COMMUNITY BANKS INC /PA/
EMPLOYEES STOCK OPTION PLAN
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>5
<FILENAME>ex_10-4.txt
<DESCRIPTION>EMPLOYEES STOCK OPTION PLAN
<TEXT>
                                                                    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)







                                       7








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