SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q
                                    ---------

       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

                              EXCHANGE ACT OF 1934


                    For the Quarter Ended September 30, 2003

                                   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)

   750 East Park Dr., Harrisburg, PA                              17111
------------------------------------------                 ------------------
(Address of Principal Executive Offices)                        (Zip Code)

                                 (717) 920-1698
                          -----------------------------
                         (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
                                      -----     -----



Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). YES  X    NO
                                               -----    -----

               Number of shares outstanding as of October 31, 2003

 CAPITAL STOCK-COMMON                                           11,606,000
 --------------------                                      ------------------
   (Title of Class)                                       (Outstanding Shares)






<PAGE>


                     COMMUNITY BANKS, INC. and SUBSIDIARIES

                                   INDEX 10-Q


PART I - Financial Information

Item 1.     Financial Statements

      Consolidated Interim Balance Sheets..................................... 3
      Consolidated Interim Statements of Income............................... 4
      Consolidated Interim Statements of Changes in Stockholders' Equity...... 5
      Consolidated Interim Statements of Cash Flows........................... 6
      Notes to Consolidated Interim Financial Statements................... 7-12

Item 2.     Management's Discussion and Analysis of Financial
     Condition and Results of Operation................................... 13-20

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.....21-22

Item 4.     Controls and Procedures ......................................... 23


PART II - Other Information

Item 1.     Legal Proceedings................................................ 24

Item 2.     Changes in Securities and Use of Proceeds........................ 24

Item 3.     Defaults Upon Senior Securities.................................. 24

Item 4.     Submission of Matters to a Vote of Security Holders.............. 24

Item 5.     Other Information................................................ 24

Item 6.     Exhibits and Reports on Form 8-K.............................. 24-26


SIGNATURES................................................................... 27



                                       2
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

                         PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements
-----------------------------

Consolidated Interim Balance Sheets
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
                                                                           September 30,              December 31,
                                                                                2003                     2002
                                                                          --------------             -------------

ASSETS

<S>                                                                       <C>                        <C>
Cash and due from banks.....................................              $       43,244             $      36,137
Interest-bearing time deposits in other banks...............                       1,179                       951
Investment securities, available for sale...................                     633,261                   667,801
Loans.......................................................                   1,068,967                   904,568
   Less:  Allowance for loan losses.........................                     (13,440)                  (12,343)
                                                                          --------------              ------------
              Net loans.....................................                   1,055,527                   892,225
Premises and equipment, net.................................                      24,507                    24,209
Goodwill and identifiable intangible assets.................                       4,699                     1,760
Other real estate owned.....................................                         572                     1,183
Loans held for sale.........................................                       6,835                    11,483
Accrued interest receivable and other assets................                      46,184                    44,149
                                                                          --------------             -------------

     Total assets...........................................              $    1,816,008             $   1,679,898
                                                                          ==============             =============

LIABILITIES

Deposits:
   Demand (non-interest bearing)............................              $      176,068             $     168,277
   Savings..................................................                     433,811                   345,598
   Time.....................................................                     496,764                   506,991
   Time in denominations of $100,000 or more................                     103,989                   112,047
                                                                          --------------             -------------
   Total deposits..........................................                    1,210,632                 1,132,913
Short-term borrowings.......................................                      92,935                    69,125
Long-term debt..............................................                     348,082                   320,533
Subordinated debentures.....................................                      15,000                    15,000
Accrued interest payable and other liabilities..............                      12,649                    13,165
                                                                          --------------             -------------

   Total liabilities........................................                   1,679,298                 1,550,736
                                                                          --------------             -------------

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; 11,854,000 and 9,410,000 shares
   issued in 2003 and 2002, respectively....................                      59,266                    47,053
Surplus.....................................................                      57,389                    46,418
Retained earnings...........................................                      21,409                    35,344
Accumulated other comprehensive income, net of
   tax of $2,397 and $3,520, respectively...................                       4,451                     6,538
Less: Treasury stock of 282,000 and 258,000
   shares at cost, respectively.............................                      (5,805)                   (6,191)
                                                                          --------------             -------------
  Total stockholders' equity................................                     136,710                   129,162
                                                                          --------------             -------------

  Total liabilities and stockholders' equity................              $    1,816,008             $   1,679,898
                                                                          ==============             =============
</TABLE>



The  accompanying  notes  are  an  integral  part  of the  consolidated  interim
financial statements.



                                       3
<PAGE>



COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>

                                                                          Three Months Ended                  Nine Months Ended
                                                                            September 30,                        September 30,
                                                                      --------------------------          -------------------------
                                                                         2003            2002                2003           2002
                                                                      --------------------------          -------------------------
INTEREST INCOME:
<S>                                                                   <C>             <C>                 <C>            <C>
   Interest and fees on loans.....................................    $   16,691      $   16,958          $   49,121     $   50,463
   Interest and dividends on investment securities:
      Taxable.....................................................         4,456           5,000              14,316         14,773
      Exempt from federal income tax..............................         2,618           2,414               7,819          7,284
   Other interest income..........................................             4              41                   7            215
                                                                      ----------      ----------          ----------     ----------
      Total interest income.......................................        23,769          24,413              71,263         72,735
                                                                      ----------      ----------          ----------     ----------

INTEREST EXPENSE:
   Interest on deposits:
      Savings.....................................................           825           1,012               2,387          3,257
      Time........................................................         4,046           5,213              12,630         15,824
      Time in denominations of $100,000 or more...................           792             911               2,538          2,848
   Interest on short-term borrowings and long-term debt...........         4,637           4,234              13,678         12,606
   Interest on subordinated debentures............................           171             ---                 526            ---
   Federal funds purchased and repo interest......................            44              95                 148            444
                                                                      ----------      ----------          ----------     ----------
      Total interest expense.....................................         10,515          11,465              31,907         34,979
                                                                      ----------      ----------          ----------     ----------
      Net interest income.........................................        13,254          12,948              39,356         37,756
Provision for loan losses.........................................           900             500               1,900          2,750
                                                                      ----------      ----------          ----------     ----------
      Net interest income after provision for loan losses........         12,354          12,448              37,456         35,006
                                                                      ----------      ----------          ----------     ----------

NON-INTEREST INCOME:
   Investment management and trust services.......................           292             260                 942            765
   Service charges on deposit accounts...........................          1,350             932               3,686          2,508
   Other service charges, commissions and fees....................           799             568               2,329          1,855
   Investment security gains .....................................           302              64               1,849            600
   Insurance premium income and commissions.......................           819             331               2,077          1,513
   Mortgage banking revenue.......................................           936             310               1,807            796
   Other income...................................................         1,003             511               2,206          2,284
                                                                      ----------      ----------          ----------     ----------
      Total non-interest income...................................         5,501           2,976              14,896         10,321
                                                                      ----------      ----------          ----------     ----------

NON-INTEREST EXPENSES:
   Salaries and employee benefits.................................         6,623           5,638              18,799         15,968
   Net occupancy expense..........................................         1,820           1,528               5,364          4,333
   Other operating expense........................................         3,135           2,397               9,593          8,712
                                                                      ----------      ----------          ----------     ----------
      Total non-interest expenses.................................        11,578           9,563              33,756         29,013
                                                                      ----------      ----------          ----------     ----------
      Income before income taxes..................................         6,277           5,861              18,596         16,314
Income taxes .....................................................         1,130           1,121               3,372          2,504
                                                                      ----------      ----------          ----------     ----------

      Net income..................................................    $    5,147      $    4,740          $   15,224     $   13,810
                                                                      ==========      ==========          ==========     ==========

CONSOLIDATED PER SHARE DATA:
   Basic earnings per share.......................................    $      .45      $      .41          $     1.32     $     1.19
   Diluted earnings per share.....................................    $      .43      $      .40          $     1.28     $     1.16
   Dividends declared.............................................    $      .17      $      .14          $      .49     $      .41

</TABLE>



The  accompanying  notes  are  an  integral  part  of the  consolidated  interim
financial statements.




                                       4
<PAGE>



COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Changes in Stockholders' Equity
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>

                                                                    Nine Month Periods Ended September 30
                                                                    -------------------------------------

                                                                                      Accumulated
                                                                                         Other
                                              Common                  Retained       Comprehensive        Treasury         Total
                                               Stock      Surplus     Earnings        Income(Loss)          Stock          Equity
                                              ------------------------------------------------------------------------------------
<S>                                           <C>         <C>          <C>               <C>               <C>            <C>
Balance, January 1, 2002.................     $44,839     $35,906      $36,923           $(4,024)          $(2,395)       $111,249
   Comprehensive income:
      Net income.........................                               13,810                                              13,810
      Unrealized gain on securities, net
        of reclassification adjustment ..                                                 11,704                            11,704
                                                                                                                          --------
     Total comprehensive income..........                                                                                   25,514
Cash dividends ($.41 per share)..........                               (4,824)                                             (4,824)
5% stock dividend declared in February
   2002 (440,000 shares).................       2,241      10,177      (12,418)                                                ---
Purchases of treasury stock
   (198,000 shares)......................                                                                   (5,142)         (5,142)
Issuance of additional shares
   (81,000 net shares of treasury
   stock reissued and 4,000 shares
   of common stock canceled).............         (21)                    (486)                              1,760           1,253
                                              -------     -------      -------           -------           -------        --------

Balance, September 30, 2002..............     $47,059     $46,083      $33,005           $ 7,680           $(5,777)       $128,050
                                              =======     =======      =======           =======           =======        ========


Balance, January 1, 2003.................     $47,053     $46,418      $35,344           $ 6,538           $(6,191)       $129,162
   Comprehensive income:
     Net income..........................                               15,224                                              15,224
     Unrealized loss on securities, net
        of reclassification adjustments..                                                 (2,087)                           (2,087)
                                                                                                                          --------
     Total comprehensive income..........                                                                                   13,137
Cash dividends ($.49 per share)..........                               (5,678)                                             (5,678)
5% stock dividend declared in
     February 2003 (470,000 shares)......       2,346      10,612      (12,984)                                                (26)
20% stock split payable in the form of a
     stock dividend, declared in
     November 2003 (1,976,000 shares)....       9,878                   (9,878)                                                ---
Purchases of treasury stock
    (138,000 shares).....................                                                                   (3,275)         (3,275)
Issuance of additional shares
    (179,000 net shares of treasury
    stock reissued and 2,000 shares
    of common stock canceled)............         (11)        359         (619)                              3,661           3,390
                                              -------     -------      -------           -------           -------        --------

Balance, September 30, 2003..............     $59,266     $57,389      $21,409           $ 4,451           $(5,805)       $136,710
                                              =======     =======      =======           =======           =======        ========
</TABLE>


The accompanying notes are an integral part of the consolidated interim
financial statements.

                                       5
<PAGE>




COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                               Nine Months Ended
                                                                                                 September 30,
                                                                                     --------------------------------------
                                                                                         2003                       2002
                                                                                     --------------------------------------
Operating Activities:
<S>                                                                                  <C>                        <C>
   Net income........................................................                $    15,224                $    13,810
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for loan losses.......................................                      1,900                      2,750
     Depreciation and amortization...................................                      2,309                      1,971
     Amortization of security premiums and discounts, net............                      2,109                         69
     Investment security gains.......................................                     (1,849)                      (600)
     Loans originated for sale.......................................                    (58,880)                   (39,811)
     Proceeds from sales of loans....................................                     64,866                     43,925
     Gains on loan sales.............................................                     (1,338)                      (796)
     Change in other assets, net.....................................                      2,845                     (2,408)
     Change in accrued interest payable and
      other liabilities, net.........................................                     (2,913)                       780
                                                                                     -----------                -----------

      Net cash provided by operating activities......................                     24,273                     19,690
                                                                                     -----------                -----------

Investing Activities:
   Net increase in interest-bearing time
    deposits in other banks..........................................                       (228)                      (193)
   Proceeds from sales of investment securities......................                    153,233                    117,267
   Proceeds from maturities of investment securities.................                    126,803                     57,081
   Purchases of investment securities................................                   (248,966)                  (232,590)
   Net increase in total loans.......................................                   (165,852)                   (52,165)
   Additions to premises and equipment...............................                     (2,311)                    (2,533)
   Other.............................................................                     (2,584)                      (880)
                                                                                     -----------                -----------

    Net cash used by investing activities............................                   (139,905)                  (114,013)
                                                                                     -----------                -----------

Financing Activities:
   Net increase in total deposits....................................                     77,719                    112,170
   Net increase in short-term borrowings.............................                     23,810                     13,727
   Proceeds from issuance of long-term debt..........................                     30,000                        ---
   Repayment of long-term debt.......................................                     (2,451)                   (26,384)
   Cash dividends and cash paid in lieu of fractional shares.........                     (5,704)                    (4,824)
   Purchases of treasury stock.......................................                     (3,275)                    (5,142)
   Proceeds from issuance of common stock............................                      2,640                      1,253
                                                                                     -----------                -----------

    Net cash provided by financing activities........................                    122,739                     90,800
                                                                                     -----------                -----------

 Increase (decrease) in cash and cash equivalents....................                      7,107                     (3,523)

Cash and cash equivalents at beginning of period.....................                     36,137                     44,764
                                                                                     -----------                -----------

Cash and cash equivalents at end of period...........................                $    43,244                $    41,241
                                                                                     ===========                ===========

</TABLE>



The  accompanying  notes  are  an  integral  part  of the  consolidated  interim
financial statements.


                                       6
<PAGE>






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


1.  Summary of Significant Accounting Policies
    ------------------------------------------

     Basis of Presentation - The accompanying  unaudited  consolidated financial
statements of Community  Banks,  Inc. and Subsidiaries  ("Community")  have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States for interim  financial  information and  instructions to Form 10-Q
and Article 10 of Regulation  S-X.  Accordingly,  they do not include all of the
information and footnotes required by accounting  principles  generally accepted
in the United  States  for  complete  financial  statements.  In the  opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included.

     Operating  results for the nine months ended  September  30, 2003,  are not
necessarily  indicative  of the results  that may be expected for the year ended
December 31, 2003.

     For  further  information,  refer  to the  audited  consolidated  financial
statements,  and footnotes thereto,  included in the Annual Report on Form 10-K,
for the year ended December 31, 2002.

     Community  Banks,  Inc.  (Community) is a financial  holding  company whose
wholly-owned  subsidiaries include Community Banks,  Community Bank Investments,
Inc.  (CBII),  Community Banks Life Insurance Co. (CBLIC) and CMTY Capital Trust
I.  Community  Banks  provides a wide range of  services  through its network of
offices in Adams,  Cumberland,  Dauphin,  Luzerne,  Northumberland,  Schuylkill,
Snyder, and York Counties in Pennsylvania and Carroll and Montgomery Counties in
Maryland.

     Statement  of Cash Flows - Cash and cash  equivalents  include cash and due
from banks and  federal  funds  sold.  The  company  made cash  payments of $2.6
million and $2.9  million and $32.0  million and $35.6  million for income taxes
and interest,  respectively,  for each of the nine month periods ended September
30, 2003 and 2002.  Excluded from the consolidated  statements of cash flows for
the periods ended September 30, 2003 and 2002 was the effect of certain non-cash
activities.  The company  acquired  real  estate  through  foreclosure  totaling
$650,000 and $2.7 million, respectively.



                                       7
<PAGE>

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

Stock-Based  Compensation  - Community has a stock-based  compensation  plan and
accounts for this plan under the recognition  and measurement  principles of APB
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
No  stock-based  compensation  cost is reflected  in net income,  as all options
granted  under this plan had an exercise  price equal to the market value of the
underlying  common stock on the date of grant.  The following table  illustrates
the effect on net income and  earnings  per share if  Community  had applied the
fair value recognition  provisions of FASB No. 123,  "Accounting for Stock-Based
Compensation," to stock-based compensation.

<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
                                                                          Three Months Ended                  Nine Months Ended
                                                                             September 30,                       September 30,
                                                                      --------------------------          -------------------------
                                                                          2003              2002              2003           2002
                                                                      --------------------------          -------------------------

<S>                                                                   <C>             <C>                 <C>            <C>
Net income, as reported.........................................      $    5,147      $    4,740          $   15,224     $   13,810
Deduct:  Total stock-based compensation
      expense determined under fair value based
      method for all awards, net of related tax effect..........            (127)            (99)               (380)          (296)
                                                                      ----------      ----------          ----------     ----------

Pro forma net income............................................      $    5,020      $    4,641          $   14,844     $   13,514
                                                                      ==========      ==========          ==========     ==========

Earnings per share:
   Basic - as reported..........................................      $      .45      $      .41          $     1.32     $     1.19
   Basic - pro forma............................................      $      .43      $      .40          $     1.29     $     1.16
   Diluted - as reported........................................      $      .43      $      .40          $     1.28     $     1.16
   Diluted - pro forma..........................................      $      .42      $      .39          $     1.25     $     1.13

</TABLE>


     Recent Accounting  Developments - In January 2003, the Financial Accounting
Standards  Board  issued FASB  Interpretation  No. (FIN) 46,  "Consolidation  of
Variable   Interest   Entities,   an   Interpretation   of  ARB  No.  51."  This
interpretation  provides new guidance for the consolidation of variable interest
entities  (VIEs) and requires such entities to be  consolidated by their primary
beneficiaries  if the entities do not  effectively  disperse  risk among parties
involved.  The  interpretation  also adds disclosure  requirements for investors
that are involved with unconsolidated VIEs. The disclosure requirements apply to
all  financial  statements  issued  after  January 31, 2003.  The  consolidation
requirements  apply  immediately  to VIEs created after January 31, 2003 and are
effective December 31, 2003 for VIEs acquired before February 1, 2003.

     In its current  form,  FIN 46 may require  Community to  deconsolidate  its
investment  in CMTY  Capital  Trust I (the  Trust)  on the  December  31,  2003,
effective  date.  The potential  deconsolidation  of  subsidiary  trusts of bank
holding  companies  formed in  connection  with the issuance of trust  preferred
securities,  like the Trust, appears to be an unintended  consequence of FIN 46.
It is currently  unknown if, or when, the FASB will address this issue.  In July
2003, the Board of Governors of the Federal  Reserve System issued a supervisory
letter  instructing  bank  holding  companies  to  continue to include the trust
preferred  securities in their Tier 1 capital for  regulatory  capital  purposes
until notice is given to the contrary. The Federal Reserve intends to review the
regulatory implications of any accounting treatment changes and, if necessary or
warranted,  provide  further  appropriate  guidance.  If the outcome is that the
Trust is no longer included in consolidated  results, the Corporation will still
meet all regulatory capital requirements.

     SFAS No. 149,  "Amendment of Statement 133 on  Derivative  Instruments  and
Hedging  Activities,"  was issued in April 2003.  SFAS 149 amends and  clarifies
financial  accounting  and  reporting  for  derivatives  instruments,  including
certain  derivative  instruments  embedded  in  other  contracts   (collectively
referred  to  as  derivatives)  and  for  hedging  activities  under  SFAS  133,
"Accounting  for Derivative  Instruments and Hedging  Activities."  SFAS 149 was
effective  for  contracts  entered  into or modified  after June 30,  2003.  The
adoption  of  this  standard  did not  have a  material  impact  on  results  of
operations, financial position, or liquidity.

     SFAS  No.  150,   "Accounting  for  Certain   Financial   Instruments  with
Characteristics  of Both  Liabilities  and Equity," was issued in May 2003. SFAS
150 requires that an issuer  classify a financial  instrument that is within its
scope as a liability.  Many of these  instruments were previously  classified as
equity.  SFAS  150 was  effective  for  financial  instruments  entered  into or
modified after May 31, 2003 and otherwise was effective  beginning July 1, 2003.
The adoption of this standard did not have any impact on results of  operations,
financial position, or liquidity.

                                       8
<PAGE>

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



2.  Investment Securities
    ---------------------

     The amortized  cost and fair values of  investment  securities at September
30, 2003 and December 31, 2002 were as follows:

<TABLE>
<CAPTION>


                                                                                                September 30, 2003
                                                                                                ------------------
                                                                                       Amortized                   Fair
                                                                                          Cost                     Value
                                                                                          ----                     -----

<S>                                                                                   <C>                       <C>
U.S. Treasury and federal agencies ......................................             $   152,188               $   151,933
Mortgage-backed U.S. government agencies.................................                 117,658                   118,945
Obligations of states and political subdivisions.........................                 178,896                   184,015
Corporate securities.....................................................                 106,074                   106,793
Equity securities........................................................                  69,275                    71,575
                                                                                      -----------               -----------

     Total...............................................................             $   624,091               $   633,261
                                                                                      ===========               ===========
</TABLE>

<TABLE>
<CAPTION>

                                                                                                December 31, 2002
                                                                                                -----------------
                                                                                       Amortized                   Fair
                                                                                          Cost                     Value
                                                                                          ----                     -----


<S>                                                                                   <C>                       <C>
U.S. Treasury and federal agencies ......................................             $   130,947               $   134,334
Mortgage-backed U.S. government agencies.................................                 206,450                   210,825
Obligations of states and political subdivisions.........................                 172,391                   177,135
Corporate securities.....................................................                  95,022                    93,094
Equity securities........................................................                  50,610                    52,413
                                                                                      -----------               -----------

     Total...............................................................             $   655,420               $   667,801
                                                                                      ===========               ===========

</TABLE>



                                       9
<PAGE>

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

3. Allowance for loan losses
   -------------------------

     Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>

                                                                 Nine Months Ended         Year Ended           Nine Months Ended
                                                                    September 30,          December 31,           September 30,
                                                                        2003                  2002                    2002
                                                                 -----------------        ------------          -----------------

<S>                                                                  <C>                    <C>                     <C>
Balance, January 1...................................                $  12,343              $  12,132               $  12,132
Provision for loan losses............................                    1,900                  3,350                   2,750
Loan charge-offs.....................................                   (1,360)                (4,180)                 (2,623)
Recoveries...........................................                      557                  1,041                     510
                                                                     ---------              ---------               ---------
Balance, September 30, 2003, December 31,
 2002, and September 30, 2002........................                $  13,440              $  12,343               $  12,769
                                                                     =========              =========               =========
</TABLE>

<TABLE>
<CAPTION>

                                RISK ELEMENTS (a)

                                                                    September 30,          December 31,           September 30,
                                                                        2003                   2002                   2002
                                                                    ------------           -----------             -----------
Loans on which accrual of interest has been
 discontinued:
<S>                                                                  <C>                    <C>                     <C>
     Commercial................................................      $   3,437              $   2,257               $   4,471
     Residential and commercial mortgages......................          6,972                  6,609                   3,600
     Other.....................................................            901                    527                     569
                                                                     ---------              ---------               ---------
                                                                        11,310                  9,393                   8,640
                                                                     ---------              ---------               ---------


Other real estate..............................................            572                  1,183                     684
                                                                     ---------              ---------               ---------

       Total non-performing assets.............................         11,882                 10,576                   9,324

Loans past due 90 days or more and still accruing interest:
     Commercial................................................            ---                    817                     578
     Residential and commercial mortgages.....................              40                     49                      78
     Consumer.................................................              31                     95                      35
                                                                     ---------              ---------               ---------
                                                                            71                    961                     691
                                                                     ---------              ---------               ---------
       Total risk elements.....................................      $  11,953              $  11,537               $  10,015
                                                                     =========              =========               =========
</TABLE>

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

Impaired Loans
--------------

     At September  30, 2003 and December 31, 2002,  the recorded  investment  in
loans for which  impairment  has been  recognized  totaled $9.1 million and $7.0
million,  respectively.  The  valuation  allowance  for impaired  loans  totaled
$739,000 and $326,000 at September 30, 2003 and December 31, 2002, respectively.
For the nine months  ended  September  30, 2003,  and 2002 the average  recorded
investment  in  impaired  loans  approximated  $8.5  million  and $6.5  million,
respectively.  Interest  recognized on impaired  loans on the cash basis for the
nine month periods ending September 30, 2003 and 2002 was not significant.

                                       10
<PAGE>

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


4.  Pension Plan:
    -------------

     Community  has a  noncontributory  defined  benefit  pension plan  covering
current and former employees of a predecessor  bank. During the third quarter of
2003, the plan was amended to curtail future eligibility service. As a result of
the curtailment, Community recognized a gain of $497,000 ($323,000 after taxes).


5. Earnings Per Share:
   -------------------

     The  following  table  sets  forth the  calculations  of Basic and  Diluted
Earnings Per Share for the periods indicated:
<TABLE>
<CAPTION>

                                                                                   Three Months Ended September 30,
                                                                   ----------------------------------------------------------------
                                                                                2003                                2002
                                                                   ----------------------------------------------------------------
                                                                                        Per-Share                          Per-Share
                                                                   Income      Shares     Amount       Income      Shares     Amount
                                                                   ----------------------------------------------------------------
                                                                                 (In thousands except per share data)
Basic EPS:
<S>                                                                <C>         <C>        <C>          <C>         <C>        <C>
Income available to common stockholders.......................     $ 5,147     11,561     $ .45        $ 4,740     11,627     $ .41
                                                                   =======                =====        =======                =====
Effect of Dilutive Securities: ...............................
Incentive stock options outstanding...........................                    345                                268
                                                                               ------                              ------
Diluted EPS:
Income available to common stockholders &
   assumed conversion.........................................     $ 5,147     11,906     $ .43        $ 4,740     11,895     $ .40
                                                                   =======                =====        =======                =====
</TABLE>

<TABLE>
<CAPTION>

                                                                                   Nine Months Ended September 30,
                                                                   ----------------------------------------------------------------
                                                                                2003                                2002
                                                                   ----------------------------------------------------------------
                                                                                        Per-Share                          Per-Share
                                                                   Income      Shares     Amount       Income      Shares     Amount
                                                                   ----------------------------------------------------------------
                                                                                 (In thousands except per share data)
Basic EPS:
<S>                                                                <C>         <C>        <C>          <C>         <C>        <C>
Income available to common stockholders.......................     $15,224     11,543     $1.32        $13,810     11,654     $1.19
                                                                   =======                =====        =======                =====
Effect of Dilutive Securities: ...............................
Incentive stock options outstanding...........................                    313                                266
                                                                                -----                               -----
Diluted EPS:
Income available to common stockholders &
   assumed conversion.........................................     $15,224     11,856     $1.28        $13,810     11,920     $1.16
                                                                   =======                =====        =======                =====
</TABLE>

Per share and share data have been  adjusted  to reflect  the 5% stock  dividend
declared on February 11, 2003, and the 20% stock split to be paid in the form of
a stock dividend declared on November 4, 2003.




                                       11
<PAGE>



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


6.   Letters of Credit
     -----------------

     Outstanding letters of credit written are conditional commitments issued by
the bank subsidiary to guarantee the performance of a customer to a third party.
Community's  exposure to credit loss in the event of nonperformance by the other
party to the financial  instrument for standby  letters of credit is represented
by the contractual amount of those  instruments.  Community had $25.1 million of
standby letters of credit as of September 30, 2003. The subsidiary bank uses the
same credit policies in making conditional obligations as it does for on-balance
sheet instruments.

     The  majority of these  standby  letters of credit  expire  within the next
twelve  months.  The  credit  risk  involved  in  issuing  letters  of credit is
essentially the same as that involved in extending other loan  commitments.  The
subsidiary bank requires  collateral and personal  guarantees  supporting  these
letters of credit as deemed  necessary.  Management  believes  that the proceeds
obtained  through  a  liquidation  of such  collateral  and the  enforcement  of
personal guarantees would be sufficient to cover the maximum potential amount of
future payments required under the corresponding guarantees.  The current amount
of the liability as of September 30, 2003 for guarantees  under standby  letters
of credit issued after December 31, 2002 is not material.


7. Comprehensive Income (dollars in thousands):
   --------------------------------------------

<TABLE>
<CAPTION>

                                                                         Three Months Ended                   Nine Months Ended
                                                                            September 30,                       September 30,
                                                                     ---------------------------          -------------------------
                                                                         2003            2002                2003           2002
                                                                     ---------------------------          -------------------------
Investment securities:
<S>                                                                  <C>              <C>                 <C>            <C>
   Unrealized holding gains (losses)
         arising during the period ...........................       $   (13,813)     $    8,030          $   (1,362)    $   18,606
   Reclassification adjustments for
      (gains) included in net income..........................              (302)            (64)             (1,849)          (600)
                                                                     -----------      ----------          ----------     ----------

Other comprehensive income (loss).............................           (14,115)          7,966              (3,211)        18,006

Tax effect....................................................            (4,940)          2,788              (1,124)         6,302
                                                                     -----------      ----------          ----------     ----------

      Other comprehensive income (loss), net of tax...........       $    (9,175)     $    5,178          $   (2,087)    $   11,704
                                                                     ===========      ==========          ==========     ==========
</TABLE>



                                       12
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES


Part 1 - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations
--------------------------

Overview

     The purpose of this review is to provide additional  information  necessary
to  fully  understand  the  consolidated  financial  condition  and  results  of
operations of Community.  Throughout  this review,  net interest  income and the
yield on  earning  assets  are  stated on a fully  taxable-equivalent  basis and
balances  represent  average  daily  balances  unless  otherwise  indicated.  In
addition,  income  statement  comparisons  are based on the first nine months of
2003 compared to the same period of 2002 unless otherwise  indicated.  Per share
and number of share amounts reflect the 20% stock split payable in the form of a
stock dividend on January 30, 2004, which was declared by the board of directors
in November, 2003.

Forward-Looking Statements

     Periodically,  Community has made and will continue to make statements that
may include forward-looking information. Community cautions that forward-looking
information disseminated through financial presentations should not be construed
as guarantees of future performance. Furthermore, actual results may differ from
expectations  contained  in such  forward-looking  information  as a  result  of
factors  that  are  not  predictable.  Examples  of  factors  that  may  not  be
predictable  or may be  out of  management's  control  include:  the  effect  of
prevailing  economic  conditions;  unforeseen or dramatic changes in the general
interest rate environment; actions or changes in policies of the Federal Reserve
Board and other  government  agencies;  and business  risk  associated  with the
management of the credit extension  function and fiduciary  activities.  Each of
these factors could affect estimates,  assumptions,  uncertainties and risk used
to develop forward-looking information, and could cause actual results to differ
materially from management's expectations regarding future performance.

Critical Accounting Policies

     The  following is a summary of those  accounting  policies  that  Community
considers to be most  important to the portrayal of its financial  condition and
results of operations as they require management's most difficult judgments as a
result of the need to make  estimates  about the  effects  of  matters  that are
inherently uncertain.

     Provision  and Allowance for Loan Losses - The allowance for loan losses is
evaluated  on a  regular  basis by  management  and is based  upon  management's
periodic  review  of the  collectibility  of the  loans in  light of  historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's  ability to repay,  estimated  value of any underlying
collateral and prevailing  economic  conditions.  This  evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as additional information becomes available.

     Impairment  is  measured  on a  loan  by  loan  basis  for  commercial  and
construction  loans over $250,000 by either the present value of expected future
cash  flows  discounted  at the  loan's  effective  interest  rate,  the  loan's
obtainable  market  price,  or the fair value of the  collateral  if the loan is
collateral dependent.

     Large  groups  of  smaller  balance   homogeneous  loans  are  collectively
evaluated for impairment.  Accordingly,  Community does not separately  identify
individual consumer and residential loans for impairment disclosures.

     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 to the allowance
for  loan  losses,  and  subsequent  recoveries,  if any,  are  credited  to the
allowance for loan losses.



                                       13
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations (Continued)
--------------------------------------

Summary of Financial Results

     Earnings per share and net income  reached  $0.43 and nearly $5.2  million,
respectively,  for the third quarter of 2003,  resulting in increases of over 8%
in per share earnings and nearly 9% in net income  compared to results  reported
in the third  quarter  of 2002.  This  performance  provided a return on average
assets of 1.12% and a return on average equity of 14.95% for the period,  nearly
equal to the 1.17% and 15.09% reported in the year earlier quarter.

     Results for the first nine months of 2003  reflected a trend similar to the
quarter to quarter  comparisons.  Earnings per share and net income for the nine
months ended  September 30, 2003 reached $1.28 and $15.2 million,  respectively,
reflecting an increase of almost 11% in earnings per share and 10% in net income
over the first nine months of 2002.  Year-to-date  return on average  assets was
1.15% and return on average equity was 15.12%.

     The current  interest  rate  environment  continues  to present  formidable
barriers  to  achieving  significant  expansion  of revenues  from net  interest
spread,  or the difference  between interest earned on loans and investments and
interest paid on deposits and other borrowings.  Community has augmented its net
interest spread by expanding its fee-based income from more traditional  banking
services and by continuing to add to its menu of integrated services,  including
sales of annuities,  mutual funds and other brokerage products;  title insurance
and settlement services; and mortgage origination activities.

     Community  has embarked on a corporate  plan to actively  pursue  strategic
acquisitions  of  nonbank  financial  service  providers  that will  expand  the
fee-based  revenue  stream and  facilitate  integration  of such  services  with
traditional banking relationships. During the third quarter, Community completed
its  previously  announced  acquisitions  of Erie  Financial  Group,  a  leading
provider of mortgage  origination  services operating largely within Community's
current footprint,  and Your Insurance Partner,  another locally-based insurance
agency  that is expected  to help  accelerate  the  expansion  of the  company's
fledgling insurance agency service capabilities. Mortgage generation activities,
and related title insurance services,  continued to be robust during the quarter
as the market was fueled by the lower  interest rates and the  affordability  of
financing  for  both  new  and  existing   homes.   The  addition  of  Erie  has
significantly   enhanced   Community's   mortgage   origination   capacity   and
proficiency.

     Meanwhile,  Community  continues  to focus  on a  deliberate  and  measured
expansion  of its  delivery  network,  which has  resulted in the addition of 14
offices in the last three years, bringing its total number of service outlets to
46. Since September 30, 2003, Community has announced the addition of three more
branches.  Community has consistently  emphasized  targeted  expansion into high
growth markets and  simultaneously  evaluated its legacy delivery system,  which
resulted in the sales of two less profitable offices since the beginning of 2002
and a third  completed  in the  fourth  quarter  of  2003.  Community's  growing
presence and improved visibility in its core markets  contributed  substantially
to market share growth in both loans and  deposits  over the last several  years
and in the first nine months of 2003.

     Despite conflicting signals in the national economy, Community generated an
increase in average  loans of 14.0% in the third quarter and 10.3% for the first
nine months of 2003,  with total loans reaching nearly $1.1 billion by September
30, 2003.  In those same periods,  average  total  deposits grew over 7% and now
stand at $1.2  billion.  Recent  benchmark  economic  measures  now point to the
potential  for a modest  recovery  following  the economic  slowdown of the last
three years.  On a local level,  the markets  served by the Community  franchise
have  been  less  adversely  affected  by  national  trends  and  have  remained
relatively  stable by comparison  to other  sectors of the country.  At the same
time, Community  aggressively  monitored and improved the condition of its asset
quality metrics, which has been a critical component of profitability throughout
2003. The company experienced some isolated deterioration in asset quality prior
to 2003,  which  resulted in higher levels of  charge-offs,  higher problem loan
totals and higher loan loss  provisions in both 2001 and 2002.  Since the end of
2002, asset quality metrics have experienced substantial improvement,  resulting
in  declines  in  charge-offs,   reduced  loan  loss  provisions,  and  improved
profitability.



                                       14
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations (Continued)
--------------------------------------

Average Statement of Condition

The average balance sheets for the nine months ended September 30, 2003 and 2002
were as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                                           Change
                                                          2003                2002                Volume             %
-------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                 <C>                  <C>                 <C>
Cash and due from banks                               $     35,804        $     38,386         $    (2,582)        (6.7)%
Federal funds sold and other                                 1,116              16,931             (15,815)       (93.4)%
Investments                                                688,069             565,898             122,171          21.6%
Loans                                                      973,752             882,621              91,131          10.3%
Allowance for loan losses                                   12,874              12,706                 168           1.3%
-------------------------------------------------------------------------------------------------------------------------
Net loans                                                  960,878             869,915              90,963          10.5%
Goodwill and identifiable intangibles                        2,375               1,087               1,288         118.5%
Loans held for resale                                        8,048               6,509               1,539          23.6%
Other assets                                                69,544              64,068               5,476           8.5%
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                          $  1,765,834        $  1,562,794         $   203,040          13.0%
-------------------------------------------------------------------------------------------------------------------------


Noninterest-bearing deposits                          $    167,130        $    164,145         $     2,985           1.8%
Interest-bearing deposits                                  997,885             918,245              79,640           8.7%
Short-term borrowings                                      115,357              51,641              63,716         123.4%
Long-term debt                                             322,774             298,789              23,985           8.0%
Subordinated debentures                                     15,000                 ---              15,000            n/a
Other liabilities                                           13,066              11,876               1,190          10.0%
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                        1,631,212           1,444,696             186,516          12.9%
-------------------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY                                       134,622             118,098              16,524          14.0%
-------------------------------------------------------------------------------------------------------------------------

  TOTAL LIABILITIES AND
     STOCKHOLDERS' EQUITY                             $  1,765,834        $  1,562,794         $   203,040          13.0%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


     Loan  growth  trends  have been  steady  since the second  quarter of 2002.
Quarterly  average loan growth has been between 6% and 7% on an annualized basis
for each  quarter from the second  quarter of 2002 through the first  quarter of
2003.  In the second  quarter of 2003,  loan  growth  picked  up,  reaching  11%
compared to the same  quarter of 2002.  Robust  growth  continued in the quarter
ended  September  30, 2003,  reaching  14% over the same  quarter of 2002.  This
helped push the nine-month growth rate to 10% for the first nine months of 2003.
Commercial loan growth remains strong in the commercial real estate market,  and
small business commercial lending has also shown recent growth. Residential real
estate lending,  composed  primarily of loans to  single-family  creditors,  has
experienced  a  steady  decline  as a result  of  refinancing  activity  and the
accessibility of secondary market liquidity, with most new credits being sold in
the secondary  market.  This strategy  reduces the interest rate risk associated
with  consumer  preferences  for  long-term,  fixed-rate  lending,  and provides
valuable liquidity for other forms of relationship lending.  Consumer demand for
credit  facilities  continues  to  be  a  significant   contributing  factor  to
sustaining  lending.  In March of 2003,  Community  began offering a longer-term
home equity loan product with bi-weekly  payments to consumers  seeking low cost
financing.

     Deposit  balances  remain  the  primary  source of  funding  for  financial
institutions  and  Community  recognized  nine-month  growth  of  7.6%  in  this
important  core-funding source.  Throughout 2002, deposit growth occurred evenly
between core  accounts and time  deposits.  In 2003,  deposit  products  such as
Community's  higher interest  PowerNOW Plus accounts  contributed to more growth
within the  interest-bearing  deposit  accounts than in demand  deposits or time
deposits.


                                       15
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations (Continued)
--------------------------------------

Community has made strategic use of short-term  funding  sources at historic low
rates to augment its funding needs.  Increases in overnight fed funds borrowings
have been used to fund earning asset growth  short-term.  Community monitors its
funding  needs and the benefits of this  currently  low cost source of funds and
considers it in relation to its ability to generate  funding  through  increased
deposits and term borrowings.  In the third quarter of 2003,  Community began to
extend the maturities of overnight borrowings through the Federal Home Loan Bank
to take  advantage  of lower  long-term  rates on  longer  term  borrowings.  In
December of 2002,  Community  executed a pooled trust preferred  issuance of $15
million to facilitate cash needs for acquisition  opportunities  and to increase
regulatory  capital  levels.  The  use of  these  alternative  funding  vehicles
continues  to provide  the excess  liquidity  necessary  to fund  earning  asset
growth.

Contractual Obligations

     Significant long-term funding obligations at September 30, 2003 are:
<TABLE>
<CAPTION>

                                         Less than     1-3      3-5     More than
Dollars in thousands            Total      1 year     years    years     5 years
--------------------------------------------------------------------------------
<S>                           <C>        <C>         <c>        <c>        <C>
Long-term debt                $348,082   $ 10,114    $30,229   $45,365  $262,374
Subordinated debentures         15,000        ---        ---       ---    15,000
Time deposits                  600,753    329,040    184,497    85,240     1,976
--------------------------------------------------------------------------------
Total                         $963,835   $339,154   $214,726  $130,605  $279,350
--------------------------------------------------------------------------------

</TABLE>


                                       16
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations (Continued)
--------------------------------------

Net Interest Income

     The  following  table  summarizes,  on a fully  taxable  equivalent  basis,
changes in net interest income and net interest margin for the nine months ended
September 30, 2003 and 2002 (in thousands):
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------
                                                 2003                          2002                   Increase (Decrease)
                                         Amount        Yield/rate     Amount         Yield/rate       Amount    Yield/rate
--------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>         <C>                <C>          <C>            <C>
Interest income                         $76,000          6.10%       $77,076            7.02%        $(1,076)       (.92)
Interest expense                         31,907          2.94%        34,979            3.69%         (3,072)       (.75)
--------------------------------------------------------------------------------------------------------------------------
Net interest income                     $44,093                      $42,097                         $ 1,996
Interest spread                                          3.16%                          3.33%                       (.17)
Impact of non-interest funds                             0.38%                          0.50%                       (.12)
--------------------------------------------------------------------------------------------------------------------------
Net interest margin                                      3.54%                          3.83%                       (.29)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

     Community's  major  source  of  revenue  is  derived  from   intermediation
activities  and is  reflected  as  net  interest  income.  Net  interest  income
represents the difference between interest income on earning assets and interest
expense on  deposits  and  borrowed  funds.  Net  interest  margin is a relative
measure of a financial institution's ability to efficiently deliver net interest
income from a given level of earnings  assets.  Both net interest income and net
interest  margin are  influenced  by the frequency and velocity of interest rate
changes  and by the  composition  and  absolute  volumes of  earning  assets and
funding sources.

     Net interest  income  increased  $2.0 million,  or 4.7% in 2003 compared to
2002. Both earning asset and  interest-bearing  liability  levels  increased.  A
decline in asset  yields  outpaced the decline in funding  costs  resulting in a
reduction in net interest spread of 17 basis points.

     Interest income decreased $1.1 million or 1.4% during the first nine months
of 2003. An increase in earning assets of approximately  $198 million was offset
by a decrease in the yield on loans and  investments,  which  decreased  in line
with a  general  decline  in  overall  rates.  Interest  expense  declined  more
substantially,  by $3.1 million, or 8.8%. Although interest-bearing  liabilities
increased  approximately  $182  million,  the benefit of a lower  interest  rate
environment  resulted in a decrease in the total rate paid on funding sources of
75 basis  points.  Given the  reduction in interest  rates since last year,  the
contribution from non-interest  funding sources declined from 50 basis points to
38 basis points and added to the decrease in net interest margin.

     In isolating third quarter 2003  performance,  net interest margin declined
from the levels achieved in the prior quarter and from a year ago. Third quarter
net interest  margin for 2003 was 3.45% compared to 3.49% in the most recent
second quarter and 3.78% in the third quarter of 2002.

     Within the scope of its  asset/liability  management policy,  Community has
repositioned  its balance  sheet  posture in  anticipation  of a gradual rise in
interest rates.  Expectations are that further  substantial  declines in overall
interest  rates  are  considered  to be  unlikely  and  that  Community  is well
positioned to benefit from a measured increase in the rate environment.

                                       17
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations (Continued)
-------------------------------------

Provision for Loan Losses

     Community remains attuned to the influence of unfolding economic conditions
and  their  potential  impact  on  credit  conditions  and the  adequacy  of the
allowance for loan losses.  The  provision for loan losses  charged to income in
2003 was $1.9 million  compared to $2.8 million in 2002. Net loan charge-offs in
2003 were  $803,000,  or .11% of  average  loans  annualized,  compared  to $2.1
million, or .32% of average loans annualized,  in the first nine months of 2002.
Non-accrual  loans of $11.3 million at September 30, 2003,  increased  from $8.6
million a year earlier, reflecting in part a migration of loans from the 90 days
past due category,  but also an increase in commercial mortgage accounts.  Loans
90 days  past due but still  accruing  interest  showed a  dramatic  decline  to
$71,000 at September  30, 2003,  from  $691,000 at September  30, 2002.  Overall
credit  quality  trends  continue  to  reflect  the  underlying  credit  quality
standards applied within Community's lending function.

Non-Interest Income

     Non-interest  income  continued  to  improve  on  a  year-over-year  basis,
reflecting  Community's  continuing  emphasis on the  expansion  of products and
services.  Non-interest  income,  exclusive of security  gains,  increased  $3.3
million,  or 34%,  in the first nine  months of 2003  compared to the first nine
months of 2002.

     Service charges on deposit accounts increased $1.2 million,  or 47%, in the
first nine months of 2003 compared to 2002.  Service  charges include the impact
of fees  associated  with  insufficient  funds,  deposit service fees, and other
similar fee-based products.  In 2003, Community instituted an overdraft program,
which fees  accounted for a portion of the increase in deposit  account  service
charges

     Insurance premium income and commissions  increased $564,000,  or 37.3%, in
2003 from 2002 and  reflected  an increase in title  insurance  activity  offset
partially by a decrease in fees earned  through  Community's  captive  insurance
business.  Consistent  with  the  growth  in  mortgage-related  activity,  title
insurance  volume reached an all-time high and included the impact of the April,
2003 acquisition of the Abstracting Company of York County.  Unlike title agency
fees,  Community's captive insurance revenues actually decreased in 2003. During
the latter part of 2002, changes in federal regulations  required that all banks
convert from a single premium to a monthly  premium on credit  insurance,  which
requires income recognition over the life of the related loan. Previously,  such
fees could be recognized upon remittance of the single premium.  Over time, this
change in income  recognition is not expected to adversely affect fees from this
service.

     Community  derives  revenue from the origination and sale of mortgage loans
into the secondary market.  Mortgage banking revenues increased $1.0 million, or
127% in 2003.  This increase  reflects a continued  demand for  fixed-rate  real
estate loans in this  historically  low interest  rate  environment,  as well as
Community's  acquisition  of Erie  Financial  Group  in July of  2003.  Mortgage
origination  fees  earned by Erie in the third  quarter  of 2003  accounted  for
approximately  one-half of the increase in year-to-date  revenue compared to the
prior year. Mortgage banking revenues may diminish if interest rates rise.

     Investment security gains of $1.8 million were recognized in the first nine
months of 2003 compared to $600,000 in 2002.  Such gains were realized  pursuant
to  management's  ongoing  effort to review  investment  holdings and  portfolio
strategy, particularly in light of the current interest rate environment. During
the first nine months of 2003,  Community recognized gains arising from discrete
sales of certain  callable  investments,  which were  likely to be called in the
near term.  Other gains  resulted  from the sale of equity  securities  of other
financial institutions.

     Other  income  for the first  nine  months  of 2003  totaled  $2.2  million
compared to $2.3 million for the first nine months of 2002. Other income for the
third quarter of 2003 totaled $1.0 million and included  nonrecurring  income of
$497,000 resulting from a curtailment of benefits in its defined benefit pension
plan. In 2002, a gain on the sale of two branches was recognized.  In July 2003,
Community  announced the sale of an additional branch,  which was consummated in
November of 2003 at a gain of  approximately  $1 million.  Community  constantly
monitors the performance of its office locations, using its ongoing analysis and
rationalization  of  its  current  office  structure  in  its  consideration  of
maintaining  existing  markets,  as well as  expansion  into  markets  with more
vibrant growth characteristics.


                                       18
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations (Continued)
-------------------------------------

Non-Interest Expenses

     The increase in salaries and employee benefits of $2.8 million or 17.7% for
2003  compared to 2002 was affected by a number of factors  including the annual
merit  increase and employees  added  through the expansion of both  Community's
office network, its fee-based activities, and corporate acquisitions.

     The increase in occupancy expense of $1.0 million,  or 23.8%,  includes the
effect of branch expansion and the opening of the Southern  Operations Center in
2002, as well as incremental costs of facilities maintenance associated with the
harsh winter weather experienced throughout Community's geographic region in the
first quarter of 2003.

     Other  operating  expense  increased  $881,000  or 10.1% in the first  nine
months of 2003.  Marketing costs increased  approximately  $700,000 in the first
nine months of 2003 as part of a plan to broaden customer awareness of Community
Banks and the services it provides in targeted markets.  Community  continues to
execute a targeted strategic marketing campaign that includes radio,  billboard,
direct  mail,  and  television  mediums.  The  timing of these  expenditures  is
intended to correspond with market expansion opportunities within several of the
markets currently experiencing disruption from merger activity.


Income Taxes

     Income  tax  expense  for the first nine  months of 2003 was $3.4  million,
resulting in an effective  tax rate of 18.1%.  The relative  level of tax-exempt
income  influences  Community's  effective  income  tax  rates  and  is  largely
responsible for the difference  between the effective tax rate for 2003 and 2002
and the statutory federal tax rate for corporations.


 Stockholders' Equity

     Capital  strength  is a critical  metric  with  which to judge the  overall
stability  of  a  financial  institution.  A  strong  capital  base  is  also  a
prerequisite for sustaining franchise growth through both internal expansion and
strategic acquisition  opportunities.  Regulatory authorities impose constraints
and  restrictions  on bank  capital  levels that are designed to help ensure the
vitality of the nation's banking system.

     The  most  fundamental   sources  of  capital  are  earnings  and  earnings
retention.  This cornerstone of capital adequacy can be augmented by a number of
capital  management  strategies,  many of which were used in 2002 and which will
continue  in 2003.  As it has for a number of  years,  the  Board  approved  the
issuance of a 5% stock  dividend in the first quarter of 2003. A 20% stock split
to be paid in the  form of a stock  dividend  to be paid in  January,  2004  was
declared in November,  2003. In addition to these stock  dividends,  Community's
strong  earnings  supported  an  increase  in the return of capital to  existing
shareholders  in the  form of an  increase  in the  traditional  cash  dividend.
Community also  continues to make  strategic use of share  repurchase as another
efficient  means of returning  capital to  shareholders.  These  strategies  and
techniques  allow  management  to maintain  capital at levels that  represent an
efficient use of this valuable resource.

     Regulators have established standards for the monitoring and maintenance of
appropriate levels of capital for financial institutions. All regulatory capital
guidelines  are now based upon a risk-based  supervisory  approach that has been
designed  to ensure  effective  management  of  capital  levels  and  associated
business risk. Such regulatory  guidelines are continually  under review and are
expected  to undergo  some  change as a result of the Basel II  capital  accords
which are currently under review by U.S. banking regulators. The following table
provides  the  risk-based   capital  positions  of  Community  and  its  banking
subsidiary,  Community  Banks, at September 30, 2003, along with a comparison to
the various current regulatory capital requirements:



                                       19
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 2.     Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
and Results of Operations (Continued)
-------------------------------------
<TABLE>
<CAPTION>
                                                                 September 30,      Regulatory         "Well
                                                                     2003            Minimum        Capitalized"
                                                                     ----            -------        ------------

                Leverage ratio
                --------------
<S>                                                                  <C>                <C>             <c>
                   Community Banks, Inc....................          7.79 %             4%               n/a
                   Community Banks.........................          7.45 %             4%                5%

                Tier 1 capital ratio
                --------------------
                   Community Banks, Inc.....................        10.32 %             4%               n/a
                   Community Banks.........................          9.87 %             4%                6%

                Total risk-based capital ratio
                ------------------------------
                   Community Banks, Inc.....................        11.38 %             8%               n/a
                   Community Banks..........................        10.88 %             8%               10%

</TABLE>


     At September 30, 2003, total  stockholders'  equity  reflected  accumulated
other  comprehensive  income of $4.5 million  compared to the accumulated  other
comprehensive  income of $6.5 million reflected in total stockholder's equity at
year-end  2002.  This  decrease  can be  attributed  to the  change  in the  net
unrealized  gain on  investment  securities  available  for sale,  net of taxes.
During the first nine months of 2003, Community reissued  approximately  179,000
shares and purchased  approximately 138,000 shares of treasury stock.  Community
currently has board approval to purchase an additional 200,000 shares through it
share repurchase plan.




                                       20
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 3.     Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------------------

     Community Banks,  Inc. has minimal  involvement  with derivative  financial
instruments  and does not use them for  trading  purposes.  Interest  rate  risk
associated with locked commitments on mortgages to be held for sale is mitigated
through  the use of forward  sales,  which lock in the price with the  secondary
market  investor on the same date  Community's  customer  locks in the rate. The
business  of  Community  and the  composition  of its balance  sheet  consist of
investments  in  interest-earning   assets  (primarily  loans,   mortgage-backed
securities  and   investment   securities),   which  are  primarily   funded  by
interest-bearing   liabilities   (deposits  and   borrowings).   Such  financial
instruments  have varying levels of  sensitivity  to changes in market  interest
rates  resulting in market risk.  Other than loans which are originated and held
for sale,  all of the  financial  instruments  of  Community  are for other than
trading purposes.

     Interest rate sensitivity  results when the maturity or repricing intervals
of interest-earning assets,  interest-bearing liabilities, and off-balance sheet
financial  instruments are different,  creating a risk that changes in the level
of market  interest rates will result in  disproportionate  changes in the value
of, and the net earnings generated from,  Community's  interest-earning  assets,
interest-bearing  liabilities,  and  off-balance  sheet  financial  instruments.
Community's  exposure to interest rate sensitivity is managed  primarily through
Community's strategy of selecting the types and terms of interest-earning assets
and  interest-bearing  liabilities  which  generate  favorable  earnings,  while
limiting the potential  negative  effects of changes in market  interest  rates.
Since  Community's  primary source of  interest-bearing  liabilities is customer
deposits,  its  ability  to manage the types and terms of such  deposits  may be
somewhat  limited  by  customer  preferences  in the  market  areas  in which it
operates.  Borrowings,  which include Federal Home Loan Bank (FHLB) advances and
short-term  loans,  subordinated  notes,  and  other  short-term  and  long-term
borrowings are generally  structured  with specific terms which in  management's
judgment,  when aggregated  with the terms for outstanding  deposits and matched
with  interest-earning  assets,  mitigate  Community's exposure to interest rate
sensitivity.

     The rates, terms and interest rate indices of Community's  interest-earning
assets result  primarily  from its strategy of investing in loans and securities
(a  substantial  portion  of which  have  adjustable-rate  terms)  which  permit
Community  to limit its exposure to interest  rate  sensitivity,  together  with
credit risk,  while at the same time  achieving a positive  interest rate spread
compared to the cost of interest-bearing liabilities.


     Significant Assumptions Utilized in Managing Interest Rate Sensitivity
     ----------------------------------------------------------------------

     Managing the Corporation's  exposure to interest rate sensitivity  involves
significant   assumptions  about  the  exercise  of  embedded  options  and  the
relationship of various interest rate indices of certain financial instruments.

     Embedded Options
     ----------------

     A  substantial  portion  of the  Corporation's  loans  and  mortgage-backed
securities and residential  mortgage loans contain significant embedded options,
which permit the borrower to prepay the  principal  balance of the loan prior to
maturity  ("prepayments") without penalty. A loan's propensity for prepayment is
dependent  upon a number of factors,  including  the current  interest  rate and
interest rate index (if any) of the loan, the financial  ability of the borrower
to refinance, the economic benefit to be obtained from refinancing, availability
of  refinancing  at attractive  terms,  as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property.  In a changing interest rate environment,  prepayments may increase or
decrease on fixed and  adjustable-rate  loans  pursuant to the current  relative
levels and expectations of future short and long-term interest rates.

     Investment securities, other than mortgage-backed securities and those with
early call provisions,  generally do not have  significant  embedded options and
repay  pursuant to specific  terms until  maturity.  While  savings and checking
deposits  generally may be withdrawn upon the customer's  request  without prior
notice, a continuing  relationship with such customers is generally  predictable
resulting in a  dependable  and  uninterrupted  source of funds.  Time  deposits
generally  have  early  withdrawal  penalties,  while term FHLB  borrowings  and
subordinated  notes  have  prepayment   penalties,   which  discourage  customer
withdrawal of time deposits and prepayment by the Corporation of FHLB borrowings
and subordinated notes prior to maturity.



                                       21
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 3.     Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------------------
(Continued)
-----------

     Interest Rate Indices
     ---------------------

     The  Corporation's  loans  and  mortgage-backed  securities  are  primarily
indexed to the national  interest indices.  When such loans and  mortgage-backed
securities are funded by  interest-bearing  liabilities  which are determined by
other indices,  usually deposits and FHLB borrowings,  a changing  interest rate
environment may result in different  levels of changes in the indices leading to
disproportionate  changes in the value of, and net earnings  generated from, the
Corporation's  financial instruments.  Each index is unique and is influenced by
different external factors,  therefore,  the historical relationships in various
indices  may not be  indicative  of the  actual  change  which  may  result in a
changing interest rate environment.

     Interest Rate Sensitivity Measurement
     -------------------------------------

     In  addition  to  periodic  GAP  reports   comparing  the   sensitivity  of
interest-earning assets and interest-bearing  liabilities to changes in interest
rates,  management  also  utilizes a report  which  measures the exposure of the
Corporation's  economic  value of  equity  to  interest  rate  risk.  The  model
calculates  the  present  value of  assets,  liabilities  and  equity at current
interest  rates,  and at  hypothetically  higher and lower interest rates at one
percent  intervals.  The  present  value of each  major  category  of  financial
instruments  is  calculated  by the model  using  estimated  cash flows based on
prepayments,  early withdrawals,  weighted average  contractual rates and terms,
and discount  rates for similar  financial  instruments.  The resulting  present
value of longer term  fixed-rate  financial  instruments  are more  sensitive to
change  in a higher  or lower  interest  rate  scenario,  while  adjustable-rate
financial   instruments   largely   reflect  only  a  change  in  present  value
representing  the difference  between the contractual and discounted rates until
the next  interest  rate  repricing  date.  The  information  provided  by these
analyses provides some indication of the potential for interest rate adjustment,
but does not  necessarily  mean that the rate  adjustment  will occur or that it
will  occur  in  accordance  with  the   assumptions.   Despite  these  inherent
limitations,  Community  believes  that the tools  used to  manage  its level of
interest rate risk provide an appropriate measure of market risk exposure.

 Interest Rate Sensitivity at September 30, 2003:
 -----------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                1-90             90-180           180-365          1 year
Dollars in thousands                            days              days              days           or more           Total
-----------------------------------------------------------------------------------------------------------------------------
Assets
<S>                                         <C>                <C>              <C>              <C>              <C>
Interest-bearing deposits in
   other banks                              $     1,179               ---              ---               ---      $     1,179
Investment securities                           104,644        $   74,723       $   64,686       $   389,208          633,261
Loans, net of unearned income                   383,482            64,951           93,466           527,068        1,068,967
Loans held for sale                               2,587                96              192             3,960            6,835
-----------------------------------------------------------------------------------------------------------------------------

Total                                       $   491,892        $  139,770       $  158,344       $   920,236      $ 1,710,242
-----------------------------------------------------------------------------------------------------------------------------

Liabilities
Savings                                     $   433,811        $      ---       $     ---        $       ---      $   433,811
Time                                             78,563            60,800          121,403           235,998          496,764
Time in denominations of
   $100,000 or more                              26,385            11,606           30,855            35,143          103,989
Short-term borrowings                            92,935               ---              ---               ---           92,935
Long-term debt                                    6,278             1,278            2,558           337,968          348,082
Subordinated debentures                          15,000               ---              ---               ---           15,000
-----------------------------------------------------------------------------------------------------------------------------
Total                                       $   652,972        $   73,684       $  154,816       $   609,109      $ 1,490,581
-----------------------------------------------------------------------------------------------------------------------------

Interest Sensitivity Gap
Periodic                                    $ (161,080)        $   66,086       $    3,528       $   311,127
Cumulative                                                        (94,994)         (91,466)          219,661
Cumulative gap as a percentage
   of earning assets                               (9)%              (6)%             (5)%               13%
</TABLE>

     The  negative  GAP  between  interest-earning  assets and  interest-bearing
liabilities  maturing  or  repricing  within  one year  approximated  5% at both
September  30,  2003,  and December 31,  2002.  Community's  interest  rate risk
posture has remained relatively constant since the end of the year.


                                       22
<PAGE>
COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART I - Item 4.  Controls and Procedures
-----------------------------------------

     Under  the  supervision  and  with  the   participation  of  the  Company's
management,  including its Chief Executive Officer and Chief Financial  Officer,
the Company has  evaluated  the  effectiveness  of its  disclosure  controls and
procedures  as of September  30,  2003.  Based upon this  evaluation,  the Chief
Executive  Officer and Chief Financial Officer have concluded that the Company's
disclosure  controls and  procedures  are adequate and  effective to ensure that
material information  relating to the Company and its consolidated  subsidiaries
is made known to them by others within those entities,  particularly  during the
period in which  this  quarterly  report was  prepared.  There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules  13a-15(f)and  15d-15(f)  under the Exchange Act) during the
fiscal quarter to which this report relates that have  materially  affected,  or
are reasonably likely to materially  affect, the Company's internal control over
financial reporting.




                                       23
<PAGE>


     COMMUNITY BANKS, INC. and SUBSIDIARIES

                           PART II - OTHER INFORMATION



Item 1 - Legal Proceedings
--------------------------

     Management is not aware of any pending legal actions, other than litigation
incidental to the business of Community, to which Community is a party.

Item 2 - Changes in Securities and Use of Proceeds
--------------------------------------------------

          Not applicable.

Item 3 - Defaults Upon Senior Securities
----------------------------------------

          Not applicable.

Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

          Not applicable.

Item 5 - Other Information
--------------------------

          Not applicable.

Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------

 (a)      Exhibits
 -----------------

          3(i) Amended Articles of  Incorporation  (Incorporated by reference to
               Exhibit 3.1,  attached to Registrant's  registration on Form 8-A,
               filed on May 13, 2002)
          3(ii)Amended  By-Laws  (Incorporated  by  reference  to  Exhibit  3.2,
               attached  to  Community's  Quarterly  Report on Form 10-Q for the
               quarter ended March 31, 2003)
          4    Instruments  defining the rights of the holders of trust  capital
               securities  and  sold  by  Community  in  December  2002  are not
               attached,  as the amount of such  securities  is less than 10% of
               the consolidated  assets of Community and its  subsidiaries,  and
               the  securities  have not been  registered.  Community  agrees to
               provide copies of such instruments to the SEC upon request.
          10.1 2000 Directors'  Stock Option Plan,  incorporated by reference to
               Exhibit 4 to Community's  registration  on Form S-8, filed on May
               17,  2000   (Incorporated   by   reference  to  Exhibit  10.1  to
               Community's  Annual  Report  on  Form  10-K  for the  year  ended
               December 31, 2002, filed with the Commission on March 28, 2003)
          10.2 1998  Long-Term  Incentive  Plan,  incorporated  by  reference to
               Exhibit 4 to Community's  registration on Form S-8, filed on June
               18, 1998(Incorporated by reference to Exhibit 10.2 to Community's
               Annual Report on Form 10-K for the year ended  December 31, 2002,
               filed with the Commission on March 28, 2003)




                                       24
<PAGE>


COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART II - Item 6.    Exhibits and Reports on Form 8-K - (a) Exhibits (Continued)
--------------------------------------------------------------------------------

          10.3 Form of Stock  Option  Agreement  - Directors  Stock  Option Plan
               (Incorporated by reference to Exhibit 10.3 to Community's  Annual
               Report on Form 10-K for the year ended  December 31, 2002,  filed
               with the Commission on March 28, 2003)
          10.4 Form  of  Stock  Option  Agreement  -  Long-Term  Incentive  Plan
               (Incorporated by reference to Exhibit 10.4 to Community's  Annual
               Report on Form 10-K for the year ended  December 31, 2002,  filed
               with the Commission on March 28, 2003)
          10.5 Employment  Agreement of Eddie L.  Dunklebarger  (Incorporated by
               reference to Exhibit 10.5 to  Community's  Annual  Report on Form
               10-K  for the  year  ended  December  31,  2002,  filed  with the
               Commission on March 28, 2003)
          10.6 Employment Agreement of Donald F. Holt (Incorporated by reference
               to Exhibit 10.6 to Community's Annual Report on Form 10-K for the
               year ended December 31, 2002,  filed with the Commission on March
               28, 2003)
          10.7 Employment Agreement,  and amendment thereto, of Robert W. Lawley
               (Incorporated by reference to Exhibit 10.7 to Community's  Annual
               Report on Form 10-K for the year ended  December 31, 2002,  filed
               with the Commission on March 28, 2003)
          10.8 Employment  Agreement,  and amendment thereto,  of Anthony N. Leo
               (Incorporated by reference to Exhibit 10.8 to Community's  Annual
               Report on Form 10-K for the year ended  December 31, 2002,  filed
               with the Commission on March 28, 2003)
          10.9 Employment  Agreement,  and  amendment  thereto,  of  Jeffrey  M.
               Seibert (Incorporated by reference to Exhibit 10.9 to Community's
               Annual Report on Form 10-K for the year ended  December 31, 2002,
               filed with the Commission on March 28, 2003)
          10.10Salary  Continuation  Agreement,  and amendment thereto, of Eddie
               L.  Dunklebarger  (Incorporated  by reference to Exhibit 10.10 to
               Community's  Annual  Report  on  Form  10-K  for the  year  ended
               December 31, 2002, filed with the Commission on March 28, 2003)
          10.11Salary Continuation  Agreement,  and amendment thereto, of Robert
               W.  Lawley   (Incorporated  by  reference  to  Exhibit  10.11  to
               Community's  Annual  Report  on  Form  10-K  for the  year  ended
               December 31, 2002, filed with the Commission on March 28, 2003)
          10.12Salary Continuation Agreement,  and amendment thereto, of Anthony
               N. Leo (Incorporated by reference to Exhibit 10.12 to Community's
               Annual Report on Form 10-K for the year ended  December 31, 2002,
               filed with the Commission on March 28, 2003)
          10.13Salary Continuation Agreement,  and amendment thereto, of Jeffrey
               M.  Seibert  (Incorporated  by  reference  to  Exhibit  10.13  to
               Community's  Annual  Report  on  Form  10-K  for the  year  ended
               December 31, 2002, filed with the Commission on March 28, 2003)
          10.14Rights  Agreement  between  Community  Banks,  Inc. and Community
               Banks,  dated  February  28, 2002,  incorporated  by reference to
               Exhibit  1 to  Community's  registration  on Form  8-A,  filed on
               February 27, 2002
          10.15Community Banks,  Inc. 401(k) Plan  (Incorporated by reference to
               Exhibit 10.15 to  Community's  Annual Report on Form 10-K for the
               year ended December 31, 2002,  filed with the Commission on March
               28, 2003)
          10.16Survivor Income  Agreement,  with Split Dollar Addendum  thereto,
               of Eddie L. Dunklebarger
          10.17Survivor Income  Agreement,  with Split Dollar Addendum  thereto,
               of Robert W. Lawley
          10.18Survivor Income  Agreement,  with Split Dollar Addendum  thereto,
               of Anthony N. Leo
          10.19Survivor Income  Agreement,  with Split Dollar Addendum  thereto,
               of Jeffrey M. Seibert
          31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
          31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
          32.1 Section 1350 Certification (Chief Executive Officer)
          32.2 Section 1350 Certification (Chief Financial Officer)




                                       25
<PAGE>

COMMUNITY BANKS, INC. AND SUBSIDIARIES

PART II - Item 6 - Exhibits and Reports on Form 8-K (Continued)
---------------------------------------------------------------


(b)      Reports on Form 8-K
----------------------------

     Registrant filed the following reports on Form 8-K during the quarter ended
September 30, 2003:


     Report Dated July 17, 2003
     --------------------------
     Registrant announced its earnings for the period ended June 30, 2003.

     Report Dated August 5, 2003
     ---------------------------
     Registrant announced the declaration of a third quarter dividend.







                                       26
<PAGE>


                                   SIGNATURES

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

                              COMMUNITY BANKS, INC.
                                  (Registrant)

Date  November 14, 2003                              /s/ Eddie L. Dunklebarger
    ------------------------                         --------------------------
                                                        Eddie L. Dunklebarger
                                                        Chairman and President
                                                       (Chief Executive Officer)

Date  November 14, 2003                              /s/ Donald F. Holt
    ------------------------                         --------------------------
                                                         Donald F. Holt
                                                      Executive Vice President
                                                      (Chief Financial Officer)









                                       27