EMPLOYMENT AGREEMENT
SALARY CONTINUATION AGREEMENT
 
 
                                                                    Exhibit 10.1
 
                              EMPLOYMENT AGREEMENT
 
     THIS EMPLOYMENT AGREEMENT ("this Agreement") is made effective this 1st day
of  January,  2004  by  COMMUNITY  BANKS,  INC.,  a  Pennsylvania   corporation,
("Company") and EDDIE L. DUNKLEBARGER, an adult individual (hereinafter referred
to as "Executive").
 
Background
----------
 
     A. The Executive is currently employed as the President and Chief Executive
Officer of the  Company and  Community  Banks,  the  Company's  bank  subsidiary
("Bank"),  pursuant to a certain Employment  Agreement among the parties,  dated
October 29, 1997 and amended on January 15, 2002 ("Original Agreement").
 
     B. The parties wish to replace the Original Agreement.
 
     C. The  Compensation  Committee of the  Company's  Board of Directors  (the
"Committee") has approved the provisions of this Agreement.
 
     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  the  Executive,  and the
         --------------------
Executive shall serve,  as President and Chief Executive  Officer of Company and
the Bank (collectively referred to from time to time as "Community"). During his
employment by Community, the Executive shall serve Community under the direction
of,  and in a manner  satisfactory  to, the Boards of  Directors  of  Community,
provided that any duties  prescribed  by the Boards of Directors are  consistent
with the Executive's  position as President and Chief Executive  Officer,  which
shall be the  usual and  customary  duties of a  president  and chief  executive
officer of a bank holding  company and a bank.  The Executive  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.  He shall report to
the  Board of  Directors  and shall  have  supervision  and  control  over,  and
responsibility for, the general management and operations of Community.
 
     2. Compensation.
        -------------
 
          a. Annual Direct Salary.  Company shall pay to Executive a base salary
             ---------------------
     in an amount to be determined by the  Committee.  This salary shall be paid
     in regular, substantially equal installments in accordance with the regular
     payroll  practices of the Company,  less any and all applicable  deductions
     for taxes, medical benefits, etc.
 
          b.  Incentive  Compensation.   The  Executive  shall  be  entitled  to
              ------------------------
     participate in any executive bonus program  maintained by the Company,  and
     the amount of such  bonus,  if any,  shall be  determined  annually  by the
     Committee.
 
     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. The Executive shall be entitled to the following:
<PAGE>
 
          a.  Employee  Benefits  Plans.  The  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  the  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 the
     Company's stock option plan, for each calendar year during the term of this
     Agreement,  Company  shall grant to  Executive  options  under its existing
     stock option plan for at least 15,000 shares of Company's stock, subject to
     approval  of the  Committee.  It is  understood  and agreed  that any major
     medical,  hospitalization  and  health-and-accident  plan  shall  cover the
     Executive under standard coverage  provisions.  The Executive shall also be
     entitled to the following benefits, at minimum:
 
               i.  Survivor  Income.  The  Executive is entitled to the benefits
                   -----------------
          described in a certain Survivor Income Agreement,  including the Split
          Dollar  Addendum  thereto,   between  Community  and  Executive  dated
          February 5, 1999 ("Survivor Income Agreement").
 
               ii. Salary Continuation  Agreement.  The Executive is entitled to
                   -------------------------------
          the  benefits  described  in a certain  Amended  and  Restated  Salary
          Continuation Agreement,  between Community and Executive dated January
          1, 2004 ("Salary Continuation Agreement").
 
               iii.  Disability  Insurance:  The  Company  shall make  available
                     ----------------------
          disability  insurance  coverage  for the  Executive  at the  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.  The 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.  The Executive shall be entitled to
             -------------------------------
     receive other perquisites and fringe benefits as the Compensation Committee
     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  more than  thirty  (30)  miles  from
     Harrisburg, Pennsylvania without an increase in duties and responsibilities
     and commensurate compensation.  In the event Executive is so transferred or
     relocated, Company shall pay all reasonable out-of-pocket expenses incurred
     by Executive in connection with such relocation.  Company shall not require
     Executive to move from his residence.
 
          d. Company Car. The Company  recognizes  the  Executive's  need for an
             -----------
     automobile  for business  purposes and shall provide the Executive  with an
     automobile, including all related maintenance, repairs, insurance and other
     costs.  In lieu of providing the Executive with an automobile,  the Company
     may provide the Executive  with a reasonable  allowance on a
 
                                       2
<PAGE>
 
     monthly basis, which allowance shall cover the Executive's costs associated
     with an  automobile,  including  without  limitation,  lease or installment
     payments, maintenance, repairs, insurance and other costs.
 
     4.  Reimbursement  of Expenses.  The Company shall  reimburse the Executive
         ---------------------------
within thirty (30) days from billing date for necessary and properly  documented
travel  and  business  expenses,  not  otherwise  reimbursed,  incurred  by  the
Executive on behalf of Community.
 
     5. Term of Employment.  The term of the Executive's  employment  under this
        -------------------
Agreement  shall  be a  rolling  three  (3)  years,  commencing  on the  date of
execution of this Agreement (the "Effective  Date").  On each anniversary of the
Effective Date, the term of this agreement shall  automatically renew and extend
for an  additional  one (1) year,  unless and until either  party shall  provide
written  notice of its  intent not to renew at least  ninety  (90) days prior to
such  anniversary  date.  Notwithstanding  the  foregoing  provisions,  upon the
occurrence  of a Change of Control (as  hereinafter  defined),  the term of this
Agreement shall automatically renew and be extended for three (3) years from the
date hereof.
 
     6. Termination.
        ------------
 
          a.  Disability.  If the  Executive  becomes  permanently  disabled (as
              -----------
     certified by a licensed physician chosen by the Committee and the Executive
     or in the event that the Committee  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 the Company to the Executive),  the Company's Board of
     Directors  (the "Board")  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 the Company.
 
          b. Cause.  The Board may terminate this Agreement and the  Executive's
             ------
     employment  hereunder  for  Cause at any  time.  For the  purposes  of this
     Agreement,  the Board  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 the Board's
     notice to the  Executive  and the  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 Community; (3) gross negligence,
     malfeasance,  or  dishonesty  of the  Executive in the  performance  of his
     duties  (after the  Board's  notice to the  Executive  and the  Executive's
     failure  to cure same  within  thirty  (30) days of such  notice);  (4) the
     commission  by  the  Executive  of an  act  constituting  a  felony  or the
     conviction of the Executive of a misdemeanor  based on dishonesty;  (5) the
     willful  and  material  breach  by  the  Executive  of  any  of  his  other
     obligations under this Agreement (after the Board's notice to the Executive
     and the  Executive's  failure to cure same within  thirty (30) days of such
     notice);  (6)  the  refusal  or  failure  of the  Executive  to  carry  out
     reasonable  directives  of the  Board  (after  the  Board's  notice  to the
     Executive and the Executive's  failure to cure same within thirty
 
 
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<PAGE>
 
     (30) days of such  notice);  (7) receipt of a final  written  directive  or
     order of any governmental body or entity having jurisdiction over Community
     requiring  termination  or  removal  of the  Executive  as Chief  Executive
     Officer,  President or Director of Community;  (8) repeated and  consistent
     failure of the  Executive  to be present  and work during  normal  business
     hours  unless the absence is due to  disability  described  in Section 7(a)
     below  (after  the  Board's  notice to the  Executive  and the  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, the  Executive's  duties  hereunder  (after the Board's
     notice to the  Executive  and the  Executive's  failure to cure same within
     thirty (30) days of such notice).
 
          c. Good Reason.  The Executive may terminate his employment  hereunder
             ------------
     for Good Reason.  The term "Good Reason"  shall mean (i) any  assignment to
     the  Executive,  without  his  consent,  of any  duties  other  than  those
     contemplated  by  Section 1 hereof,  or any  reduction  in the  Executive's
     duties or responsibilities for Community; (ii) any removal of the Executive
     from  any of the  positions  indicated  in  Section  1  hereof,  except  in
     connection with termination of the Executive's  employment for Cause; (iii)
     a reduction of the  Executive's  Annual Direct  Salary;  (iv) breach by the
     Company of its  obligations  under Section 3 hereof (after the  Executive's
     notice to the Company and the Company's  failure to cure such breach within
     thirty (30) days of such notice); (v) any other willful and material breach
     by the  Company  of this  Agreement  (after the  Executive's  notice to the
     Company and the  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 the Company of the  provisions of Section 3(c) above
     (pertaining to relocation).
 
          d. Voluntary Termination by The Executive. Executive may terminate his
             ---------------------------------------
     employment  at any  time  for a  reason  other  than a  reason  of the type
     described  in Section  6(c) above on one  hundred  eighty  (180) days prior
     written notice to the Company.
 
     7. Payments Upon Termination.
        --------------------------
 
          a. Death, Disability or for Cause. If the Executive's employment shall
             -------------------------------
     be terminated  because of death,  disability or for Cause, or, in the event
     the Executive  terminates  his  employment  pursuant to Section 6(d) above,
     Community shall pay the 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 the  Executive at the date of  termination,  and the
     Company  shall  have no further  obligations  to the  Executive  under this
     Agreement.
 
          b.  Unilateral and Good Reason  Termination  (Not Including  Change of
              ------------------------------------------------------------------
     Control). If the Executive's employment is terminated by the Company (other
     ---------
     than  pursuant to Sections  6(a) or (b) hereof or as a result of nonrenewal
     of this Agreement),  or if the Executive shall terminate his employment for
     Good Reason  (except for a termination  by the Executive due to a Change of
     Control as defined  herein),  then the Company  shall pay the Executive one
     hundred  twenty  percent  (120%) of his full Annual  Direct Salary from the
     date of termination for the remaining term of this  Agreement.  The Company
     shall not be required to maintain  employee  benefit  plans and programs to
     which the  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
 
 
                                       4
<PAGE>
 
     which  the  Executive  had  been  entitled  prior  to  termination  of  his
     employment pursuant to this Section.
 
          c.  Termination  Following  Change of  Control.  In the event that the
              -------------------------------------------
     Executive were to terminate his  employment  within three (3) months of the
     date of a Change of Control  (as  defined  herein) or the  Company,  or any
     successor thereto,  terminates Executive's employment at any time following
     a Change of Control, the Executive shall be entitled as his sole remedy to:
 
               (i) a lump sum  payment  equal to three  times the average of the
          sum of base salary and bonus payments that the Executive has been paid
          in the  three  years  preceding  the  date of such  termination,  such
          payment to be made in cash  within  thirty  (30) days from the date on
          which the Executive ceases to be employed hereunder; and
 
               (ii) in the event of a Change of Control as described in Sections
          9(b), (c) or (d), either (A) eligibility for Executive, his spouse and
          his dependant  children to  participate  in the health  benefits plans
          ("Plans")  of any  successor  ("Successor")  to the Company  until the
          earlier of age 65 or the Executive's  becoming eligible to participate
          in the health  benefit plans (such period  referred to  hereinafter as
          the  "Benefits  Period")  as if the  Executive  was an employee of the
          Successor or (B) if for any reason  Executive may not  participate  in
          the Successor's  Plans,  then the Successor shall make annual payments
          to  Executive  in such  amounts as will enable  Executive  to purchase
          private  insurance  that will afford to Executive,  his spouse and his
          dependant children  substantially the same benefits as are afforded to
          employees  of the  Successor  during  the  Benefits  Period  ("In Lieu
          Payments").  Executive  shall be  responsible  for the  payment of any
          taxes he may incur as a result of  receiving an In Lieu  Payment,  and
          the amount of any In Lieu Payment shall be reduced by the amount which
          would be deducted from Executive's  wages if he were  participating in
          such Plans as an employee of the  Successor,  provided  however,  that
          nothing in this  Section  7(c)(ii)  shall limit the  authority  of the
          Successor  to  modify  its  Plans  or  increase  the  amount  that its
          employees  must  contribute  to the Plans during the Benefits  Period,
          including without limitation the reduction of benefits.
 
     8.  Certain  Additional  Payments  by the  Company.  In the event  that any
         -----------------------------------------------
payments made to the Executive  upon  termination  of employment in  conjunction
with a Change of  Control  (pursuant  to this  Agreement  and any  other  plans,
programs or arrangements  maintained by the Corporation and any other agreements
between  the  Executive  and  Community)  would  constitute   "excess  parachute
payments"  within the meaning of Section  280G of the  Internal  Revenue Code of
1986,  as  amended,  the  Corporation  will make an  additional  payment  to the
Executive  in an amount  such that  after the  payment  of all income and excise
taxes, the Executive will be in the same after-tax  position as if no excise tax
had been imposed.
 
     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 the Company  representing  24.99% or more of the
     combined voting power of the Company's securities then outstanding;
 
                                       5
<PAGE>
 
          b. A merger,  consolidation  or other  reorganization  of the Company,
     except where the resulting entity is controlled, directly or indirectly, by
     the Company;
 
          c. A merger,  consolidation  or other  reorganization  of the Company,
     except where shareholders of the 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 the Company's Board of Directors;
 
          d. A sale,  exchange,  transfer or other  disposition of substantially
     all of the assets of the  Company to  another  entity,  except to an entity
     controlled,  directly or indirectly, by the Company or a corporate division
     involving the Company;
 
          e. A contested proxy  solicitation of the 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 the Company; or
 
          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 the 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 the
     Company's securities then outstanding,
 
          b.  the  date  of the  transfer  of all  or  substantially  all of the
     Company's assets;
 
          c.  the  date on  which a  merger,  consolidation  or  combination  is
     consummated, as applicable;
 
          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 the Company; or
 
          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.
 
                                       6
<PAGE>
 
     11.  Damages  for  Breach  of  Contract.  In the  event of a breach of this
          -----------------------------------
Agreement by either the Company or the 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 the  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 descent and distribution.
 
     13. Binding  Effect.  This Agreement shall be binding upon and inure to the
        -----------------
benefit of the Company,  it  successors  and assigns and the  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.  The Company shall  indemnify the  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 Community
or is or was  serving at the  request of the  Company  as a  director,  officer,
employee or agent of another person or entity.  To the fullest extent  permitted
by Pennsylvania  law, the Company shall in advance of final  disposition pay any
and all expenses  (including,  without limitation,  attorney's fees) incurred by
the Executive in connection  with any threatened,  pending or completed  action,
suit or  proceeding  with  respect to which the  Executive  may be  entitled  to
indemnification  hereunder;  provided,  however,  that the  Executive  agrees to
reimburse the Company all such monies advanced if the presiding court finds that
he breached  or failed to perform  his duties as a director  or officer,  as the
case  may  be,  of  Community  and  that  the  breach  or  failure   constituted
self-dealing,  willful  misconduct or  recklessness.  The  Executive's  right to
indemnification  provided  herein  is not  exclusive  of  any  other  rights  of
indemnification  to  which  the  Executive  may be  entitled  under  any  bylaw,
agreement, vote of shareholders or otherwise, and shall continue beyond the term
of this  Agreement.  The Company shall use its best efforts to obtain  insurance
coverage for the  Executive  under an  insurance  policy  covering  officers and
directors of the Company against  lawsuits,  arbitrations or other  proceedings;
however, nothing herein shall be construed to require the Company to obtain such
insurance,  if the  Board of  Directors  of the  Company  determines  that  such
coverage cannot be obtained at a commercially reasonable price.
 
     17.  Non-competition.  The Executive shall not, while employed by Community
          ----------------
and, if the Executive  terminates  his  employment  with  Community  pursuant to
Section 6(d) or the Company terminates his employment for Cause, 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,  founder,  director, general or
 
 
                                       7
<PAGE>
 
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  the  Company's
subsidiaries  have offices or branches prior to  termination of the  Executive's
employment.  In the event the Executive terminates his employment with Community
pursuant to Section  6(d) above or the Company  terminates  his  employment  for
Cause,  the  Executive  agrees,  for a  period  of one (1) year  following  such
termination  (i) not to solicit  any  Community  employees  or officers to leave
Community to accept  employment by the  Executive or his new employer;  and (ii)
not to solicit or encourage any customers of Community or any of its  affiliates
to cease doing business with Community or its affiliates  and/or to transfer any
or all of their business  relationships  to any institution  which the Executive
may found or to the Executive's new employer.
 
     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
(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):
 
If to the Executive:       Eddie L. Dunklebarger
                           960 Sunnyside Road
                           York, PA  17404
 
If to the Company:         Community Banks, Inc.
                           750 East Park Drive
                           Harrisburg, PA  17111
                           Attention:  Chairman, Compensation Committee.
 
     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 the 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,  the Survivor Income Agreement and the Salary Continuation  Agreement
shall  constitute the entire  agreement  between the parties with respect to the
subject matter hereof 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
 
 
                                       8
<PAGE>
 
 
signed by both  parties.  As of the complete  execution of this  Agreement,  the
Original  Agreement  shall be terminated,  with no further rights or obligations
thereunder due to or from either party.
 
         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officers and the Executive has hereunto set his
hand and seal as of the date first above written.
 
COMMUNITY BANKS, INC.
 
 
By: /s/ Earl L. Mummert                            /s/ Kaye Strawser
---------------------------------                  -----------------------------
Earl L. Mummert                                        Witness/Attest
Title:  Chairman, Compensation Committee
 
Date: July 23, 2004
---------------------------------
 
 
EXECUTIVE
 
 
/s/ Eddie L . Dunklebarger                         /s/ Kaye Strawser
---------------------------------                  -----------------------------
Eddie L. Dunklebarger                                  Witness
 
Date: July 23, 2004
---------------------------------
 
 
                                       9
 

 

 

 
 
 
Exhibit 10.1
 
 
 
                              AMENDED AND RESTATED
                          SALARY CONTINUATION AGREEMENT
 
     THIS AGREEMENT is made effective this 1st day of JANUARY,  2004,  COMMUNITY
BANKS INC. a Pennsylvania  corporation (the Company") and EDDIE L.  DUNKLEBARGER
(the Executive").
 
                                  INTRODUCTION
 
     To encourage the Executive to remain an employee of the Company, on JANUARY
1, 2000,  the Company  entered  into a Salary  Continuation  Agreement  with the
Executive.
 
     The Company is willing to provide additional salary  continuation  benefits
to the  Executive  and the Company and  Executive  mutually  desire to amend the
Salary Continuation Agreement as hereinafter provided.
 
                                    AGREEMENT
 
     The Executive and the Company agree as follows:
 
                                    Article 1
                                   Definitions
 
     1.1 Definitions.  Whenever used in this Agreement,  the following words and
phrases shall have the meanings specified:
 
 
          1.1.1 "Change of Control" shall mean any of the following:
 
               (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;
<PAGE>
 
               (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 at 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;
 
               (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.
 
     Notwithstanding  anything else to the contrary set forth in this Agreement,
if (i)  an  agreement  is  executed  by the  Company  providing  for  any of the
transactions or events  constituting a Change of Control as defined herein,  and
the agreement  subsequently  expires or is terminated without the transaction or
event being  consummated,  and (ii)  Executive's  employment  did not  terminate
during  the  period  after  the  agreement  and  prior  to  such  expiration  or
termination, for purposes of this Agreement it shall be as though such agreement
was  never  executed  and no  Change of  Control  event  shall be deemed to have
occurred as a result of the execution of such agreement.
 
 
 
          1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
 
                                       2
<PAGE>
 
 
 
          1.1.3 "Corporation" means Community Banks, Inc.
 
 
          1.1.4 "Disability" means the Executive suffering a sickness,  accident
     or  injury  which,  in the  judgment  of a  physician  satisfactory  to the
     Company,  prevents the Executive from performing  substantially  all of the
     Executive's  normal  duties for the Company for a period of nine (9) months
     of  any  twelve  (12)  consecutive  month  period.  As a  condition  to any
     benefits,  the Company may require the Executive to submit to such physical
     or mental  evaluations  and tests as the Company's Board of Directors deems
     appropriate.
 
 
 
          1.1.5 "Early  Termination"  means the Termination of Employment before
     Normal Retirement Age for reasons other than death, Disability, Termination
     for Cause or following a Change of Control.
 
 
 
          1.1.6 "Early  Termination Date" means the month, day and year in which
     Early Termination occurs.
 
 
 
          1.1.7 "Normal Retirement Age" means the Executive's 62nd birthday.
 
 
 
          1.1.8  "Normal   Retirement  Date"  means  the  later  of  the  Normal
     Retirement Age or Termination of Employment.
 
 
 
          1.1.9 "Plan Year" means each  twelve-month  period commencing with the
     effective date of this Agreement.
 
 
 
          1.1.10 "Termination for Cause" See Section 5.2.
 
 
                                       3
<PAGE>
 
 
          1.1.11  "Termination of Employment" means that the Executive ceases to
     be employed by the Company for any reason  whatsoever  other than by reason
     of a leave of absence  which is approved by the  Company.  For  purposes of
     this  Agreement,  if there is a dispute over the  employment  status of the
     Executive or the date of the  Executive's  Termination of  Employment,  the
     Company shall have the sole and absolute right to decide the dispute.
 
 
 
                                    Article 2
                                Lifetime Benefits
 
     2.1 Normal Retirement  Benefit.  Upon Termination of Employment on or after
the Normal Retirement Age for reasons other than death, the Company shall pay to
the  Executive  the benefit  described  in this Section 2.1 in lieu of any other
benefit under this Agreement.
 
 
          2.1.1  Amount of  Benefit.  The  aggregate  annual  Normal  Retirement
     Benefit under this Section 2.1 is One Hundred  Eighty  Thousand  ($180,000)
     Dollars.  The annual benefit amounts as depicted on Schedule A and Schedule
     B are calculated by amortizing the annual normal  retirement  benefit using
     the  interest  method of  accounting,  a discount  rate as set forth in the
     Schedules, monthly compounding and monthly payments.
 
 
 
          2.1.2 Payment of Benefit.  The Company shall pay the annual benefit to
     the  Executive in  consecutive  equal monthly  installments  payable on the
     first day of each month commencing with the month following the Executive's
     Normal Retirement Date and continuing for 239 additional months.
 
 
     2.2 Early Termination  Benefit.  Upon Early Termination,  the Company shall
pay to the  Executive  the benefit  described in this Section 2.2 in lieu of any
other benefit under this Agreement.
 
                                       4
<PAGE>
 
 
          2.2.1 Amount of Benefit.  The annual benefit under this Section 2.2 is
     the Early Termination Annual Benefit set forth in Schedule A or Schedule B,
     as the case may be, for the Plan Year ending immediately prior to the Early
     Termination Date.
 
 
 
          2.2.2 Payment of Benefit.  The Company shall pay the annual benefit to
     the  Executive in  consecutive  equal monthly  installments  payable on the
     first day of each month commencing with the month following the Executive's
     Normal Retirement Age and continuing for 239 additional months.
 
 
 
     2.3  Disability  Benefit.  If the Executive  terminates  employment  due to
Disability  prior  to  Normal  Retirement  Age,  the  Company  shall  pay to the
Executive the benefit described in this Section 2.3 in lieu of any other benefit
under this Agreement.
 
 
          2.3.1 Amount of Benefit.  The annual benefit under this Section 2.3 is
     the Disability  Annual  Benefits set forth in Schedule A and Schedule B for
     the Plan Year ending  immediately prior to the date in which Termination of
     Employment occurs.
 
 
 
          2.3.2 Payment of Benefit.  The Company shall pay the Disability Annual
     Benefit  to  the  Executive  in  consecutive  equal  monthly   installments
     commencing within 90 days after the date of the Executive's  Termination of
     Employment and continuing for 239 additional months.
 
 
     2.4 Change of Control Benefit. If the Executive is in the active service of
the  Company at the time of a Change of Control,  the  Company  shall pay to the
Executive the benefit described in this Section 2.4 in lieu of any other benefit
under this Agreement.
 
 
          2.4.1 Amount of Benefit.  The annual benefit under this Section 2.4 is
     the Change in Control Benefit set forth on Schedule A and Schedule B.
 
 
                                       5
<PAGE>
 
 
          2.4.2 Payment of Benefit.  The Company shall pay the Change in Control
     Benefit to the Executive in consecutive equal monthly  installments payable
     on the first day of each  month  commencing  with the month  following  the
     Executive's Normal Retirement Age and continuing for 239 additional months.
 
 
 
                                    Article 3
                                 Death Benefits
 
     3.1 Death During Active Service.  If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive's beneficiary the
benefit described in this Section 3.1. This benefit shall be paid in lieu of the
Lifetime Benefits of Article 2.
 
          3.1.1 Amount of Benefit.  The annual benefit under this Section 3.1 is
     the Normal Retirement Benefit described in Section 2.1.1.
 
 
          3.1.2 Payment of Benefit.  The Company shall pay the annual benefit to
     the beneficiary in consecutive  equal monthly  installments  payable on the
     first day of each month commencing with the month following the Executive's
     death and continuing for 239 additional months.
 
 
     3.2 Death During  Benefit  Period.  If the Executive dies after the benefit
payments  have  commenced  under this  Agreement  but before  receiving all such
payments,  the  Company  shall pay the  remaining  benefits  to the  Executive's
beneficiary  at the same time and in the same  amounts they would have been paid
to the Executive had the Executive survived.
 
     3.3 Death Following Termination of Employment But Before Benefits Commence.
If the Executive is entitled to benefits under this Agreement, but dies prior to
receiving said benefits,  the Company shall pay to the  Executive's  beneficiary
the  same  benefits,  in the same
 
                                       6
<PAGE>
 
 
manner,  they would have been paid to the Executive had the Executive  survived;
however, said benefit payments will commence upon the Executive's death.
 
                                    Article 4
                                  Beneficiaries
 
     4.1 Beneficiary  Designations.  The Executive shall designate a beneficiary
by filing a written  designation  with the Company.  The Executive may revoke or
modify  the  designation  at any  time by  filing  a new  designation.  However,
designations  will only be effective if signed by the  Executive and accepted by
the  Company  during  the  Executive's  lifetime.  The  Executive's  beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the  Executive,  or if the  Executive  names a  spouse  as  beneficiary  and the
marriage  is  subsequently  dissolved.  If the  Executive  dies  without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
 
     4.2  Facility of Payment.  If a benefit is payable to a minor,  to a person
declared incapacitated,  or to a person incapable of handling the disposition of
his or her  property,  the Company may pay such benefit to the  guardian,  legal
representative or person having the care or custody of such minor, incapacitated
person or  incapable  person.  The  Company  may  require  proof of  incapacity,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit.  Such  distribution  shall  completely  discharge  the Company from all
liability with respect to such benefit.
 
                                    Article 5
                               General Limitations
 
     Notwithstanding  any  provision  of this  Agreement  to the  contrary,  the
Company shall not pay any benefit under this Agreement:
 
     5.1 Termination for Cause.  Notwithstanding any provision of this Agreement
to the contrary, the Company shall not pay any benefit under this Agreement,  if
the Company terminates the Executives employment for:
 
 
                                       7
<PAGE>
 
          5.1.1 Gross negligence or gross neglect of duties;
 
 
 
          5.1.2 Commission of a felony or of a gross misdemeanor involving moral
     turpitude; or
 
 
 
          5.1.3 Fraud, disloyalty, dishonesty or willful violation of any law or
     significant  Company policy  committed in connection  with the  Executive's
     employment and resulting in an adverse effect on the Company.
 
 
 
          5.1.4 Removal.  Notwithstanding any provision of this Agreement to the
     contrary, the Company shall not pay any benefit under this Agreement if the
     Executive is subject to a final removal or  prohibition  order issued by an
     appropriate  federal banking agency pursuant to Section 8(e) of the Federal
     Deposit Insurance Act.
 
 
     5.2  Competition  After  Termination  of  Employment.  No benefits shall be
payable,  except for benefits paid due to a Change of Control, if the Executive,
without the prior  written  consent of the Company,  engages in conduct which is
deemed to  violate  the  non-competition  clause of the  Executive's  Employment
Contract, which clause is hereby incorporated herein by reference,  both parties
further hereby acknowledging having received, read and understood a copy of said
Employment Contract.
 
     5.3 Suicide or  Misstatement.  If the Executive  commits suicide within two
years  after the date of this  Agreement,  or if the  insurance  company  denies
coverage  for  material  misstatements  of  fact  made by the  Executive  on any
application  for life insurance  purchased by the company,  or any other reason,
provided however that the Company shall evaluate the reason for the denial,  and
upon  advice  of  Counsel  and  in  its  sole  discretion,  consider  judicially
challenging any denial.
 
                                       8
<PAGE>
 
                                    Article 6
                          Claims and Review Procedures
 
     6.1 Claims  Procedure.  The Company  shall notify any person or entity that
makes a claim against the Agreement (the  "Claimant") in writing,  within ninety
(90)  days  of  Claimant's  written  application  for  benefits,  of  his or her
eligibility or noneligibility  for benefits under the Agreement.  If the Company
determines that the Claimant is not eligible for benefits or full benefits,  the
notice shall set forth (1) the specific reasons for such denial,  (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect his or her claim,  and a description of why it is needed,  and (4) an
explanation of the  Agreement's  claims review  procedure and other  appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed.  If the  Company  determines  that  there  are  special  circumstances
requiring  additional  time to make a  decision,  the Company  shall  notify the
Claimant  of the  special  circumstances  and the  date by which a  decision  is
expected to be made, and may extend the time for up to an additional  ninety-day
period.
 
     6.2 Review  Procedure.  If the Claimant is determined by the Company not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different  benefits,  the Claimant  shall have the  opportunity to
have such claim reviewed by the Company by filing a petition for review with the
Company  within  sixty  (60) days  after  receipt  of the  notice  issued by the
Company.  Said  petition  shall state the  specific  reasons  which the Claimant
believes  entitle him or her to benefits  or to greater or  different  benefits.
Within sixty (60) days after receipt by the Company of the petition, the Company
shall afford the Claimant (and counsel, if any) an opportunity to present his or
her position to the Company orally or in writing,  and the Claimant (or counsel)
shall have the right to review the pertinent documents. The Company shall notify
the Claimant of its decision in writing  within the  sixty-day  period,  stating
specifically  the basis of its  decision,  written in a manner  calculated to be
understood by the Claimant and the specific provisions of the Agreement on which
the  decision is based.  If,  because of the need for a hearing,  the  sixty-day
period  is not  sufficient,  the  decision  may be
 
 
                                       9
<PAGE>
 
 
deferred for up to another sixty-day period at the election of the Company,  but
notice of this deferral shall be given to the Claimant.
 
                                    Article 7
                           Amendments and Termination
 
     This  Agreement  may be amended or terminated  only by a written  agreement
signed by the Company and the Executive.
 
                                    Article 8
                                  Miscellaneous
 
     8.1  Binding  Effect.  This  Agreement  shall  bind the  Executive  and the
Company,   and   their   beneficiaries,    survivors,   executors,   successors,
administrators and transferees.
 
     8.2 No Guarantee of Employment.  This Agreement is not an employment policy
or contract.  It does not give the  Executive the right to remain an employee of
the Company,  nor does it interfere  with the  Company's  right to discharge the
Executive.  It also does not require  the  Executive  to remain an employee  nor
interfere with the Executive's right to terminate employment at any time.
 
     8.3  Non-Transferability.  Benefits  under this  Agreement  cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
 
     8.4 Tax Withholding. The Company shall withhold any taxes that are required
to be withheld from the benefits provided under this Agreement.
 
     8.5  Applicable  Law.  The  Agreement  and all  rights  hereunder  shall be
governed by the laws of the Commonwealth of  Pennsylvania,  except to the extent
preempted by the laws of the United States of America.
 
     8.6  Unfunded  Arrangement.  The  Executive  and  beneficiary  are  general
unsecured  creditors  of the  Company  for the  payment of  benefits  under this
Agreement.  The benefits
 
 
                                       10
<PAGE>
 
 
represent  the mere promise by the Company to pay such  benefits.  The rights to
benefits  are not  subject  in any  manner to  anticipation,  alienation,  sale,
transfer,  assignment,  pledge,  encumbrance,   attachment,  or  garnishment  by
creditors.  Any  insurance  on the  Executive's  life is a general  asset of the
Company to which the  Executive  and  beneficiary  have no  preferred or secured
claim.
 
     8.7 Recovery of Estate Taxes. If the  Executive's  gross estate for federal
estate tax  purposes  includes  any amount  determined  by  reference  to and on
account of this Agreement, and if the beneficiary is other than the Executive' s
estate,  then the  Executive's  estate  shall be  entitled  to recover  from the
beneficiary  receiving such benefit under the terms of the Agreement,  an amount
by which the total estate tax due by the Executive's  estate,  exceeds the total
estate tax which  would have been  payable if the value of such  benefit had not
been included in the Executive's  gross estate. If there is more than one person
receiving such benefit, the right of recovery shall be against each such person.
In the event the  beneficiary  has a liability  hereunder,  the  beneficiary may
petition  the  Company  for a lump sum  payment  in an amount  not to exceed the
beneficiary's liability hereunder.
 
     8.8 Entire  Agreement.  This  Agreement  constitutes  the entire  agreement
between the Company and the Executive as to the subject matter hereof. No rights
are  granted  to the  Executive  by virtue of this  Agreement  other  than those
specifically set forth herein.
 
     8.9  Administration.  The Company  shall have powers which are necessary to
administer this Agreement, including but not limited to:
 
          8.9.1 Interpreting the provisions of the Agreement;
 
 
 
          8.9.2  Establishing  and  revising  the method of  accounting  for the
     Agreement;
 
 
 
          8.9.3 Maintaining a record of benefit payments; and
 
 
                                       11
<PAGE>
 
 
          8.9.4  Establishing  rules  and  prescribing  any forms  necessary  or
     desirable to administer the Agreement.
 
          IN  WITNESS  WHEREOF,  the  Executive  and a duly  authorized  Company
     officer have signed this Agreement.
 
                                              COMPANY:
                                              COMMUNITY BANKS, INC.
 
/s/ Richard A. Soulies                        By /s/ Patricia E. Hoch
----------------------                          ---------------------------
Witness                                          Name:  Patricia E. Hoch
                                                 Title: Corp. Secretary
 
                                              EXECUTIVE:
 
 
/s/ Richard A. Soulies                        /s/ Eddie L. Dunklebarger
----------------------                        -------------------------
Witness                                       Eddie L. Dunklebarger
 
 
<PAGE>
 
                                   Schedule A
 
                              Community Banks, Inc.
                          Salary Continuation Agreement
 
                                Lifetime Benefits
 
                              Eddie L. Dunklebarger
 
<TABLE>
<CAPTION>
 
Plan Year                                         Early Termination    Disability      Change of Control
Ending Jan 1  Vesting Schedule    Accrued Benefit  Annual Benefit    Annual Benefit     Annual Benefit
_______________________________________________________________________________________________________
<S>               <C>               <C>               <C>               <C>               <C>
2005              100%              $305,125          $57,811           $29,497           $80,000
2006              100%              $347,376          $61,075           $33,581           $80,000
2007              100%              $392,907          $64,104           $37,983           $80,000
2008              100%              $441,973          $66,914           $42,726           $80,000
2009              100%              $494,848          $69,522           $47,838           $80,000
2010              100%              $551,828          $71,942           $53,346           $80,000
2011              100%              $613,231          $74,188           $59,282           $80,000
2012              100%              $679,401          $76,272           $65,678           $80,000
2013              100%              $750,708          $78,206           $72,572           $80,000
2014              100%              $827,551          $80,000           $80,000           $80,000
</TABLE>
 
 
<PAGE>
 
                                   Schedule B
 
                              Community Banks, Inc.
                          Salary Continuation Agreement
 
                                Lifetime Benefits
 
                              Eddie L. Dunklebarger
 
 
<TABLE>
<CAPTION>
 
Plan Year                                         Early Termination    Disability      Change of Control
Ending Jan 1  Vesting Schedule    Accrued Benefit  Annual Benefit    Annual Benefit     Annual Benefit
______________________________________________________________________________________________________
<s>               <C>               <C>               <C>                 <C>             <C>
2005              100%              $63,949           $11,548             $5691           $100,000
2006              100%              $132,180          $22,371           $11,762           $100,000
2007              100%              $204,982          $32,514           $18,241           $100,000
2008              100%              $282,659          $42,021           $25,153           $100,000
2009              100%              $365,538          $50,931           $32,528           $100,000
2010              100%              $453,967          $59,282           $40,397           $100,000
2011              100%              $548,319          $67,108           $48,793           $100,000
2012              100%              $648,990          $74,444           $57,752           $100,000
2013              100%              $756,403          $81,319           $67,310           $100,000
2014              100%              $871,009          $87,762           $77,508           $100,000
2015              100%              $993,291          $93,801           $88,390           $100,000
1/2016            100%              1,123,763        $100,000          $100,000           $100,000