Document:

EXHIBIT 10.4

                              COMMUNITY BANKS, INC.
                            LONG-TERM INCENTIVE PLAN
                             STOCK OPTION AGREEMENT

TO:      ______________________________
         Name

         ------------------------------
         Social Security Number

DATE:
     ----------------------------------

     You are hereby  granted  an option,  effective  as of the date  hereof,  to
purchase  _______________  shares  of  Common  Stock of  Community  Banks,  Inc.
("CBI"),  hereby designated as Incentive Stock Options (sometimes referred to as
"ISO's") at a price of $______.  per share, and  ___________shares of CBI Common
Stock,  hereby designated as Non-qualified  Stock Options (sometimes referred to
as  "NQSO's")  at a price of  $_______ . per share,  pursuant  to the  Community
Banks, Inc. Long-Term Incentive Plan (the "Plan") adopted by the shareholders of
CBI on May 26, 1998 and effective May 31, 1998.

VESTING OF ISO's
----------------

     OPTIONEE AGE 54 OR YOUNGER ON DATE OF THIS AGREEMENT

     Your ISO(s) may first be  exercised  on and after one year from the date of
grant,  but not before  that time.  On and after one year and prior to two years
from the date of grant,  your ISO(s) may be exercised for up to 20% of the total
number of shares then subject to the ISO(s). On and after two years and prior to
three years from the date of grant,  your ISO(s) may be exercised  for up to 40%
of the total  number of shares  then  subject to the ISO(s)  minus the number of
shares  previously  purchased  by exercise of the ISO(s) (as  adjusted for stock
dividends, stock splits, combinations of shares,  recapitalizations and what the
Compensation   Committee   deems  in  its   sole   discretion   to  be   similar
circumstances). On or after three years and prior to four years from the date of
grant,  your ISO(s) may be exercised for up to 60% of the total number of shares
then  subject to the ISO(s) minus the number of shares  previously  purchased by
exercise  of  the  ISO(s)  (as  adjusted  for  stock  dividends,  stock  splits,
combinations of shares,  recapitalizations  and what the Compensation  Committee
deems in its sole  discretion  to be similar  circumstances).  On and after four
years  and  prior to five  years  from the date of  grant,  your  ISO(s)  may be
exercised for up to 80% of the total number of shares then subject to the ISO(s)
minus the number of shares  previously  purchased  by exercise of the ISO(s) (as
adjusted  for  stock   dividends,   stock   splits,   combinations   of  shares,
recapitalizations  and  what  the  Compensation  Committee  deems  in  its  sole
discretion to be similar circumstances).On and after five years from the date of

<PAGE>

grant your ISO(s) may be exercised  for up to 100% of the total number of shares
then  subject to the ISO(s) minus the number of shares  previously  purchased by
exercise  of  the  ISO(s)  (as  adjusted  for  stock  dividends,  stock  splits,
combinations of shares,  recapitalizations  and what the Compensation  Committee
deems in its sole discretion to be similar circumstances).  No fractional shares
shall be  issued or  delivered.  The  ISO(s)  shall  terminate  and shall not be
exercisable after expiration of ten years from the date of grant.

     OPTIONEE AGE 55 OR OLDER ON DATE OF THIS AGREEMENT

     Your ISO(s) may first be  exercised  on and after one year from the date of
grant,  but not before  that time.  On and after one year and prior to two years
from the date of grant,  your  ISO(s) may be  exercised  for up to 33.33% of the
total  number of shares then  subject to the ISO(s).  On and after two years and
prior to three years from the date of grant, your ISO(s) may be exercised for up
to 66.67% of the total  number of shares  then  subject to the ISO(s)  minus the
number of shares previously purchased by exercise of the ISO(s) (as adjusted for
stock dividends,  stock splits,  combinations of shares,  recapitalizations  and
what the  Compensation  Committee  deems in its sole  discretion  to be  similar
circumstances). On or after three years and prior to four years from the date of
grant, your ISO(s) may be exercised for up to 100% of the total number of shares
then  subject to the ISO(s) minus the number of shares  previously  purchased by
exercise  of  the  ISO(s)  (as  adjusted  for  stock  dividends,  stock  splits,
combinations of shares,  recapitalizations  and what the Compensation  Committee
deems in its sole discretion to be similar circumstances).  No fractional shares
shall be  issued or  delivered.  The  ISO(s)  shall  terminate  and shall not be
exercisable after expiration of ten years from the date of grant.

VESTING OF NQSO's
-----------------

     Your  NQSO(s) may first be exercised on and after one year from the date of
grant,  but not before that time.  On and after one year from the date of grant,
your NQSO(s) may be exercised  for up to 100% of the total number of shares then
subject to the NQSO(s).

CHANGE OF CONTROL
-----------------

     In the event of a "change of control" (as  hereafter  defined) of CBI, your
option may,  from and after the date of the change in control,  be exercised for
up to 100% of the total  number of shares then  subject to the option  (computed
without  regard  to  the  exercise  restrictions  set  forth  in  the  preceding
paragraph) minus the number of shares previously  purchased upon exercise of the
option (as adjusted for stock  dividends,  stock splits,  combinations of shares
and what the  Compensation  Committee deems in its sole discretion to be similar
circumstances).  A "change of control" shall be deemed to have occurred upon the
happening of any of the following events:

          (1)  a change  within a  twelve  month  period  in a  majority  of the
               members of the Board of Directors of CBI;

                                       2
<PAGE>

          (2)  a change within a twelve month period in the holders of more than
               50% of the outstanding voting stock of CBI; or

          (3)  any other event deemed to constitute a "change of control" by the
               Compensation Committee.

LIMITATION UPON GRANT OF ISOs
-----------------------------

     ISOs will not be granted  if the effect of the grant  would be to allow you
to exercise for the first time,  in any calendar  year,  ISOs to purchase  stock
having a fair  market  value of more than  $100,000  (determined  at the date of
grant).

METHOD OF EXERCISE
------------------

     You may exercise your option by giving  written  notice to the Secretary of
CBI on forms supplied by CBI at its then principal executive office, accompanied
by payment of the option  price for the total  number of shares you specify that
you wish to  purchase.  The payment may be in any of the  following  forms:  (i)
cash,  which may be evidenced  by a check  (provided,  that any  optionee  whose
employment  has  terminated  and the estate of any deceased  optionee  must make
payment by certified or cashier's check); (ii) certificates  representing shares
of CBI Common  Stock  which will be valued by the  Secretary  of CBI at the fair
market value on the date of exercise,  accompanied by an assignment of the stock
to CBI; or (iii) any combination  thereof. Any assignment of stock shall be in a
form and substance satisfactory to the Secretary of CBI, including guarantees of
signature(s) where he/she deems such guarantees necessary or desirable.

TERMINATION
-----------

     Your option will, to the extent not previously  exercised by you, terminate
three months after the date on which your  employment by CBI or a CBI subsidiary
is terminated  other than by reason of disability (as defined in Section 105 (d)
(4) of the Internal  Revenue Code of 1954, as amended (the "Code")),  retirement
or death  (but in no event  later  than ten years  from the date this  option is
granted).  After the date your  employment is terminated,  you may exercise this
option  only  for the  number  of  shares  which  you had a  right  to  purchase
(including,  but not limited to, any shares  which you are  entitled to purchase
pursuant to the third full  paragraph  hereof) and did not  purchase on the date
your employment terminated. If you are employed by a CBI subsidiary corporation,
your  employment  shall be deemed to have  terminated  on the date your employer
ceases to be CBI subsidiary corporation, unless you are on that date transferred
to CBI or another  CBI  subsidiary  corporation.  Your  employment  shall not be
deemed to have terminated if you are transferred  from CBI to a CBI affiliate or
subsidiary, or vice versa, or from one of CBI subsidiary corporations to another
CBI subsidiary corporation.

                                       3
<PAGE>

     If you die while  employed  by CBI or a CBI  subsidiary  corporation,  your
executor  or  administrator  may,  at any time within one year after the date of
your  death (but in no event  later than ten years from the date this  option is
granted),  exercise the option for up to 100% of the total number of shares then
subject to the option (computed without regard to the exercise  restrictions set
forth in the second  paragraph  hereof)  minus the  number of shares  previously
purchased  upon exercise of the option (as adjusted for stock  dividends,  stock
splits,  combinations of shares and what the Compensation Committee deems in its
sole discretion to be similar circumstances).

     If your employment by CBI or a CBI subsidiary  corporation is terminated by
reason of your becoming  disabled  (within the meaning of Section 105 (d) (4) of
the Code),  you or your legal  guardian or custodian  may at anytime  within one
year after the date of such  termination  (but in no event  later than ten years
from the date this option is granted), exercise the option for up to 100% of the
total number of shares then subject to the option  (computed  without  regard to
the exercise  restrictions set forth in the second  paragraph  hereof) minus the
number of shares  previously  purchased upon exercise of the option (as adjusted
for  stock  dividends,  stock  splits,  combinations  of  shares  and  what  the
Compensation   Committee   deems  in  its   sole   discretion   to  be   similar
circumstances).  Your  executor,  administrator,  guardian,  or  custodian  must
present proof of his/her authority satisfactory to CBI prior to being allowed to
exercise this option.

     If your employment by CBI or a CBI subsidiary  corporation is terminated by
reason of  retirement,  you may at anytime  within three years after the date of
such termination (but in no event later than ten years from the date this option
is  granted),  exercise  the option for up to 100% of the total number of shares
then subject to the option (computed without regard to the exercise restrictions
set forth in the second paragraph  hereof) minus the number of shares previously
purchased  upon exercise of the option (as adjusted for stock  dividends,  stock
splits,  combinations of shares and what the Compensation Committee deems in its
sole  discretion to be similar  circumstances).  For purposes of this  Agreement
only,  you shall be considered to have retired if your  employment is terminated
when you have  attained at least the age of sixty (60) years and have  completed
ten (10) years of service to CBI and/or any of its subsidiaries.

     Except with respect to your death or  disability  as described  above,  any
options  exercised later than three (3) months after the date your employment by
CBI or a CBI  subsidiary is terminated  cannot receive ISO treatment and will be
deemed NQSOs.

ADJUSTMENT
----------

     In the event of any change in the outstanding shares of CBI Common Stock by
reason   of  a   stock   dividend,   stock   split,   combination   of   shares,
recapitalization,  merger,  consolidation,  transfer of assets,  reorganization,
conversion,  or what the Compensation  Committee deems in its sole discretion to
be similar  circumstances,  the number and kind of shares subject to this option
and the option price for such shares shall be appropriately adjusted in a manner
to be determined in the sole discretion of the Compensation Committee.

                                       4
<PAGE>

TRANSFERABILITY / RIGHTS PRIOR TO EXERCISE
------------------------------------------

     This option is not transferable, except in the event of disability or death
as provided above. During your lifetime, this option is exercisable only by you.
Until the option  price has been paid in full  pursuant to due  exercise of this
option and the purchased shares are delivered to you, you do not have any rights
as a stockholder of CBI. CBI reserves the right not to deliver to you the shares
purchased by virtue of the exercise of this option  during any period of time in
which  CBI  deems,  in its  sole  discretion,  that  such  delivery  may  not be
consummated  without violating a federal,  state,  local, or securities exchange
rule, regulation, or law.

OTHER RESTRICTIONS
------------------

     Notwithstanding  anything to the contrary contained herein,  this option is
not  exercisable  until all the following  events occur and during the following
periods of time:

          (1)  Until  the Plan  pursuant  to which  this  option is  granted  is
               approved by the stockholders of CBI;

          (2)  Until this option and the  optioned  shares are  approved  and/or
               registered with such federal,  state, and local regulatory bodies
               or agencies and securities exchanges as CBI may deem necessary or
               desirable;

          (3)  During   any   period  of  time  in  which  CBI  deems  that  the
               exercisability  of this  option,  the  offer to sell  the  shares
               optioned hereunder,  or the sale thereof,  may violate a federal,
               state, local, or securities exchange rule,  regulation or law, or
               may  cause  CBI to be  legally  obligated  to issue or sell  more
               shares than CBI is legally entitled to issue or sell.

     The  following  two  paragraphs  shall  be  applicable  if,  on the date of
exercise  of this  option,  the Common  Stock to be  purchased  pursuant to such
exercise  has not been  registered  under the  Securities  Act of 1933 and under
applicable  state  securities  laws,  and shall continue to be applicable for so
long as such registration has not occurred:

          A.   The optionee hereby agrees,  warrants, and represents that he/she
               will acquire the Common Stock of CBI to be issued  hereunder  for
               his/her own respective account for investment  purposes only, and
               not with a view to, or in  connection  with,  any resale or other
               distribution   of  any  of  such  shares,   except  as  hereafter
               permitted.  The optionee  further  agrees that he/she will not at
               any  time  make  any  offer,  sale,  transfer,  pledge,  or other
               disposition of such Common Stock to be issued  hereunder  without
               an effective  registration  statement under the Securities Act of
               1933 (as amended) and under any applicable  state securities laws
               or an opinion of counsel for CBI to the effect that the  proposed
               transaction will be exempt from such  registration.  The optionee
               agrees that, as a condition precedent to CBI obligation to permit
               the exercise of this  option,  the  optionee  shall  execute such
               instruments, representations,  acknowledgments, and agreements as
               CBI may,  in its sole  discretion,  deem  advisable  to avoid any
               violation of federal,  state, local, or securities exchange rule,
               regulation, or law.

                                       5
<PAGE>

          B.   The  certificates  for Common  Stock to be issued to the optionee
               hereunder shall bear the following legend:

               "The  shares  represented  by  this  certificate  have  not  been
               registered under the Securities Act of 1933 (as amended) or under
               applicable  state  securities laws. The shares have been acquired
               for  investment  and  may  not  be  offered,  sold,  transferred,
               pledged,   or   otherwise   disposed  of  without  an   effective
               registration  statement  under  the  Securities  Act of 1933  (as
               amended) and under any  applicable  state  securities  laws or an
               opinion  of  counsel  for  the  Corporation   that  the  proposed
               transaction will be exempt from such registration."

     The  foregoing  legend shall be removed upon  registration  of the legended
shares under the  Securities  Act of 1933 (as amended) and under any  applicable
state  laws or upon  receipt  of any  opinion  of  counsel  for  CBI  that  said
registration is no longer required.

     The sole purpose of the agreements, warranties, representations, and legend
set  forth in the two  preceding  paragraphs  is to  prevent  violations  of the
Securities Act of 1933 (as amended) and any applicable state securities laws.

CONFLICTING TERMS
-----------------

     This option shall be subject to the terms of the Plan in effect on the date
this option is granted,  which terms are hereby incorporated herein by reference
and made a part hereof.  In the event of any conflict  between the terms of this
option and the terms of the Plan in effect on the date of this option, the terms
of the Plan shall  govern.  This  option  constitutes  the entire  understanding
between CBI and you with respect to the subject  matter hereof and no amendment,
supplement, or waiver of this option, in whole or in part, shall be binding upon
CBI unless in writing and signed by the President and Chief Executive Officer of
CBI This option and the performances of the parties hereunder shall be construed
in accordance with and governed by the laws of the  Commonwealth of Pennsylvania
applicable to contracts made and to be performed  solely in the  Commonwealth of
Pennsylvania.

                                       6
<PAGE>

NO RIGHT TO CONTINUED EMPLOYMENT
--------------------------------

     Nothing in this  Agreement  shall  confer  upon the  optionee  any right to
continue  in the  employ  of CBI or any of its  subsidiaries,  or  limit  in any
respect  the  right  of CBI or  any  such  subsidiary  to  terminate  optionee's
employment at any time.

Please  sign the copy of this option and return it to CBI's  Secretary,  thereby
indicating your understanding and agreement with its terms and conditions.

ATTEST:                                        COMMUNITY BANKS, INC.

                                 By:
-------------------------------    ---------------------------------------------

I hereby acknowledge receipt of a copy of the foregoing Stock Option and, having
read it, hereby signify my understanding of and my agreement with its terms and
conditions.

-------------------------------    ---------------------------------------------
Witness                                           (Signature)

---------------------------
(Date)

                                       7EXHIBIT 10.5

                              EMPLOYMENT AGREEMENT

     AGREEMENT  made this 29th day of October,  1997,  by and between  COMMUNITY
BANKS, INC., a Pennsylvania corporation,  ("Community"), THE PEOPLES STATE BANK,
a Pennsylvania  state  chartered  banking  institution  ("Peoples") and EDDIE L.
DUNKLEBARGER, an adult individual (hereinafter referred to as "Executive").

                              W I T N E S S E T H:

     WHEREAS,  Executive is currently employed by Peoples,  as the President and
Chief Executive Officer of Peoples,  pursuant to a certain Executive  Employment
Agreement between Peoples and Executive, dated May 14, 1993; and

     WHEREAS,  Community  and Peoples have entered into a certain  Agreement and
Plan of  Reorganization  of even date (the "Merger  Agreement")  whereby Peoples
will be merged with and into PSB Interim Bank, a  Pennsylvania  state  chartered
financial  institution,  as of the  Effective  Date of the  Merger  (as  defined
therein)  and PSB Interim  Bank will,  as of the  Effective  Date of the Merger,
change its name to The Peoples State Bank; and

     WHEREAS, as of the Effective Date of the Merger,  Peoples will be a wholly-
owned subsidiary of Community; and

     WHEREAS,  the Company wishes to employ Executive and Executive wishes to be
employed  by  Company,  as the  President  and Chief  Executive  Officer  of the
Company, upon the terms set forth below, as of the Effective Date of the Merger;
and

     WHEREAS, for purposes of the Agreement,  Community and Peoples are referred
to collectively as the "Company."

     NOW, THEREFORE,  in consideration of the agreements  hereinafter contained,
and intending to be legally bound hereby, the parties agree as follows:

          1. Duties as Executive.  Company shall employ  Executive and Executive
shall serve  Community and Peoples as President and Chief  Executive  Officer of
Company and shall  nominate and support for  relection  Executive as a member of
Company's Board of Directors and a non-voting member of the Executive Committee.
During his  employment  by  Company,  Executive  shall serve  Company  under the
direction  of,  and in a manner  satisfactory  to,  the  Board of  Directors  of
Company,  provided  that any duties  prescribed  by the Board of  Directors  are
consistent with Executive's position as President and Chief Executive Officer of
Company,  which shall be the usual and customary duties of a president and chief
executive  officer of a bank holding  company and a bank.  He shall  perform his
duties faithfully,  diligently,  and to the best of his ability and shall devote
his full time and best efforts to the affairs of Community and Peoples. He shall
report to the Chairman of the Board of  Directors  and the Board of Directors of
Company and shall have supervision and control over, and responsibility for, the
general management and operations of Company.
<PAGE>

          2. Compensation.

               a. Annual Direct Salary. As compensation for services rendered to
Company under this  Agreement,  the Executive  shall be entitled to receive from
Company  an  annual  direct  salary  of  One  Hundred  Ninety  Thousand  Dollars
($190,000.00)  per year, as increased  hereunder,  (the "Annual Direct Salary"),
payable in substantially equal monthly installments (or such other more frequent
intervals as may be  determined  by the Board of Directors of Company as payroll
policy  for senior  executive  officers)  prorated  for any  partial  employment
period. The Annual Direct Salary shall be reviewed by the Executive Committee of
Company on each  anniversary  of this  Agreement  and shall be  increased at the
discretion of the Board of Directors  upon the  recommendation  of the Executive
Committee. In no event shall the Annual Direct Salary be decreased.

               b.  Incentive  Compensation.  For  a  period  of  two  (2)  years
commencing with calendar year 1998, Executive shall be paid a bonus equal to the
greater of (i) $50,000.00 per year; or (ii) any bonus to which  Executive  would
be entitled as a participant of Company's existing executive bonus program. Such
bonus shall be paid within 30 days  following  the end of the  calendar  year to
which such bonus  relates.  Following  such  two-year  period,  Executive  shall
participate in Company's existing executive bonus program.

          3. Fringe Benefits,  Vacation, Expenses, and Perquisites. It is agreed
that  nothing paid to the  Executive  under any of the  below-described  benefit
plans or  arrangements  shall be  deemed  to be in lieu of  compensation  to the
Executive hereunder. Executive shall be entitled to:

               a.  Employee  Benefits  Plans.  Executive  shall be  entitled  to
participate in or receive benefits under all Company  employment  benefit plans,
including but not limited to any  profit-sharing  plan,  pension  plan,  savings
plan, stock option plan,  supplemental executive retirement plan, major medical,
hospitalization  and  health-and-accident  plan or arrangement made available by
Company to its  executives  and key  management  employees,  subject to and on a
basis consistent with terms, conditions and overall administration of such plans
and arrangements. With respect to Company's stock option plan, for each calendar
year during the term of this Agreement  beginning with 1998, Company shall grant
to Executive  options  under its  existing  stock option plan for at least 6,000
shares of Company's  stock.  It is understood and agreed that any major medical,
hospitalization and health-and-accident plan shall cover the Executive, his wife
and  children  under  standard  coverage  provisions.  Executive  shall  also be
entitled to the following benefits, at minimum:

                                       2
<PAGE>

                    i. Life  Insurance:  Company shall provide and maintain life
insurance for the Executive if he qualifies therefor on a standard  underwriting
basis.  Such life insurance  shall at all times be maintained at an amount equal
to the sum of  $100,000  and shall name as  beneficiary  such  person(s)  as the
Executive shall  designate in writing.  In the event of failure of the Executive
to designate a beneficiary of such policy,  the estate of the Executive shall be
the beneficiary of such policy.

                    ii. Survivor Income.  Company and Executive shall enter into
a certain Survivor Income  Agreement,  in substantially the form attached hereto
as Exhibit  "A",  whereby  Executive  shall  participate  in a  survivor  income
insurance program provided by Company to its executive officers.

                    iii.  Disability  Insurance:  Company  shall make  available
disability  insurance coverage for the Executive at Company's expense,  provided
the Executive qualifies as a medically acceptable risk to the issuing company on
a standard  underwriting  basis,  which  shall  provide  that,  in the event the
Executive is unable to perform his duties  hereunder  as a result of  incapacity
due to physical or mental illness, he shall be entitled to receive not less than
an amount equal to seventy percent (70%) of his then Annual Direct Salary, until
he reaches the age of sixty-five (65) or dies,  whichever occurs first.  Company
shall  continue to pay to the  Executive  his Annual  Direct  Salary  during any
applicable "elimination (waiting) period," but not to exceed six (6) months.

               b. Other Perquisites and Benefits. Executive shall be entitled to
receive  other  perquisites  and fringe  benefits as the Board of  Directors  of
Company deems appropriate, in its sole discretion.

               c.  Relocation.  Company shall not,  without the prior consent of
Executive  transfer or relocate the office in which Executive  performs the bulk
of his duties to any location  which is further in actual  driving  mileage than
the driving mileage from Peoples'  headquarters in East Berlin,  Pennsylvania to
Millersburg,  Pennsylvania. Company shall not require Executive to move from his
residence.

               d.  Company  Car.  Company  recognizes  Executive's  need  for an
automobile for business purposes and shall provide Executive with an automobile,
including all related maintenance,  repairs,  insurance and other costs. In lieu
of providing Executive with an automobile,  Company may provide Executive with a
reasonable allowance on a monthly basis, which allowance shall cover Executive's
costs  associated with an automobile,  including  without  limitation,  lease or
installment payments, maintenance, repairs, insurance and other costs.

                                       3
<PAGE>

          4. Reimbursement of Expenses. Company shall reimburse Executive within
thirty (30) days from billing date for necessary and properly  documented travel
and business expenses, not otherwise reimbursed, incurred by Executive on behalf
of Company.

          5. Term of Employment. Company employs the Executive and the Executive
accepts  employment with Company for a period of five (5) years beginning on the
Effective Date of the Merger (as defined in the Merger  Agreement) and ending on
the  date  which is five (5)  years  after  the  Effective  Date of the  Merger,
subject,  however,  to  prior  termination  of this  Agreement  as set  forth in
paragraph 6 below.  Upon the  expiration of the third year within said five-year
period, and upon the expiration of each additional year of employment (each such
period being referred to herein as "the  Expiration  Date"),  this Agreement and
the period of Executive's  employment  hereunder will be automatically  extended
for an additional  year (resulting in successive  three- year terms) unless,  no
later than ninety (90) days prior to the  Expiration  Date,  either the Board of
Directors of Company or Executive gives written notification to the other of his
or its intention not to renew the Agreement or Executive's employment. Notice of
intent not to renew that is properly  given under this  paragraph  will have the
effect of causing the Agreement to terminate two (2) years after the  Expiration
Date (unless terminated prior thereto in accordance with paragraph 6 below).

          6. Termination.

               a. Death.  Executive's  employment hereunder shall terminate upon
his death.

               b. Disability.  If the Executive becomes permanently disabled (as
certified by a licensed  physician chosen by Company and the Executive or in the
event  Company  and the  Executive  cannot  agree upon a  physician,  each shall
designate a licensed physician,  and the licensed physicians so designated shall
appoint a third  physician  whose  decision  shall be binding  upon the parties)
because of sickness,  physical or mental disability, or any other reason, and is
unable to perform or complete  his duties under this  Agreement  for a period of
ninety (90) consecutive days (or time equal to the elimination  period under any
disability  insurance  program  provided by Company to the  Executive),  Company
shall have the option to terminate  this  Agreement by giving  written notice of
termination to the Executive. Such termination shall be without prejudice to any
right the Executive has under any  disability  insurance  program  maintained by
Company.

                                       4
<PAGE>

               c.  Cause.   Company  may  terminate   this   Agreement  and  the
Executive's employment hereunder for Cause at any time. For the purposes of this
Agreement,  Company shall have "Cause" to terminate the  Executive's  employment
upon (1) the  failure  by the  Executive  to  substantially  perform  his duties
hereunder, other than any such failure resulting from the Executive's incapacity
due to physical or mental  illness  (after  Company's  notice to  Executive  and
Executive's  failure to cure same within thirty (30) days of such  notice);  (2)
the engaging by the  Executive  in willful  misconduct  materially  injurious to
Company;  (3) gross negligence,  malfeasance,  or dishonesty of the Executive in
the  performance  of  his  duties  (after  Company's  notice  to  Executive  and
Executive's  failure to cure same within thirty (30) days of such  notice);  (4)
the commission by Executive of an act constituting a felony or the conviction of
Executive of a  misdemeanor  based on  dishonesty;  (5) the willful and material
breach by Executive of any of his other  obligations under this Agreement (after
Company's notice to Executive and Executive's failure to cure same within thirty
(30) days of such notice);  (6) the refusal or failure of Executive to carry out
reasonable  directives  of the Board (after  Company's  notice to Executive  and
Executive's  failure to cure same within thirty (30) days of such  notice);  (7)
receipt of a final written directive or order of any governmental body or entity
having  jurisdiction  over  Company  requiring  termination  or  removal  of the
Executive as Chief  Executive  Officer,  President  or Director of Company;  (8)
repeated  and  consistent  failure of  Executive  to be present  and work during
normal  business  hours  unless the absence is due to  disability  described  in
Section 7(a) below (after Company's notice to Executive and Executive's  failure
to cure same within  thirty  (30) days of such  notice);  or (9)  insubordinate,
gross  incompetence  or misconduct in the  performance  of, or gross neglect of,
Executive's   duties   hereunder   (after  Company's  notice  to  Executive  and
Executive's failure to cure same within thirty (30) days of such notice).

               d. Health and Good Reason. Executive may terminate his employment
hereunder (1) if his health  should  become  impaired to an extent that it makes
continued  performance  of his duties  hereunder  hazardous  to his  physical or
mental health or his life, or (2) for Good Reason.  The term "Good Reason" shall
mean (i) any assignment to Executive,  without his consent,  of any duties other
than those  contemplated  by Section 1 hereof,  or any reduction in  Executive's
duties or  responsibilities  for Company;  (ii) any removal of Executive from or
any failure to nominate  and support  for  re-election  Executive  to any of the
positions  indicated in Section 1 hereof,  except in connection with termination
of  Executive's  employment for Cause;  (iii) a reduction of Executive's  Annual
Direct Salary;  (iv) breach by Company of its obligations under Section 3 hereof
(after  Executive's  notice to Company and Company's failure to cure such breach
within  thirty (30) days of such  notice);  (v) any other  willful and  material
breach by Company of this  Agreement  (after  Executive's  notice to Company and
Company's  failure to cure such breach  within thirty (30) days of such notice);
(vi) any  Change of Control  (as  defined  herein);  or (vii) any  violation  by
Company of the provisions of Section 3(c) above (pertaining to relocation).

                                       5
<PAGE>

               e. Voluntary  Termination  by Executive.  Executive may terminate
his  employment  with Company at anytime for a reason other than a reason of the
type  described  in Section  6(d) above on one hundred  eighty  (180) days prior
written notice to Company.

          7. Payments Upon Termination.

               a. Death,  Disability  or for Cause.  If  Executive's  employment
shall be terminated because of death,  disability or for Cause, or, in the event
Executive terminates his employment with Company pursuant to Section 6(e) above,
Company shall pay  Executive  his full Annual Direct Salary  through the date of
termination at the rate in effect at the time of termination,  and other amounts
owing to Executive at the date of termination  and Company shall have no further
obligations to Executive under this Agreement. In the event Executive terminates
his employment  hereunder pursuant to Section 6(d)(1) as a result of disability,
Executive  shall be entitled to the  benefits  referenced  in Section  3(a)(iii)
above.

               b.  Unilateral  and  Good  Reason  Termination.   If  Executive's
employment is terminated by Company  (other than pursuant to Sections  6(a), (b)
or (c) hereof or as a result of nonrenewal of this  Agreement),  or if Executive
shall  terminate his  employment  for Good Reason  (except for a termination  by
Executive due to a Change in Control as defined herein),  then Company shall pay
Executive  one hundred  twenty  percent  (120%) of his full Annual Direct Salary
from the date of termination for the remaining term of this  Agreement.  Company
shall not be required to maintain  employee  benefit plans and programs to which
Executive was entitled prior to the date of termination. The parties acknowledge
that twenty percent (20%) of such Annual Direct Salary payment  referenced above
represents  the parties' best  estimation of the value of such other benefits to
which  Executive  had been  entitled  prior  to  termination  of his  employment
pursuant to this  Section.  In the event that  Executive  were to terminate  his
employment due to any Change in Control (as defined herein),  Executive shall be
entitled  (as his sole  remedy) to a lump sum payment in an amount  equal to his
full  Annual  Direct  Salary  then  in  effect  for the  remaining  term of this
Agreement  in cash  within  thirty  (30) days  from the date on which  Executive
ceases to be  employed  by Company.  The  parties  acknowledge  and agree that a
termination  by Executive for health reasons  pursuant to Section  6(d)(1) above
shall not trigger the payments set forth in this Section 7(b).

               c.  Voluntary  Termination  by  Executive.   If  Executive  shall
terminate his employment  with Company  pursuant to Section 6(e) above,  Company
shall  pay  Executive  his  full  Annual  Direct  Salary  through  the  date  of
termination  and other amounts owing to Executive at the date of termination and
Company shall have no further obligations to Executive under this Agreement.

                                       6
<PAGE>

          8.  Section  280G.   Notwithstanding  any  other  provisions  of  this
Agreement or any other agreement  entered into by Executive and Company,  except
any agreement which expressly modifies this Section 8 ("Other  Agreement"),  and
notwithstanding  any formal or informal plan or other arrangement  heretofore or
hereafter  adopted  by the  Company  for the  direct or  indirect  provision  of
compensation to Executive  (including groups of participants or beneficiaries of
which Executive is a member),  whether or not such compensation is deferred,  is
in cash, or is in the form of a benefit to or for Executive (a "Benefit  Plan"),
Executive shall not have any right to receive any payment or other benefit under
this  Agreement,  any Other  Agreement,  or any Benefit  Plan if such payment or
benefit,  taking into account all other payments or benefits to or for Executive
under this Agreement,  all Other Agreements,  and all Benefit Plans, would cause
any payment to  Executive  under this  Agreement  to be  considered a "parachute
payment" within the meaning of Section 280G of the Internal Revenue Code as then
in effect (a  "Parachute  Payment").  In the event that the  receipt of any such
payment or benefit under this  Agreement,  any Other  Agreement,  or any Benefit
Plan would cause Executive to be considered to have received a Parachute Payment
under this Agreement,  then Executive shall have the right, in Executive's  sole
discretion,  to designate those payments or benefits under this  Agreement,  any
Other Agreements and/or any Benefit Plans, which should be reduced or eliminated
so as to avoid having the payment to Executive under this Agreement to be deemed
to be a Parachute Payment.

          9.  Definition of Change of Control.  For purposes of this  Agreement,
the term "Change of Control" shall mean:

               a. An  acquisition by any "person" or "group" (as those terms are
defined or used in Section 13(d) of the Exchange Act, as enacted and in force on
the date  hereof) of  "beneficial  ownership"  (within the meaning of Rule 13d-3
under  the  Exchange  Act,  as  enacted  and in  force on the  date  hereof)  of
securities of Company  representing  24.99% or more of the combined voting power
of Company's securities then outstanding;

               b. A merger, consolidation or other reorganization of Company,
except where the resulting entity is controlled, directly or indirectly, by
Company;

               c. A merger,  consolidation or other  reorganization  of Company,
except where  shareholders of Company  immediately  prior to consummation of any
such transaction continue to hold as least a majority of the voting power of the
outstanding  voting  securities of the legal entity  resulting  from or existing
after any transaction and a majority of the members of the Board of Directors of
the legal  entity  resulting  from or existing  after a  transaction  are former
members of Company's Board of Directors;

               d.  A  sale,   exchange,   transfer  or  other   disposition   of
substantially  all of the  assets of Company  to  another  entity,  except to an
entity  controlled,  directly or indirectly,  by Company or a corporate division
involving Company;

                                       7
<PAGE>

               e. A contested proxy solicitation of Company's  shareholders that
results in the  contesting  party  obtaining  the  ability  to cast  twenty-five
percent  (25%)  or more of the  votes  entitled  to be  cast in an  election  of
directors of Company.

               f. During any period of two (2) consecutive years during the term
of this Agreement and any renewal  hereof,  individuals  who at the beginning of
such period  constitute  the Board of Directors of Company  cease for any reason
(other than for health,  disability  or other  medical  incapacity  or voluntary
retirement) to constitute at least a majority thereof.

          10.  Definition  of Date of Change of  Control.  For  purposes of this
Agreement, the date of Change of Control shall mean the earlier of:

               a. the first day on which a "person"  or "group"  (as those terms
are  defined or used in Section  13(d) of the  Exchange  Act,  as enacted and in
force on the date hereof) acquire the "beneficial ownership" (within the meaning
of Rule  13d-3  under the  Exchange  Act,  as  enacted  and in force on the date
hereof) of 24.99% or more of the combined  voting power of Company's  securities
then outstanding,

               b.  the  date  of the  transfer  of all or  substantially  all of
Company's assets,

               c. the date on which a merger,  consolidation  or  combination is
consummated, as applicable, or

               d. the  date on which a  contesting  party in a  contested  proxy
solicitation of Company's  shareholders  obtains the ability to cast twenty-five
percent  (25%)  or more of the  votes  entitled  to be  cast in an  election  of
directors of Company.

               e. the date on which  there is a change  in the  majority  of the
members of the Board  during any two (2)  consecutive  years  during the term of
this Agreement and any renewal hereof, for reasons other than health, disability
or other medical incapacity or voluntary retirement.

          11.  Damages for Breach of Contract.  In the event of a breach of this
Agreement  by either the  Company or  Executive  resulting  in damages to either
party, that party may recover from the party breaching the Agreement any and all
damages that may be sustained.

          12. No  Assignment.  The right of Executive or any other person to the
payment of deferred  compensation  or other benefits under this Agreement  shall
not be assigned,  transferred,  pledged,  or encumbered except by will or by the
laws of the dissent and distribution.

                                       8
<PAGE>

          13. Binding Effect.  This Agreement shall be binding upon and inure to
the benefit of Company,  it successors  and assigns and Executive and his heirs,
executors, administrators, and legal representatives.

          14.  Governing  Law. This  Agreement  shall be construed in accordance
with and governed by the laws of the Commonwealth of Pennsylvania.

          15. Severability. If any provision of this Agreement shall be found by
any court of competent  jurisdiction  to be  unenforceable,  the parties  hereby
waive such  provision to the extent that it is found to be  unenforceable.  Such
provision may be modified by such court so that it becomes enforceable,  and, as
modified,  will be enforced as any other provision hereof,  all other provisions
continuing in full force and effect.

          16. Indemnification. Company shall indemnify Executive, to the fullest
extent permitted by Pennsylvania law, with respect to any threatened, pending or
completed action,  suit or proceeding  brought against him by reason of the fact
that he is or was a director, officer, employee or agent of Company or is or was
serving at the request of Company as a director,  officer,  employee or agent of
another person or entity.  To the fullest extent permitted by Pennsylvania  law,
Company  shall  in  advance  of  final  disposition  pay any  and  all  expenses
(including,  without  limitation,  attorney's  fees)  incurred by  Executive  in
connection with any threatened,  pending or completed action, suit or proceeding
with respect to which  Executive may be entitled to  indemnification  hereunder;
provided,  however,  that Executive agrees to reimburse  Company all such monies
advanced if the presiding  court finds that he breached or failed to perform his
duties as a director  of  officer,  as the case may be, of Company  and that the
breach or failure constituted self-dealing,  willful misconduct or recklessness.
Executive's  right to  indemnification  provided  herein is not exclusive of any
other rights of  indemnification  to which  Executive may be entitled  under any
bylaw, agreement,  vote of shareholders or otherwise,  and shall continue beyond
the term of this  Agreement.  Company  shall  use its  best  efforts  to  obtain
insurance coverage for Executive under an insurance policy covering officers and
directors  of  Company  against  lawsuits,  arbitrations  or other  proceedings;
however,  nothing  herein shall be  construed to require  Company to obtain such
insurance,  if the Board of Directors of Company  determines  that such coverage
cannot be obtained at a commercially reasonable price.

          17.  Noncompetition.  Executive  shall not,  while employed by Company
and,  only if Executive  terminates  his  employment  with  Company  pursuant to
Section 6(e), for a period of one (1) year after such  termination,  Compete (as
hereinafter defined).  The term "Compete" shall mean employment by, or direct or
indirect  participation  in (as an  owner,  shareholder,  director,  general  or
limited  partner,  officer,  manager,  consultant or agent,  or otherwise),  any
business,  firm,  corporation,  partnership  or other  entity or person which is
engaged  in  commercial   banking   within  any  county  in  which   Community's
subsidiaries  have  offices or  branches  prior to  termination  of  Executive's
employment.  In the event  Executive  terminates  his  employment  with  Company
pursuant to Section 6(e) above,  Executive agrees,  for a period of one (1) year
following such termination (i) not to solicit any Company  employees or officers
to leave Company to accept employment by Executive or his new employer; and (ii)
not to solicit or encourage any Company  customers to cease doing  business with
the Company and/or to transfer any or all of their business relationships to any
institution which Executive may found or to Executive's new employer.

                                       9
<PAGE>

          18. Notice. For the purposes of this Agreement,  notices and all other
communications  provided for in the  Agreement  shall be in writing and shall be
deemed  to have been  duly  given  when  delivered  or  mailed by United  States
certified mail, return receipt requested, postage prepaid, addressed as follows:

If to Executive:   Eddie L. Dunklebarger
                   960 Sunnyside Road
                   York, PA  17404

If to Company:     Community Banks, Inc.
                   150 Market Square
                   Millersburg, PA  17061
                   Attention:  Ernest L. Lowe

or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.

          19. Validity.  The invalidity or  unenforceability of any provision or
provisions of this Agreement shall not affect the validity or  enforceability of
any other  provision  of this  Agreement,  which shall  remain in full force and
effect.

          20.  Amendment.  This  Agreement  may be amended or  canceled  only by
mutual  agreement  of the parties in writing.  So long as  Executive  lives,  no
person other than the parties  hereto shall have any rights under or interest in
this Agreement or the subject matter hereof.

          21.  Attorney's  Fees and Costs.  If any action at law or in equity is
necessary to enforce or interpret the terms of this  Agreement,  the  prevailing
party shall be entitled to  reasonable  attorney's  fees,  costs,  and necessary
disbursements in addition to any other relief that may be proper.

          22. Entire  Agreement.  As of the Effective  Date of the Merger,  this
Agreement and a certain  Salary  Continuation  Agreement  between  Executive and
Peoples shall constitute the entire  agreement  between the parties and no prior
promises,  agreements or  warranties,  verbal or written,  shall be of any force
unless embodied herein.  No modification of this Agreement shall be of any force
or effect  unless  reduced to  writing  and  signed by both  parties.  As of the
Effective  Date of the  Merger,  the  existing  Executive  Employment  Agreement
between  Peoples and Executive  shall be  terminated,  with no further rights or
obligations  thereunder  due to or  from  either  party.  This  Agreement  shall
supersede  that  certain  Executive  Employment  Agreement  between  Peoples and
Executive, dated May 14, 1993.

                                       10
<PAGE>

     IN WITNESS WHEREOF, Company has caused this Agreement to be executed by its
duly authorized officers and Executive has hereunto set his hand and seal as of
the date first above written.

ATTEST:                                              COMMUNITY BANKS, INC.

/S/ Patricia E. Hoch                                 By:/S/ Thomas L. Miller
--------------------                                    --------------------

                                                     THE PEOPLES STATE BANK

/S/ Carole L. Parr                                   By:/S/ Carlton L. Jacobs
------------------                                      ---------------------

WITNESS:                                             EXECUTIVE:

/S/ Carole L. Parr                                   /S/ Eddie L. Dunklebarger
------------------                                   -------------------------
                                                     Eddie L. Dunklebarger

                                       11

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