                     Terry L. Burrows
                                                 Executive Vice-President
                                                 (Chief Financial Officer)


                                       17
<PAGE>