SECURITIES AND EXCHANGE COMMISSION
                                         
                             Washington, D.C.  20549
                                         
                                    FORM 10-Q
                                         
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                                         
                                     OF 1934
                                         
                                         
                       For the Quarter Ended June 30, 1997
                                         
                                         
                                   No. 0-15786             
                             (Commission File Number)
                                         
                                         
                              COMMUNITY BANKS, INC.                       
              (Exact Name of Registrant as Specified in its Charter)
                                         
   
          PENNSYLVANIA                                       23-2251762       
    (State of Incorporation)                          (IRS Employer ID Number)
   
          
          150 Market Street, Millersburg, PA                 17061         
      (Address of Principal Executive Offices)              (Zip Code)
                                         
                                         
                                  (717) 692-4781           
                         (Registrant's Telephone Number)
                                         
                                         
   
   
   Indicate by check mark whether the registrant (1) has filed all reports 
   required to be filed by Sections 12, 13, or 15 (d) of the Securities
   Exchange Act of 1934 during the preceding 12 months (or for such shorter
   period that the registrant was required to file such reports) and (2) has
   been subject to such filing requirements for the past 90 days.
   
   
                                                   Yes  X     No     
   
                Number of Shares Outstanding as of June 30, 1997.
                                         
      CAPITAL STOCK-COMMON                                    3,013,052      
       (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 Cash Flows.............................4
     
     Notes to Consolidated Financial Statements........................5-8
     
     Management's Discussion and Analysis of Financial
        Condition and Results of Operation.............................9-11
     
     
     
     Part II
     
     Other information and Signatures..................................12
     
     
     
     
     
     
     
     
     
     
     
                         PART I - FINANCIAL INFORMATION
                                        
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                        
     The following financial information sets forth the operations of
     Community Banks, Inc. and Subsidiaries for the three month and six
     month periods ending June 30, 1997 and 1996.
     
     
     In the opinion of management, the following Consolidated Balance
     Sheets and related Consolidated Statements of Income and Cash Flows
     reflect all adjustments (consisting of normal recurring accrual
     adjustments) necessary to present fairly the financial position and
     results of operations for such periods.
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
                                             
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
                                       -1-
     
     




   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED BALANCE SHEETS
   (unaudited)
   (dollars in thousands except per share data)
   
                                              
                                                 June 30,         December 31,
                                                  1997                1996    
                                               
                                   
   ASSETS                     
   
   Cash and due from banks...................     $ 20,002         $ 16,547
   Interest-bearing time deposits in other 
      banks..................................        1,528            1,397
   Investment securities, available for sale
      (market value).........................      156,649          145,446
   Loans.....................................      266,178          261,976
   Less:  Unearned income....................      (11,640)         (11,965)
          Allowance for loan losses..........       (2,887)          (2,798)
          Net loans..........................      251,651          247,213 
   Premises and equipment, net...............        8,216            7,848
   Goodwill..................................        1,027            1,147
   Other real estate owned...................          526              351
   Loans held for sale.......................        1,744            4,622
   Accrued interest receivable and other         
      assets.................................        7,776            7,947
    
      Total assets...........................     $449,119         $432,518 
                                                  ========         ========
   
   LIABILITIES
   
   Deposits:
      Demand.................................     $ 29,010         $ 27,345
      Savings................................      158,817          150,369
      Time...................................      151,182          152,615
      Time in denominations of $100,000 or
       more..................................       13,386           12,927  
      Total deposits.........................      352,395          343,256
   Short-term borrowings.....................        8,995           13,217 
   Long-term debt............................       35,000           25,000
   Accrued interest payable and other 
      liabilities............................        3,528            3,306
      
      Total liabilities......................      399,918          384,779
   
   
   STOCKHOLDERS' EQUITY
   
   Preferred stock, no par value; 500,000
      shares authorized; no shares issued
      and outstanding........................        ---              ---
   Common stock-$5.00 par value; 5,000,000
      shares authorized; 3,056,920 and
      2,888,088 shares issued in 1997 and
      1996, respectively.....................       15,285           14,440
   Surplus...................................       17,880           13,716
   Retained earnings.........................       16,954           19,743
   Net unrealized gain (loss) on investment 
    securities available for sale, net of tax          198              261  
   Less:  Treasury stock of 43,868 and 19,927 
      shares, respectively, at cost..........       (1,116)            (421) 
      Total stockholders' equity.............       49,201           47,739 
      Total liabilities and stockholders'
       equity................................     $449,119         $432,518
                                                  ========         ========
   
   
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
                                    
                                     -2-
   
<TABLE>

   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF INCOME
   (unaudited)
   (dollars in thousands except per share data)
<CAPTION>
   
   
                                                        Three Months Ended        Six Months Ended
                                                             June 30,                  June 30,     
<S>                                                       1997       1996          1997      1996  
   Interest income:                                    <C>         <C>          <C>        <C> 
   Interest and fees on loans.................          $5,798      $5,456       $11,586    $10,985
   Interest and dividends on investment 
    securities:
        Taxable...............................           2,037       1,475         3,958      2,834
        Exempt from federal income tax........             409         391           793        833
   Fed funds interest.........................              13         108            28        189
   Other interest income......................              18          17            37         29
        Total interest income.................           8,275       7,447        16,402     14,870
   
   Interest expense:
   Interest on deposits:  
        Savings...............................             834         810         1,629      1,570
        Time..................................           2,016       2,014         4,034      4,067
        Time in denominations of $100,000 or
         more.................................             179         165           358        320
   Interest on short-term borrowings and
    long-term debt............................             227         112           469        226
   Fed funds purchased and repo interest......             238         ---           439        ---
        Total interest expense................           3,494       3,101         6,929      6,183
        Net interest income...................           4,781       4,346         9,473      8,687
   Provision for loan losses..................             140         183           380        385
        Net interest income after provision 
         for loan losses......................           4,641       4,163         9,093      8,302
   Other income:
        Trust department income...............              73          65           144        132
        Service charges on deposit accounts...             241         246           482        466
        Other service charges, commissions
         and fees.............................              44          66           100        111
        Investment security gains ............             123         130           419        277
        Income on insurance premiums..........             142         164           286        297
        Gains on mortgage sales...............              62          70           102         70
        Other income..........................              70          48           179         80
             Total other income...............             755         789         1,712      1,433
   
   Other expenses:
        Salaries and employee benefits........           1,592       1,547         3,133      3,054
        Net occupancy expense.................             496         448         1,008        919
        Operating expense of insurance
          subsidiary..........................              91         100           221        187
        Other operating expense...............           1,058         957         2,009      1,932
             Total other expense..............           3,237       3,052         6,371      6,092
             Income before income taxes.......           2,159       1,900         4,434      3,643
   Provision for income taxes.................             621         460         1,272        857
   
             Net income.......................          $1,538      $1,440       $ 3,162    $ 2,786
                                                        ======      ======       =======    =======
   Average number of fully diluted shares         
    outstanding...............................       3,077,337   2,895,418     3,078,382  2,895,004
                                                     =========   =========     =========  =========
   Earnings per share: 
      Primary.................................         $   .51      $  .48       $  1.05    $   .92 
      Fully diluted...........................         $   .50      $  .48       $  1.03    $   .91
   Dividends paid per share...................         $   .21      $  .19       $   .41    $   .36
   
   Per share data has been adjusted to reflect stock dividends.
   
   
   The accompanying notes are an integral part of the consolidated financial 
   statements.
                                       -3-      
   
</TABLE>
   
   
   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF CASH FLOWS
   (unaudited)
   (dollars in thousands)
   
                                                           Six Months Ended
                                                                June 30,    
                                                            1997       1996   
   
   
   Operating Activities:
      Net income......................................   $ 3,162      $ 2,786 
      Adjustments to reconcile net income to net
       cash provided by operating activities:
         Provision for loan losses....................       380          385
         Provision for depreciation and amortization..       514          457
         Amortization of goodwill.....................       120          120
         Investment security gains....................      (419)        (277)
         Loans originated for sale....................    (1,991)      (3,800) 
         Proceeds from sales of loans.................     4,971        3,875
         Gains on mortgage sales......................      (102)         (70)
         Decrease (increase) in other assets..........      (104)       (1,304)
         Increase (decrease) in accrued interest 
          payable and other liabilities...............       254          117 
           Net cash provided by operating activities..     6,785        2,289  
   
   Investing Activities:
      Net decrease (increase) in interest-bearing time                    
       deposits in other banks........................      (131)        (965)
      Proceeds from sales of investment           
       securities.....................................    11,530          653
      Proceeds from maturities of investment 
       securities.....................................    11,693       16,647
      Purchases of investment securities..............   (34,102)     (21,940) 
      Net decrease (increase) in total loans..........    (4,718)      (6,275)
      Purchases of premises and equipment.............      (882)        (609)
           Net cash used by investing activities......   (16,610)     (12,489)
   Financing Activities:
      Net increase in total deposits..................     9,139       16,060  
      Net increase (decrease) in short-term borrowings    (4,222)        (256)
      Proceeds from issuance of long-term debt........    10,000         ---
      Cash dividends..................................    (1,262)      (1,113)
      Proceeds from issuance of common stock..........       320           53
      Purchases of treasury stock.....................      (695)        (161) 
           Net cash provided by financing activities..    13,280       14,583
       
           Increase (decrease) in cash and cash
            equivalents...............................     3,455        4,383
            
            
   Cash and cash equivalents at beginning of period...    16,547       17,085
   Cash and cash equivalents at end of period.........   $20,002      $21,468 
                                                         =======      =======
   
   
   
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
   
                                      -4-      
   
   
   
   
   
   
                                           
   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 and six month periods ended June 30, 1997 and
   1996.
   
             The accounting policies of Community Banks, Inc. and subsidiaries,
   as applied in the consolidated interim financial statements presented herein,
   are substantially the same as those followed on an annual basis as presented
   on page 9 of the 1996 Annual Report to shareholders.  
   
             In February, 1997, the Financial Accounting Standards Board issued
   Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
   ("SFAS 128"). SFAS 128 established standards for computing and presenting
   earnings per share and applies to entities with publicly held common stock or
   potential common stock. SFAS 128 simplifies the standards for cumputing
   earnings per share previously found in APB Opinion No. 15, "Earnings Per
   Share," by replacing the presentation of primary earnings per share with a
   presentation of basic earnings per share. It also requires dual presentation
   of basic and diluted earnings per share on the face of the income statement
   for all entities with complex capital structures.
   
             SFAS 128 is effective for financial statements issued for periods
   ending after December 15, 1997, including interim periods. Earlier
   application is not permitted; however, restatement of all prior-period
   earnings per share data is required upon adoption. The impact of adoption of
   SFAS 128 on the Corporation's earnings per share data is immaterial.
   Community Banks, Inc. currently reports primary earnings per share and
   diluted earnings per share on its Consolidated Statements of Income.  
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                   -5-
   
   
   
   
   
   
   2.  Investment Securities
            The amortized cost and estimated market values of investment
   securities at June 30, 1997 and December 31, 1996, were as follows:
   
   
                                                           1997
                                                           
                                                                                
                                                                  Estimated
                                                Amortized           Market
                                                  Cost              Value  
   
   U.S. Treasury securities and obligations
    of U.S. government corporations and
     agencies...............................    $ 38,836          $ 38,956
   Mortgage-backed U.S. government 
    agencies................................      80,348            78,972
   Obligations of states and political
    subdivisions............................      32,001            32,291
   Corporate securities.....................       1,015             1,029  
   Equity securities........................       4,149             5,401 
         Total..............................    $156,349          $156,649 
                                                ========          ======== 
   
   
                                                           1996
                                                                          
   U.S. Treasury securities and obligations 
    of U.S. government corporations and
     agencies...............................    $ 40,267          $ 40,432
   Mortgage-backed U.S. government 
    agencies................................      69,837            68,528
   Obligations of states and political
    subdivisions............................      30,496            30,958
   Corporate securities.....................       1,101             1,123   
   Equity securities........................       3,349             4,405
         Total..............................    $145,050          $145,446
                                                ========          ======== 
                                        
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                       -6-           
   
                                       





                                      

   
   
   
   
   3.  Allowance for loan losses
            Changes in the allowance for loan losses are as follows:
   
                                          Six months ended    Year Ended
                                              June 30,        December 31,
                                                1997               1996     
   
   Balance, January 1..................       $2,798               $2,574
   Provision for loan losses...........          380                1,042
   Loan charge-offs....................         (441)              (1,296)
   Recoveries..........................          150                  478
   
   Balance, June 30, 1997 and 
    December 31, 1996 .................       $2,887               $2,798
                                              ======               ======
   
                   NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
   
                                               June 30,          December 31,
                                                1997                 1996     
   
   Loans past due 90 days or more
    and still accruing interest:
      Commercial, financial and 
       agricultural...................         $   72               $   20
      Mortgages.......................            510                  547
      Personal installment............            268                  189
      Other...........................              9                   11
                                                  859                  767
   
   Loans renegotiated with the borrowers         NONE                 NONE
   
   Loans on which accrual of interest
    has been discontinued:
      Commercial, financial and
       agricultural....................           818                  723 
      Mortgages........................         2,027                1,904 
      Other............................           258                  283
                                                3,103                2,910
    
   Other real estate...................           526                  351
      Total............................        $4,488               $4,028  
                                               ======               ======     
   
   (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
        The Corporation adopted FAS 114 "Accounting by Creditors for Impairment
   of a Loan", as amended by FAS 118, on January 1, 1995. Under the standard, a
   loan is considered impaired, based on current information and events, if it
   is probable that the Corporation will be unable to collect the scheduled
   payments of principal or interest when due according to the contractual
   terms of the loan agreement. For purposes of applying FAS 114, larger groups
   of smaller-balance loans such as residential mortgage and installment loans
   are collectively evaluated for impairment. Management has established a
   smaller-dollar-value threshold of $250,000 for all loans. Loans exceeding
   this threshold are evaluated in accordance with FAS 114. An insignificant
   delay or shortfall in the amount of payments, when considered 
   
                                      -7-
   
   
   
   independent of other factors, would not cause a loan to be rendered
   impaired. Insignificant delays or shortfalls may include, depending on
   specific facts and circumstances, those that are associated with temporary
   operational downturns or seasonal business delays.
   
        Management performs periodic reviews of its loans to identify impaired
   loans. The measurement of impaired loans is based on the present value of
   expected future cash flows discounted at the historical effective interest
   rate, except that all collateral-dependent loans are measured for impairment
   based on the fair value of the collateral. 
   
        Loans continue to be classified as impaired unless they are brought
   fully current and the collection of scheduled interest and principal is
   considered probable. When an impaired loan or portion of an impaired loan is
   determined to be uncollectible, the portion deemed uncollectible is charged
   against the related valuation allowance and subsequent recoveries, if any,
   are credited to the valuation allowance. The company does not accrue
   interest on impaired loans. While a loan is considered impaired, cash
   payments received are applied to principal or interest depending upon
   management's assessment of the ultimate collectibility of principal and
   interest.
   
        At June 30, 1997 the Corporation recorded no investment in impaired
   loans recognized in accordance with FAS 114 and no related FAS 114 valuation
   allowance. For the six month period ended June 30, 1997, the average balance
   of impaired loans was negligible. The application of FAS 114 has not had any
   effect on the comparability of the non-performing loan table in footnote 3
   between the periods presented. The company recognized no interest on
   impaired loans on the cash basis.  
                                         
   
   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 $740,000 and
   $1,025,000 and $6,931,000 and $6,358,000 for income taxes and interest,
   respectively, for each of the six month periods ended June 30, 1997 and
   1996.
   
            Excluded from the consolidated statements of cash flows for the
   periods ended June 30, 1997 and 1996 was the effect of certain non-cash
   activities. The company acquired real estate through foreclosure totalling
   $275,000 and $246,000, respectively. The company also recorded a decrease in
   deferred tax liabilities of $32,000 in 1997. A decrease in deferred tax
   liabilities of $833,000 was recognized in 1996. These variations related to
   the effects of changes in the net unrealized gain (loss) on investment
   securities available for sale.
   
   
    
   
   
   
   
   
   
   
   
   
                                      -8-
   
   
   
   
   
   
   
   
   
   
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      



                                       



   
   
   
   
   
                    Community Banks, Inc. and Subsidiaries
                     Management's Discussion and Analysis
               of Financial Condition and Results of Operations
                                       
   Results of Operations
                                       
        Net interest income after provision for loan losses for the first
   six months of 1997 was $791,000 or 9.5% greater than net interest income
   after provision for loan losses for the first six months of 1996. Total
   interest income increased $1,532,000 or 10.3% during the period while
   total interest expense increased $746,000 or 12.1%. Average earning
   assets were approximately 11.6% greater during the first six months of
   1997 than the first six months of 1996. Average loan balances increased
   6.5% and average investment securities increased approximately 25.7% in
   1997. Average interest-bearing liabilities increased approximately
   12.0%. The average yields realized on earning assets approximated 8.4%
   and 8.2% during the first six months of 1997 and 1996, respectively. The
   average costs of interest-bearing liabilities approximated 4.0% and 3.9%
   for the same periods. Net interest margins on a tax equivalent basis
   approximated 4.9% and 5.0% for the first six months of 1997 and 1996,
   respectively. The provision for loan losses charged to income decreased
   1.3% in 1997. Total loans past due 90 days and still accruing interest,
   non-performing loans, and other real estate approximated $4,488,000 and
   $4,028,000, respectively, as of June 30, 1997 and December 31, 1996.  
   
        Total other income for the first six months of 1997 was $279,000 or
   19.5% more than total other income for the first six months of 1996.
   Affecting this change were security gains of $419,000 and $277,000 
   recognized in 1997 and 1996, respectively. Gains recognized on mortgage
   sales totalled $102,000 in 1997 while $70,000 were recognized in 1996.
   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 lower in 1997 than 1996. Loans held for sale as
   of June 30, 1997 totalled $1,744,000. The market value of these loans
   approximated book value at that time. Other income in 1997 was also
   affected by tax refunds. Total other expenses for the first six months
   of 1997 increased $279,000 or 4.6%. Contributing factors were increases
   of $79,000 or 2.6% in salaries and employee benefits and $89,000 in net
   occupancy expense.   
   
        The provision for income taxes increased $415,000 for the first six
   months of 1997 in comparison to the first six months of 1996. Affecting
   this increase was a decline in tax-free income in 1997. The effective
   tax rates approximated 28.7% and 23.5% for the respective periods.  
   
        The previously described factors contributed to a net increase of
   $376,000 or 13.5% in net income for the six month period ended June 30,
   1997.
   
        The significant changes and related causes which occurred during
   the three month period ending June 30, 1997 were generally consistent
   with those described for the six month period ending June 30, 1997.
   Investment security gains decreased while gains on mortgage sales
   increased in the second quarter of 1997. Gains on mortgage sales were
   $62,000 and $70,000, respectively, for the three month periods ending
   June 30, 1997 and 1996. Investment security gains were $123,000 and
   $130,000 for the three month periods ending June 30, 1997 and 1996,
   respectively.
       
        
   
   
                                    -9-
   
   
   
   
   
   
   
    
      
   
               
                                    
   
   
   
   
   Management's Discussion, Continued
   
   
   Financial Condition
   
        As of June 30, 1997 cash and due from banks was $3,455,000 or 20.9%
   greater than it was at December 31, 1996. This apparent increase was
   affected by a one day aberration for the average of cash and due from
   banks approximated $14,500,000 for June of 1997. Interest-bearing time
   deposits in other banks and investment securities increased $11,334,000
   or 7.7% during this same period. Contributing to this change was an
   increase of $10,444,000 in mortgage-backed U.S. agency securities. The
   approximate market value of debt securities was $952,000 less than
   amortized cost at June 30, 1997. The approximate market value of debt
   securities was $660,000 less than amortized cost at December 31, 1996.
   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 June 30, 1997 and December 31, 1996, management classified
   investment securities with amortized costs and market values of
   $156,349,000 and $156,649,000, and $145,050,000 and $145,446,000,
   respectively, as available for sale. Gross unrealized gains and losses
   relating to debt securities approximated $916,000 and $1,868,000,
   respectively, at June 30, 1997. Net loans increased $4,438,000 or 1.8%
   from December 31, 1996 to June 30, 1997. Affecting this change were an
   increase in real estate loans and a decrease in consumer loans.
   Commercial loans increased $2,184,000 or 5.0% during the period. The
   allowance for loan losses approximated 1.13% and 1.12% of net loans at
   June 30, 1997 and December 31, 1996. Much of the increase in net
   premises and equipment of $386,000 related to new banking offices.
   Goodwill continues to be amortized at an annualized rate of $240,000. As
   previously noted, Community Banks, Inc. sells only fixed-rate real
   estate and education loans specifically designated for resale on the
   secondary market and at June 30, 1997 and December 31, 1996 these loans
   totalled $1,744,000 and $4,622,000, respectively. Affecting the decrease
   of $171,000 in accrued interest receivable and other assets was a
   decrease in accrued interest. These factors contributed to an increase
   of $16,601,000 or 3.8% in total assets from December 31, 1996 to June
   30, 1997. 
     
        Total deposits increased $9,139,000 or 2.7% from December 31, 1996
   to June 30, 1997. All of the increase can be attributed to increases in
   demand and savings deposits. It is management's philosophy to generally
   maintain competitive but not overly-aggressive interest rates relative
   to interest-bearing liabilities. Management decreased short-term
   borrowings and increased long-term debt in 1997 in an attempt to better
   balance rate sensitive assets and liabilities. At June 30, 1997
   long-term debt totalling $35,000,000 was comprised of borrowings from
   the Federal Home Loan Bank of Pittsburgh of $15,000,000 and repurchase
   agreements totalling $20,000,000 at a weighted average interest rate of
   5.89%.  
                
        Based on a one year interval, rate sensitive assets to rate
   sensitive liabilities approximated 92% as of June 30, 1997.
   
   
   
   
    
                                     -10-
   
   
   
   Management's Discussion, Continued 
   
   
   
        As of June 30, 1997 the Corporation had risk-based capital in
   excess of the fully implemented regulatory requirements, and tier 1 plus
   tier 2 capital approximated 18% of risk-weighted assets. Effective
   January 1, 1994, the Corporation adopted the provisions of Statement of
   Financial Accounting Standards No. 115, "Accounting for Certain
   Investments in Debt and Equity Securities," which requires the
   Corporation to reflect securities available and held for sale at fair
   value on the balance sheet. Upon adoption, the Corporation classified
   all investment securities as available for sale and recorded the
   increase to fair value of $2,246,000, net of applicable income taxes, 
   as a separate component of equity. The increase recorded to
   stockholders' equity at June 30, 1997 was $198,000, net of applicable
   income taxes. Management believes that this action is necessary to
   provide for proper administration of the investment portfolio and can be
   accommodated by the capitalization of the Corporation.  
   
   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 June 30, 1997.
   
   
   Forward Outlook
        
        Management is unaware of any regulatory recommendations which, if
   implemented, would have a material effect on the liquidity, capital
   resources, or operations of CBI. Increased loan demand is anticipated
   for the remainder of 1997 and management will continue to carefully
   evaluate this demand based on the creditworthiness of the borrower and
   the relative strength of the economy in the Corporation's market.     
   
        The Corporation is anticipating the maintenance of a favorable net
   interest margin throughout the remainder of 1997.
   
   Other Events
   
        On April 22, 1996, the Corporation announced plans to repurchase up
   to 130,500 shares or 5% of its outstanding common stock. The repurchases
   will be made from time to time in open market transactions. The
   repurchased shares will become Treasury shares and will be used for
   general corporate purposes, including grants under its Employee Stock
   Option Plans. As of June 30, 1997, the Corporation had purchased 37,945
   shares pursuant to this repurchase plan.
   
        The Corporation declared a 5 percent stock dividend payable April
   8, 1997, to shareholders of record on March 24, 1997. 
   
   
                                      
                                    -11-
    
   
   
   
   
   
            

    
    
    
    
    
    
    
                      COMMUNITY BANKS, INC. and SUBSIDIARIES
                                          
                     PART II - OTHER INFORMATION AND SIGNATURES
    
    
    Item 4.  Submission of Matters to Vote of Security Holders
    
                  
         The annual meeting of shareholders of Community Banks, Inc. was held
    May 6, 1997 for the purpose of considering and voting upon the following
    matters:
    
             1.  To elect five (5) Directors:  Ray N. Leidich, Thomas W. Long,
    Donald L. Miller, and Samuel E. Cooper to serve until the 2001 Annual
    Meeting of Shareholders. In addition, Susan K. Nenstiel was elected to
    serve until 1999. Each director received affirmative votes representing at
    least 75.36% of the shares outstanding.            
    
    
    
    Item 6.  Exhibits and Reports on Form 8-K
    
             (a)  Exhibits - none
    
             (b)  Registrant was not required to file any reports
                  on  Form 8-K during the quarter ending June 30, 1997.
    
             
                                          
                                          
                                          
                                     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    August 6, 1997                     /S/ Thomas L. Miller   
                                                    Thomas L. Miller
                                                         Chairman     
                                               (Chief Executive Officer)
                                              
    
    
    Date    August 6, 1997                    /S/ Terry L. Burrows   
                                                    Terry L. Burrows
                                                 Executive Vice-President
                                                 (Chief Financial Officer)
    
    
    
    
    
                                       -12-