
                            SCHEDULE 14A INFORMATION
                    Proxy Statement Pursuant to Section 14(a)
                     of the Securities Exchange Act of 1934

   [X]   Filed by the registrant

         Filed by a party other than the registrant


Check the appropriate box:

   [ ]   Preliminary Proxy Statement

   [ ]   Confidential, for Use of the Commission Only (as permitted by
         Rule 14a-6(e)(2))


   [X]   Definitive Proxy Statement

   [ ]   Definitive Additional Materials

   [ ]   Soliciting Material Under Rule 14a-12


                           Community Bank System, Inc.
--------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)

--------------------------------------------------------------------------------
     (Name of Person(s) Filing Proxy Statement if other than the Registrant)

   Payment of Filing Fee (Check the appropriate box):

   [X]   No fee required.


   [ ]   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
         0-11.

--------------------------------------------------------------------------------

   (1) Title of each class of securities to which transaction applies.

--------------------------------------------------------------------------------

   (2) Aggregate number of securities to which transaction applies:

--------------------------------------------------------------------------------

   (3) Per unit price or other underlying value of transaction computed pursuant
   to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
   calculated and state how it was determined):

--------------------------------------------------------------------------------

   (4) Proposed maximum aggregate value of transaction:

--------------------------------------------------------------------------------

   (5) Total fee paid:

--------------------------------------------------------------------------------


   [ ]   Fee paid previously with preliminary materials.

   [ ]   Check box if any part of the fee is offset as provided by Exchange Act
         Rule 0-11(a)(2) and identify the filing for which the offsetting fee
         was paid previously. Identify the previous filing by registration
         statement number, or the Form or Schedule and the date of its filing.

         (1) Amount Previously Paid:____________________________________________

         (2) Form, Schedule or Registration Statement No.:______________________

         (3) Filing Party:______________________________________________________

         (4) Date Filed:________________________________________________________

<PAGE>


                                     [Logo]

                           COMMUNITY BANK SYSTEM, INC.
                             5790 Widewaters Parkway
                           DeWitt, New York 13214-1883

                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

                                                                   April 8, 2002


    TO THE SHAREHOLDERS OF COMMUNITY BANK SYSTEM, INC.:

    At the direction of the Board of Directors of COMMUNITY BANK SYSTEM, INC., a
Delaware  corporation  (the  "Company"),  NOTICE IS HEREBY GIVEN that the Annual
Meeting of Shareholders of the Company (the "Meeting") will be held at 1:00 p.m.
on  Wednesday,  May 15,  2002 at the Inn at Nichols  Village  in Clarks  Summit,
Pennsylvania  for the  purpose  of  considering  and voting  upon the  following
matters:

              1.  The  election of four  directors  to hold office for a
                  term of three  years and until their  successors  have
                  been duly elected.

              2.  The  transaction  of  any  other  business  which  may
                  properly   be  brought   before  the  Meeting  or  any
                  adjournment thereof.

                                          By Order of the Board of Directors



                                          /s/ DONNA J. DRENGEL
                                          --------------------
                                          Donna J. Drengel
                                          Secretary







--------------------------------------------------------------------------------

YOUR VOTE IS  IMPORTANT.  YOU ARE  THEREFORE  REQUESTED  TO SIGN AND  RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE, EVEN IF YOU EXPECT TO BE PRESENT AT
THE MEETING. YOU MAY WITHDRAW YOUR PROXY AT ANY TIME PRIOR TO THE MEETING, OR IF
YOU DO ATTEND THE MEETING,  YOU MAY WITHDRAW YOUR PROXY AT THAT TIME AND VOTE IN
PERSON IF YOU WISH.

--------------------------------------------------------------------------------

<PAGE>


                                     [Logo]

                           COMMUNITY BANK SYSTEM, INC.
                             5790 Widewaters Parkway
                           DeWitt, New York 13214-1883



                                 PROXY STATEMENT
                FOR ANNUAL MEETING OF SHAREHOLDERS, MAY 15, 2002

    This Proxy Statement is furnished as part of the  solicitation of proxies by
the Board of Directors  of Community  Bank System,  Inc.  (the  "Company"),  the
holding  company for Community  Bank,  N.A. (the "Bank"),  for use at the Annual
Meeting of  Shareholders  of the Company (the "Meeting") to be held at 1:00 p.m.
on  Wednesday,  May 15, 2002,  at the Inn at Nichols  Village in Clarks  Summit,
Pennsylvania. This Proxy Statement and the form of Proxy are first being sent to
Shareholders on approximately April 8, 2002.

    At the Meeting,  the Shareholders  will be asked to vote for the election of
directors.  Four of the total of  twelve  directors  who serve on the  Company's
Board of Directors will stand for  re-election  to the Board at the Meeting.  In
addition,  voting will be  conducted  on any other  matters  which are  properly
brought before the Meeting.

                            VOTING RIGHTS AND PROXIES

    The Board of  Directors  of the  Company  has fixed the close of business on
March  25,  2002 as the  record  date for  determining  which  Shareholders  are
entitled  to notice of and to vote at the  Meeting.  At the close of business on
the  record  date,  12,918,903  shares  of  common  stock,  no par  value,  were
outstanding  and entitled to vote at the  Meeting.  This is the  Company's  only
class of voting stock  outstanding.  Each share of  outstanding  common stock is
entitled to one vote with respect to each item to come before the Meeting. There
will be no cumulative voting of shares for any matter voted upon at the Meeting.
The Bylaws of the Company  provide that one-third of the  outstanding  shares of
the Company,  represented in person or by proxy,  shall constitute a quorum at a
shareholder  meeting.  The Company is not aware of any persons who  beneficially
own more than 5% of the outstanding voting stock of the Company as of the record
date for the Meeting.

    If the  enclosed  form of Proxy is  properly  executed  and  returned to the
Company prior to or at the Meeting, and if the Proxy is not revoked prior to its
exercise, all shares represented thereby will be voted at the Meeting and, where
instructions have been given by a Shareholder,  will be voted in accordance with
such instructions.

    Any Shareholder executing a Proxy which is solicited hereby has the power to
revoke it at any time  prior to its  exercise.  A Proxy may be revoked by giving
written  notice to the  Secretary  of the Company at the  Company's  address set
forth above,  by attending the Meeting and voting the shares of stock in person,
or by executing and delivering to the Secretary a later-dated Proxy.

    The Company will bear all costs of soliciting  Proxies.  The solicitation of
Proxies  will be by mail,  but  Proxies  may  also be  solicited  by  telephone,
telegram,  or in person by directors,  officers,  and other regular employees of
the Company or of the Bank.  Should the  Company,  in order to solicit  Proxies,
request the assistance of other financial  institutions,  brokerage  houses,  or
other  custodians,  nominees,  or  fiduciaries,  the Company will reimburse such
persons  for  their  reasonable   expenses  in  forwarding  proxy  materials  to
Shareholders and obtaining their Proxies.

    The Annual  Report of the  Company for the fiscal  year ended  December  31,
2001, incorporating the Annual Report on Form 10-K filed by the Company with the
Securities  and Exchange  Commission,  is being sent to  Shareholders  with this
Proxy Statement.


<PAGE>


                   ELECTION OF DIRECTORS AND INFORMATION WITH
                   RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS

    The first  Item to be acted  upon at the  Meeting  is the  election  of four
directors,  each to hold  office for three years and until his  successor  shall
have been duly elected and qualified.  The nominees receiving a plurality of the
votes  represented  in  person  or by  proxy  at the  Meeting  will  be  elected
directors.

    All  Proxies in proper  form which are  received  by the Board  prior to the
election of directors  at the Meeting  will be voted "FOR" the  nominees  listed
below, unless authority is withheld in the space provided on the enclosed Proxy.
Each nominee is presently a director of the  Company,  and each  director of the
Company is also a director of the Bank. In the event any nominee  declines or is
unable to serve,  it is intended  that the Proxies will be voted for a successor
nominee  designated by the Board.  All nominees have  indicated a willingness to
serve, and the Board knows of no reason to believe that any nominee will decline
or be unable to serve if elected. The twelve members of the Board (including the
nominees for re-election at the Meeting, if elected) are expected to continue to
serve on the Board until their respective terms expire.

    The  information  set forth below is furnished for each nominee for director
to be elected at the  Meeting and each  director  of the  Company  whose term of
office  continues  after the Meeting.  The share  ownership  numbers for certain
directors  include  shares  that  would be  issuable  upon  exercise  of "Offset
Options"  granted to these directors in order to reduce the Company's  liability
under its Stock  Balance  Plan.  The purpose of the Offset  Options,  which were
approved by the Company's  Shareholders at the 1998 Annual Meeting, is explained
on page 7. See footnote "(e)" on page 5 for the number of currently  exercisable
stock options (including,  without limitation,  Offset Options) held by specific
directors.

            NOMINEES FOR DIRECTOR AND DIRECTORS CONTINUING IN OFFICE

<TABLE>
<CAPTION>
                                                                                                 SHARES OF COMPANY COMMON
                                                                                                 STOCK BENEFICIALLY OWNED (c)
                                                             BUSINESS                             AS OF MARCH 25, 2002 (d)
         NAME AND            DIRECTOR OF THE            EXPERIENCE DURING                    -------------------------------
         AGE (a)              COMPANY SINCE            PAST FIVE YEARS (b)                      NUMBER(e)         PERCENT
-------------------------   ------------------   -----------------------------------         --------------     ------------
<S>                                    <C>        <C>                                               <C>                 <C>
  NOMINEES (FOR TERMS TO EXPIRE AT ANNUAL MEETING IN 2005):
  Paul M. Cantwell, Jr.(f)             2001       Owner,  law firm of Cantwell &                     75,107              .58%
  Age 60                                          Cantwell,  Malone,  New  York.
                                                  Prior    to   January    2001,
                                                  Chairman  and  President,  The
                                                  Citizens   National   Bank  of
                                                  Malone.

  William M. Dempsey                   1984       Retired.    Prior   to   2001,                     53,594              .41%
  Age 63                                          Assistant  to  the  President,
                                                  Rochester     Institute     of
                                                  Technology,   Rochester,   New
                                                  York; President/Dean, American
                                                  College  of   Management   and
                                                  Technology  (RIT),  Dubrovnik,
                                                  Croatia  (August  1997  - July
                                                  1999);  prior to August  1997,
                                                  Vice  President of Finance and
                                                  Administration, RIT.


  Saul Kaplan(g)                       2001       Co-Owner,  Montage  Foods,                        515,276             3.99%
  Age 76                                          Scranton, Pennsylvania.
</TABLE>


                                      -2-
<PAGE>


<TABLE>
<CAPTION>
                                                                                                 SHARES OF COMPANY COMMON
                                                                                                 STOCK BENEFICIALLY OWNED (c)
                                                             BUSINESS                             AS OF MARCH 25, 2002 (d)
         NAME AND            DIRECTOR OF THE            EXPERIENCE DURING                    -------------------------------
         AGE (a)              COMPANY SINCE            PAST FIVE YEARS (b)                      NUMBER(e)         PERCENT
-------------------------   ------------------   -----------------------------------         --------------     ------------
<S>                                    <C>        <C>                                               <C>                 <C>
  NOMINEES (FOR TERMS TO EXPIRE AT ANNUAL MEETING IN 2005): (CONTINUED)

  William N. Sloan                     1991       Vice President for  Administration                 50,701              .39%
  Age 67                                          Emeritus,  The State University of
                                                  New  York   College  at   Potsdam,
                                                  Potsdam, New York.




  DIRECTORS CONTINUING IN OFFICE

  TERMS EXPIRING AT ANNUAL MEETING IN 2004:

  John M. Burgess                      1991       Retired.  Prior to 1991, President                 60,621              .47%
  Age 65                                          of Kinney Drugs,  Inc., a drug and
                                                  retail  chain with stores  located
                                                  throughout northern New York.

  Nicholas A. DiCerbo                  1984       Partner,  law firm of DiCerbo  and                126,677              .98%
  Age 55                                          Palumbo, Olean, New York.

  James A. Gabriel                     1984       Owner,  law  firm  of  Franklin  &                 87,468              .67%
  Age 54                                          Gabriel, Ovid, New York.

  Harold Kaplan(g)                     2001       Co-Owner, Montage Foods, Scranton,                146,341             1.13%
  Age 68                                          Pennsylvania.

  TERMS EXPIRING AT ANNUAL MEETING IN 2003:

  Sanford A. Belden                    1992       President   and  Chief   Executive                 83,958              .65%
  Age 59                                          Officer of the Company.

  Lee T. Hirschey                      1991       Chairman   and   Chief   Executive                 64,576              .50%
  Age 66                                          Officer,    Climax   Manufacturing
                                                  Company,       converter       and
                                                  manufacturer  of   paper  products
                                                  with   facilities  in  Castorland,
                                                  Lowville,  and West Carthage,  New
                                                  York.

                                                  Owner,  Valley Dodge Truck Center,
  Peter A. Sabia(g)                    2001       Dunmore, Pennsylvania.                             97,147              .75%
  Age 70
                                                  President  and  owner of Wight and
  David C. Patterson                   1991       Patterson,  Inc., manufacturer and                 63,755              .49%
  Age 60                                          seller of  livestock  feed located
                                                  in Canton, New York.

</TABLE>





                                       -3-
<PAGE>


<TABLE>
<CAPTION>
                                                                                                      SHARES OF COMPANY COMMON
                                                                                                    STOCK BENEFICIALLY OWNED (c)
  In addition to the information  provided above,  the following  summarizes the                      AS OF MARCH 25, 2002 (d)
  security  ownership  of the highest paid  executive  officers who are not also                -----------------------------------
  directors of the Company:
                                                                                                   NUMBER(e)              PERCENT
                                                                                                 --------------          -----------
 <S>                                                   <C>                                        <C>                     <C>
  James A. Wears                                       President, Banking                            67,872                 .52%

  Michael A. Patton                                    President, Financial Services                 76,383                 .59%

  David G. Wallace                                     Executive Vice President                      71,837                 .55%
                                                       and Chief Financial Officer

  David J. Elias                                       President, Chief Executive Officer            22,689                 .18%
                                                       and Chief Investment Officer, Elias
                                                       Asset Management, Inc.(h)

  Number of shares of Company common stock beneficially owned by all directors, persons            1,643,632               12.24%
  chosen to become directors and executive officers of the Company as a group (16 persons)
</TABLE>

     (a)  Harold  Kaplan  and  Saul  Kaplan  are   brothers.   No  other  family
          relationships  exist between any two or more of the current  directors
          or named executive officers of the Company.

     (b)  No nominee for director or continuing  director of the Company holds a
          directorship  with  any  company  (other  than the  Company)  which is
          registered  pursuant to Section 12 or subject to the  requirements  of
          Section  15(d) of the  Securities  Exchange  Act of 1934,  or with any
          company which is a registered  investment company under the Investment
          Company Act of 1940.

     (c)  Represents all shares as to which named  individual  possessed sole or
          shared  voting or  investment  power as of March 25,  2002,  including
          shares held by, in the name of, or in trust for,  spouse and dependent
          children of named  individual and other  relatives  living in the same
          household,  even if beneficial ownership has been disclaimed as to any
          of these shares by the nominee or director.

     (d)  The listed amounts  include  shares as to which certain  directors and
          named  executive  officers  are  beneficial  owners  but not the  sole
          beneficial  owners as follows:  Mr. Belden is the beneficial  owner of
          466 shares held by the Company's  401(k) plan; Mr. Burgess' wife holds
          5,100 shares;  Mr. Cantwell's wife holds 5,100, and Mr. Cantwell holds
          10,608 shares as Trustee under a decedent's  will;  Mr.  DiCerbo holds
          27,067  shares  jointly with his wife,  38,986  shares are held in the
          name of the law partnership of DiCerbo and Palumbo, and 783 shares are
          held by his wife; Mr.  Elias's wife owns 10,000 shares,  and she holds
          stock  options to acquire  additional  shares as set forth in note (e)
          below; Mr. Hirschey's wife holds 1,000 shares,  and Mr. Hirschey holds
          14,000  shares as Trustee  for the  Retirement  Plan of  Employees  of
          Climax  Manufacturing  Company;  43,288  shares  are held by a limited
          partnership  controlled by Mr. H. Kaplan;  42,000 shares are held by a
          limited  partnership  controlled by Mr. S. Kaplan; Mr. Patterson holds
          2,380 shares  jointly  with his wife,  and 1,492 shares as Trustee for
          the Wight and Patterson  Retirement Plan; Mr. Patton is the beneficial
          owner of 11,526 shares held by the Company's 401(k) plan, and his wife
          holds 1,400  shares;  Mr. Sabia holds 96,087  shares  jointly with his
          wife;  Mr. Sloan holds 173 shares  jointly with his wife, and his wife
          holds 492 shares; Mr. Wallace is the beneficial owner of 14,403 shares
          held by the  Company's  401(k) plan;  and Mr. Wears is the  beneficial
          owner of 18,272  shares held by the  Company's  401(k) plan,  he holds
          12,453 shares jointly with his wife, and his wife holds 3,254 shares.


                                      -4-
<PAGE>




     (e)  Includes  shares that the  following  individuals  currently  have the
          right to acquire,  or will have the right to acquire within 60 days of
          March  25,  2002,  through  exercise  of stock  options  issued by the
          Company:  Mr. Belden,  42,238 shares; Mr. Burgess,  47,901 shares; Mr.
          Cantwell,  1,000 shares;  Mr.  Dempsey,  51,994 shares;  Mr.  DiCerbo,
          53,387  shares;  Mr.  Elias,  2,362 shares;  Mr.  Elias's wife (a Bank
          employee),  327 shares;  Mr.  Gabriel,  56,164 shares;  Mr.  Hirschey,
          37,884  shares;  Mr. H. Kaplan,  1,000  shares;  Mr. S. Kaplan,  1,000
          shares; Mr. Patterson,  52,685 shares; Mr. Patton,  38,297 shares; Mr.
          Sabia,  1,000 shares; Mr. Sloan,  48,579 shares;  Mr. Wallace,  44,376
          shares; and Mr. Wears, 29,697 shares. These shares are included in the
          total number of shares  outstanding for the purpose of calculating the
          percentage ownership of the foregoing  individuals and of the group as
          a  whole,  but not for  the  purpose  of  calculating  the  percentage
          ownership of other individuals listed in the foregoing table.

     (f)  Mr.  Cantwell was appointed to the Board of Directors  pursuant to the
          terms of a Merger  Agreement  dated as of September 26, 2000 providing
          for the  acquisition  of The Citizens  National  Bank of Malone by the
          Bank. The acquisition was consummated in January 2001.

     (g)  Pursuant to the terms of a Merger  Agreement  dated as of November 29,
          2000  providing  for the merger of First  Liberty  Bank Corp.  ("First
          Liberty") with and into the Company  (which merger was  consummated in
          May 2001),  the  Company  agreed to appoint  three of First  Liberty's
          former  directors,  Saul Kaplan,  Peter A. Sabia and Harold Kaplan, to
          serve as members of its Board of Directors  for terms  expiring at the
          2002, 2003 and 2004 annual Shareholders  meetings,  respectively.  The
          Merger Agreement further provided that, subject to the exercise of the
          Board's  fiduciary  duty,  Messrs.  Kaplan,  Sabia and Kaplan would be
          nominated for at least one additional  three-year term upon expiration
          of these initial  terms,  and that the Board would  recommend that the
          Company's Shareholders vote in favor of their reelection.

     (h)  Elias Asset Management, Inc. is a wholly-owned subsidiary of the Bank.

BOARD COMMITTEES AND MEETINGS

    The Board of  Directors  of the  Company  held  twelve  regularly  scheduled
meetings and eight special  meetings  during the fiscal year ended  December 31,
2001. During this period,  each director of the Company attended at least 75% of
the  aggregate of the total number of meetings of the Board and the total number
of meetings held by committees of the Board on which he served.

    Among   its   standing   committees,   the   Board   of  the   Bank  has  an
Audit/Compliance/Risk  Management  Committee  which also serves as the Company's
Audit Committee.  As described more fully on page 16, the  Audit/Compliance/Risk
Management Committee reviews internal and external audits of the Company and the
Bank and the adequacy of the Company's and the Bank's accounting, financial, and
compliance controls, and investigates and makes recommendations to the Company's
Board and the Bank's Board  regarding the  appointment of independent  auditors.
During 2001,  this  Committee  held four  meetings  and its present  members are
Directors William M. Dempsey (Chair), John M. Burgess, and William N. Sloan.

    The Bank's  Board also has a  Personnel  Committee  which  reviews and makes
recommendations  to the Bank's  Board  regarding  compensation  adjustments  and
employee  benefits  to be  instituted  and which  also  serves as the  Company's
Personnel  Committee.  As  described  more fully on pages 13-15,  the  Personnel
Committee reviews the compensation of nonofficer employees in the aggregate, and
the salaries and  performance of executive  officers are reviewed  individually.
The Personnel  Committee held four meetings in 2001, and its present members are
Directors William N. Sloan (Chair), Paul M. Cantwell,  Jr., Nicholas A. DiCerbo,
and Lee T. Hirschey.

    The Company has a Nominating  Committee which makes  recommendations  to the
Board for nominees to serve as directors. The Nominating Committee will consider
written  recommendations  from  shareholders  for nominees to serve on the Board
that are sent to the Secretary of the Company at the Company's main office.  The
Nominating  Committee  held one  meeting in 2001,  and its  present  members are
Directors William M. Dempsey (Chair), Lee T. Hirschey, and David C. Patterson.


                                      -5-
<PAGE>


    The President  and Chief  Executive  Officer of the Company  serves as an ex
officio member of all Board  committees  except the Audit Committee and receives
no  compensation  for serving in this  capacity.  Mr.  Gabriel,  as Chair of the
Board,  also  serves  as a member  of all  Board  Committees  except  the  Audit
Committee.

COMPENSATION OF DIRECTORS

    As  directors  of both the Company and the Bank,  Board  members  receive an
annual retainer of $8,000, $500 for each Board meeting they attend, and $350 for
each  committee  meeting  they  attend.  Mr.  Belden  does not receive an annual
retainer or compensation for attending Board and committee  meetings.  The Chair
of the Board  receives an all  inclusive  $46,000  retainer  for serving in that
capacity.  The Chairs of the Loan Committee,  the Personnel  Committee,  and the
Strategic/Executive Committee each receive an annual retainer of $2,500; and the
Chairs  of  the  Investment  Committee,  the  Technology  Committee,  the  Trust
Committee,  and the  Audit/Compliance/Risk  Management Committee each receive an
annual retainer of $750. The Company pays the travel  expenses  incurred by each
director in attending meetings of the Board.

    Directors  may  elect to defer  all or a  portion  of  their  director  fees
pursuant to a Deferred  Compensation Plan for Directors.  Directors who elect to
participate  in the Plan  designate the  percentage of their director fees which
they wish to defer  (the  "deferred  fees")  and the date to which  they wish to
defer payment of benefits  under the plan (the  "distribution  date").  The plan
administrator establishes an account for each participating director and credits
to such account (i) on the date a  participating  director  would have otherwise
received  payment of his deferred fees, the number of deferred shares of Company
Common Stock which could have been  purchased  with the deferred  fees, and (ii)
from time to time such  additional  number of deferred  shares  which could have
been  purchased  with any  dividends  which would have been  received had shares
equal to the number of shares  credited to the account  actually been issued and
outstanding.  On the  distribution  date,  the  participating  director shall be
entitled  to  receive  shares of  Company  common  stock  equal to the number of
deferred  shares  credited to the director's  account either in a lump sum or in
annual  installments  over a three,  five or ten year period.  The effect of the
plan is to permit  directors to invest  deferred  director  fees in stock of the
Company,  having the benefit of any stock price  appreciation  and  dividends as
well as the  risk  of any  decrease  in the  stock  price.  To the  extent  that
directors participate in the plan, the interests of participating directors will
be more  closely  associated  with the  interests of  shareholders  in achieving
growth in the Company's stock price.

    In 1995, the directors re-evaluated their total compensation arrangement, in
light of the increased responsibility associated with the changing nature of the
Company and the "Blue  Ribbon  Report"  issued by the  National  Association  of
Corporate  Directors.  Among other things,  the Blue Ribbon Report suggests that
director  compensation be structured so that it is specifically aligned with the
long-term  interests of shareholders.  Effective  January 1, 1996, the Company's
1994 Long Term Incentive Compensation Program (the "Incentive Plan") was amended
to  allow  for the  issuance  of  Non-Qualified  Stock  Options  to  nonemployee
directors.  The Board  believes that  providing  for the grant of  Non-Statutory
Stock Options to nonemployee  directors is in the best interests of the Company.
In the spirit of the Blue Ribbon  Report,  such a provision  more closely aligns
the  interests  of  individual  directors  with the  long-term  interests of the
Company's Shareholders, and enables the Company to continue to attract qualified
individuals  to  serve on the  Board.  In  particular,  when  directors  receive
equity-based  compensation such as stock options,  their overall compensation is
enhanced  when the market price of the Company's  common stock  increases and is
adversely  affected  when  the  market  price  of  the  Company's  common  stock
decreases.

    The Incentive  Plan provides that each eligible  nonemployee  director is to
receive an option to purchase  2,000 shares of common stock on or about  January
1st of each year. Each option granted to a nonemployee director is granted at an
option  price per share  equal to the  market  value per share of the  Company's
common  stock on the date of grant,  and is fully  exercisable  upon its date of
grant, provided that shares of common stock acquired pursuant to the exercise of
such options may not be sold or otherwise  transferred by a director  within six
months of the grant.  Each  option is  exercisable  until the earlier of (i) ten
years from the date of grant, or (ii)  termination of the optionee's  service on
the Board for cause (as  defined in the  Incentive  Plan).  Notwithstanding  the
foregoing, to the extent that the Committee appointed by the Board to administer
the Incentive  Plan  determines  that grants may be exempt from Section 16(b) of
the Securities Exchange Act


                                      -6-
<PAGE>


of 1934,  as  amended,  the  Non-Statutory  Stock  Options  granted to  eligible
nonemployee  directors  shall relate to a number of shares of common stock to be
determined based upon the financial  performance of the Company.  Such financial
performance  shall be determined  based upon factors  including (but not limited
to) the  Company's  asset  quality,  return  on  equity,  and  CAMELS  rating (a
measurement of capital, assets, management,  earnings, liquidity and sensitivity
utilized by the Office of the  Comptroller  of the Currency,  the Bank's primary
regulator).  Pursuant to the 1996 amendment to the Incentive Plan, each eligible
nonemployee  director  received an option to  purchase  9,620  shares  effective
January 1, 2001.

    In addition, in keeping with the spirit of the Blue Ribbon Report, effective
January  1,  1996,  the Board  adopted a "Stock  Balance  Plan" for  nonemployee
directors  of the Company who have  completed  at least six months of service as
director.  The plan establishes an account for each eligible  director.  Amounts
credited  to those  accounts  reflect  the value of 200 shares of the  Company's
Common Stock for each year of service  between 1981 and 1995 at the December 31,
1995 market  value,  plus an annual  amount  equal to 200  additional  shares of
Common Stock  beginning  in 1996,  plus an annual  earnings  credit equal to the
one-year  average total return on the Company's  Common Stock.  The crediting of
additional  units  beginning  in 1996 is subject to an  adjustment  factor which
reflects the Company's  asset quality,  return on equity and CAMELS rating.  The
account  balance is payable to each  director in the form of a lifetime  annuity
or, at the election of the director,  monthly installment payments over a three,
five, or ten year period  following the later of age 55 or  disassociation  from
the Board, is subject to a six-year vesting schedule,  and is forfeitable in the
event of termination from the Board for cause.

    In 1998,  amendments to the Stock  Balance Plan and the Incentive  Plan were
approved by the Company's shareholders allowing the grant of "Offset Options" to
directors  under the Incentive  Plan.  The effect of these Offset  Options is to
permit the Company to reduce the grantee's Stock Balance Plan account balance by
an amount equal to the growth in value of the Offset Options  (i.e.,  the amount
by which the  aggregate  fair market  value of the Common Stock  underlying  the
Offset Options exceeds the aggregate exercise price of the Offset Options) as of
the date on which the director's  account is valued,  provided that a director's
account  may not be reduced  below  zero.  As such,  the Offset  Options are not
intended  to  materially  change  the  level of  compensation  to  participating
directors  under the Stock Balance Plan,  but are intended to reduce the cost of
director compensation to the Company. In the event that the growth in value of a
director's Offset Options is less than the value of the director's Stock Balance
Plan account as of the date that the Offset Options are exercised, the shortfall
will be paid to the director  either in cash or, at the Company's  option in the
case of an exercise  prior to retirement,  by the issuance of additional  Offset
Options.  In the event that the growth in value of a director's  Offset  Options
exceeds the value of the  director's  Stock Balance Plan account,  no adjustment
will be made.

    The Bank has a consulting  agreement with Paul M. Cantwell,  Jr., a director
of the Company and the Bank and the former  Chairman  and  President of Citizens
National  Bank of Malone.  Under  this  agreement,  Mr.  Cantwell  will  provide
consulting  services  to the Bank  until  January  26,  2006 to  facilitate  the
transition  of Citizens  National  Bank's  business and  operations to the Bank,
develop  new  business  opportunities  in the market  areas  formerly  served by
Citizens  National Bank,  and advise the Bank  regarding  corporate and business
matters.  Mr.  Cantwell will provide these services on a part-time basis (not to
exceed 250 hours per year), and will be paid $50,000 per year. This amount is to
paid on a "grossed-up" basis for any Medicare and social security taxes (but not
federal,  state or local income  taxes)  payable by Mr.  Cantwell on the amount.
This means that in effect the Company will pay his Medicare and social  security
taxes.  Pursuant to the agreement,  the Bank has also agreed to pay the premiums
for a life insurance policy for Mr. Cantwell's  beneficiaries.  This policy must
provide  coverage  for no  less  than  the  remaining  payments  due  under  the
consulting  agreement.  Finally,  the Bank will make available  health insurance
coverage  for Mr.  Cantwell  and his spouse on the same  basis as its  employees
until age 65 and, thereafter, on the same basis as other retirees of the Bank.






                                      -7-
<PAGE>




                       COMPENSATION OF EXECUTIVE OFFICERS

    The following table sets forth information  concerning  compensation paid to
those  persons  who  served  as chief  executive  officer  (or in an  equivalent
capacity)  during  2001  and to the  other  most  highly  compensated  executive
officers whose annual salary and bonus earned during 2001 exceeded $100,000.

                                              SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                                     Long-Term
                                                                                                    Compensation
                                                      Annual Compensation                              Awards
                                ---------------------------------------------------------------------------------------------------

                                                                                   Other Annual                       All Other
            Name and                                                               Compensation        Stock         Compensation
       Principal Position            Year          Salary ($)     Bonus ($) (1)      ($) (2)        Options (#)         ($)(3)
  ----------------------------- ---------------  ---------------  --------------- ---------------  ---------------  ---------------
<S>                                  <C>           <C>              <C>               <C>             <C>             <C>
  Sanford A. Belden                  2001          468,000          187,200           4,355           29,534          227,487
  President and Chief                2000          450,000          159,200           4,987           23,206          254,177
  Executive Officer                  1999          398,000          159,200           3,270           18,420          227,181

  James A. Wears                     2001          176,500           52,950           3,822            8,480           36,104
  President, Banking                 2000          161,500           46,500           3,378            7,230           12,687
                                     1999          155,000           46,500           4,278            6,275           11,062

  Michael A. Patton                  2001          176,500           52,950           1,878            8,480           43,164
  President, Financial               2000          161,500           48,450           2,697            7,230           13,983
  Services                           1999          155,000           46,500           4,446            6,275           12,108

  David G. Wallace                   2001          164,000           49,200               0            7,823           34,163
  Executive Vice President           2000          149,000           44,700               0            6,647           26,041
  and Chief Financial Officer        1999          142,500           42,750               0            5,770           21,651

  David J. Elias                     2001          315,000           31,217           2,096           11,814            3,471
  President, Chief Executive         2000          227,628          162,658           2,628                0            3,242
  Officer and Chief
  Investment Officer, Elias
  Asset Management, Inc.
</TABLE>

    (1) The amounts shown in this column for Messrs.  Belden, Wears, Patton, and
Wallace  reflect  payments  under the Company's  Management  Incentive  Plan, an
annual cash award plan based on performance  and designed to provide  incentives
for employees.  The amount shown in this column for Mr. Elias reflects  payments
under Mr. Elias's Employment Agreement.

    (2) The amounts disclosed in this column include the reportable value of the
personal use of Company-owned  vehicles for Messrs.  Belden,  Wears, Patton, and
Elias, which amounted to $4,355,  $3,822, $1,878, and $2,096,  respectively,  in
2001.

    (3) The  amounts in this  column  include:  (a) the value of group term life
insurance  benefits in excess of $50,000 under a plan available to all full-time
employees for which Messrs.  Belden, Wears, Patton,  Wallace, and Elias received
$1,340, $1,290, $1,290,  $1,290, and $1,290 in 2001,  respectively;  (b) Company
contributions   to  the  Employee   Savings  and  Retirement   Plan,  a  defined
contribution  plan,  amounting to $5,250 for Mr.  Belden,  $3,967 for Mr. Wears,
$5,251 for Mr. Patton, $3,948 for Mr. Wallace, and $2,181 for Mr. Elias in 2001;
(c)  Company  contributions  under the  Company's  Deferred  Compensation  Plan,
amounting  to  $21,229  for Mr.  Belden,  $7,672 for Mr.  Wears,  $7,672 for Mr.
Patton,  and $7,130 for Mr. Wallace in 2001; and (d) the expense associated with
supplemental retirement plans, amounting to $199,628 for Mr. Belden, $23,175 for
Mr. Wears,  $28,951 for Mr.  Patton,  and $21,795 for Mr.  Wallace in 2001.  The
Company does not maintain any  "split-dollar"  arrangements for any of the named
executives.




                                      -8-
<PAGE>



                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

    The following table provides further  information on grants of stock options
pursuant to the Company's  Long-Term  Incentive  Compensation  Program in fiscal
year 2001 to the named executives as reflected in the Summary Compensation Table
on page 8.

<TABLE>
<CAPTION>
                                                                                                      Potential Realizable Value
                                                                                                                  at
                                                                                                       Assumed Annual Rates of
                                                                                                       Stock Price Appreciation
                                                                                                           for Option Term
                                           % of Total                                                -----------------------------
                                            Options
                                           Granted to
                                           Employees     Exercise or                      Market
                             Options       in Fiscal      Base Price     Expiration      Value on
           Name            Granted (#)        Year          ($/Sh)          Date        Grant Date       5%             10%
  -----------------------  -------------  -------------  -------------  -------------  ------------- -----------------------------
<S>                           <C>            <C>             <C>           <C>             <C>           <C>          <C>
  Sanford A. Belden           29,534         11.85%          24.75         1/1/11          24.75         459,701      1,164,972
  James A. Wears               8,480          3.40%          24.75         1/1/11          24.75         131,992        334,495
  Michael A. Patton            8,480          3.40%          24.75         1/1/11          24.75         131,992        334,495
  David G. Wallace             7,823          3.14%          24.75         1/1/11          24.75         121,766        308,579
  David J. Elias              11,814          4.74%          24.75         1/1/11          24.75         183,887        466,005
</TABLE>
    Effective  January 1, 2001, the Board of Directors  issued  incentive  stock
options to Messrs. Belden, Wears, Patton, Wallace, and Elias at the then current
market  price of $24.75 per share.  Such  options  become  exercisable  over the
course of five years,  with  one-fifth of the options  becoming  exercisable  on
January 1, 2002, 2003, 2004, 2005, and 2006.



               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION/SAR VALUES

    The following table provides  information for the named executive  officers,
with respect to (i) stock options exercised in fiscal year 2001, (ii) the number
of stock  options  held at the end of fiscal  year 2001,  and (iii) the value of
in-the-money stock options at the end of fiscal year 2001.

<TABLE>
<CAPTION>
                                                                                                       Value of Unexercised
                                                               Number of Unexercised Options           In-the-Money Options
                                                                      at 12/31/01 (#)                  at 12/31/01 ($) (1)
                                                              --------------------------------   ---------------------------------
                               Shares
                             Acquired on         Value
           Name             Exercise (#)     Realized ($)        Exercisable     Unexercisable      Exercisable     Unexercisable
  -----------------------  ---------------- ----------------  ---------------------------------  ---------------------------------
<S>                            <C>             <C>                <C>              <C>                 <C>              <C>
  Sanford A. Belden            18,931          190,029            25,007           65,151              42,557           99,912
  James A. Wears               18,650          319,246            24,164           20,301             158,281           30,082
  Michael A. Patton             4,000           75,616            32,764           20,301             268,114           30,082
  David G. Wallace              1,200           25,320            39,281           18,699             369,962           27,696
  David J. Elias                    0                0                 0           11,814                   0           17,130
</TABLE>

    (1) Based on the closing price of the Company's common stock on December 31,
2001 of $26.20 per share.










                                      -9-
<PAGE>


<TABLE>
<CAPTION>
                                                  PENSION PLAN TABLE

                                                   YEARS OF SERVICE
     Highest Five
     Year Average
   Compensation (1)             15                   20                   25                   30                    35
  --------------------  -------------------- -------------------- -------------------- --------------------  ---------------
<S>                           <C>                  <C>                  <C>                   <C>                <C>
          20,000               2,700                3,600                4,500                 5,400              6,300
          50,000               8,203               10,937               13,671                16,406             19,140
         100,000              19,828               26,437               33,046                39,656             46,265
         125,000              25,640               34,187               42,734                51,281             59,827
         150,000              31,453               41,937               52,421                62,906             73,390
         170,000              36,103               48,137               60,171                72,206             84,240
</TABLE>

    (1) For 2001, the Internal Revenue Code limits the total  compensation  that
may be taken into account in calculating benefits to $170,000.

    The table above sets forth the estimated  annual  benefits under the formula
adopted for post-1988 years of service, payable upon retirement at age 65 in the
form of a single life annuity. Benefits are computed based on the average annual
compensation  for the highest  consecutive  five years in the 10 years preceding
retirement.  The amounts are not subject to any deduction  for Social  Security.
For purposes of  calculating  the benefit,  an employee may not be credited with
more than 35 years of  service.  The base  salary and cash award  amounts in the
Summary  Compensation Table on page 8 reflect the covered compensation under the
plan for Messrs.  Belden,  Wears, Patton,  Wallace,  and Elias. Messrs.  Belden,
Wears, Patton,  Wallace, and Elias have been credited with 9, 31, 31, 13, and 21
years of service, respectively, under the plan.

    The pension  plan  maintained  by the Company is a  noncontributory  defined
benefit  plan which is funded by the Company and  administered  by a  retirement
committee  which  consists of persons  appointed by the Board of Directors.  The
plan covers all  employees  of the Company who have  completed  one full year of
continuous service.  The Company first entered into a nonqualified  supplemental
retirement  plan agreement with Mr. Belden in January 1995,  with Mr. Wallace in
March 1997 and with Messrs.  Wears and Patton in January 2001.  The Company does
not currently maintain a nonqualified retirement plan for Mr. Elias.

EMPLOYMENT AGREEMENTS

     The Company has an employment  agreement with Mr. Belden  providing for his
employment as the Company's President and Chief Executive Officer until December
31,  2007.  The  agreement  provides  that  during the period from April 1, 2002
through December 31, 2002, the Company shall pay Mr. Belden a base salary at the
annual rate in effect on March 31, 2002,  which was $485,550.  Mr. Belden's base
salary for calendar  years after 2002 shall be increased at the same rate as the
rate  applied by the Company in its merit pool for salary  increases  to be paid
for the  applicable  calendar year. The agreement may be terminated by the Board
for  cause at any time,  and  shall be  terminated  upon Mr.  Belden's  death or
disability.  If Mr.  Belden's  employment  is terminated by the Company prior to
December 31, 2007 for reasons other than cause, death or disability,  Mr. Belden
will be  entitled  to  severance  pay equal to the greater of (i) the sum of Mr.
Belden's  annual base salary at the time of the  termination and the most recent
payment to Mr. Belden under the  Company's  Management  Incentive  Plan, or (ii)
amounts of base salary and expected  Management  Incentive  Plan  payments  that
otherwise  would have been payable to Mr. Belden  through the unexpired  term of
his  employment  (provided  that in the  event  that  Mr.  Belden's  involuntary
termination without cause occurs under circumstances entitling him to the change
in  control  benefits  described  in  the  following  paragraph,  the  foregoing
severance pay shall be reduced by the  consulting fee payments to be made to Mr.
Belden as described below). In addition, Mr. Belden will be permitted to dispose
of any restricted stock previously granted to him, all of his stock options will
become fully exercisable, and the Company will cover Mr. Belden and his eligible
dependents  under  all  benefit  plans and  programs  available  to its  retired
employees.

     If Mr.  Belden's  employment  is  terminated  for reasons other than cause,
death or disability  within two years  following a change of control,  or if Mr.
Belden  voluntarily  resigns  during this period based upon an  involuntary  and
material  adverse  change  in  his  title,  duties,  responsibilities,   working
conditions,  total  remuneration,  or the geographic location of his

                                      -10-
<PAGE>


assignment,  the Company will retain him as a  consultant  for three years at an
annual  consulting  fee equal to his base  salary  plus the award to Mr.  Belden
under the  Management  Incentive  Plan for the year  immediately  preceding  the
change in control,  will  reimburse him for any loss incurred on the sale of his
home, will permit him to dispose of any restricted stock  previously  granted to
him,  and  all of  his  stock  options  will  become  fully  exercisable.  As an
alternative to paying change of control benefits to Mr. Belden over a three-year
period,  the Board of Directors may elect,  in its sole  discretion,  to pay all
benefits due to Mr. Belden in a single lump sum payment within 90 days following
the change of control and Mr. Belden's termination of employment.  The agreement
provides  that the amount of any change in control  payments  made to Mr. Belden
will be "grossed up" to hold Mr. Belden  harmless from all income and excise tax
liability attributable to the payments.

    The Company also  maintains  four year  employment  agreements  with Messrs.
Wears,  Patton,  and Wallace,  providing for their  continued  employment  until
December 31, 2004. These agreements provide for severance pay, in the event of a
termination  for reasons other than cause,  death,  or  disability  equal to the
greater  of (i) the sum of the  employee's  annual  base  salary  at the time of
termination  and the most recent  payment to the  employee  under the  Company's
Management  Incentive Plan, or (ii) amounts payable to the employee  through the
unexpired term of his employment.  In addition,  if the agreement is not renewed
at the end of its term  (other  than by  reason  of the  employee's  refusal  to
negotiate or rejection of a bona fide offer from the  Company),  the employee is
entitled  to  severance  pay equal to one year of the  employee's  then  current
annual base salary,  provided  that such  severance  pay shall be reduced to the
extent that the employee receives wages or self-employment income during the one
year period following  expiration of the agreement.  The agreements also provide
change of control benefits which include a three year consulting  engagement and
accelerated  vesting  on  all  outstanding  stock  options.   The  employee  may
voluntarily  terminate  his  employment  within two years  following a change in
control, in which event the employee shall be entitled to full change in control
benefits,  with his consulting  fees to be reduced by any  non-Company  wages or
self-employment  income derived by the employee during the three-year consulting
period.  As an alternative to paying change of control  benefits to the employee
over a  three-year  period,  the  Board  of  Directors  may  elect,  in its sole
discretion, to pay all benefits due to the employee in a single lump sum payment
within 90 days following the change of control and the employee's termination of
employment.  In the  event  this lump sum  payment  is made,  the  amount of the
payment will be increased to hold the employee  harmless  from any increased tax
liability resulting from the accelerated payment.

    The Bank has an agreement with Mr. Elias and Elias Asset Management, Inc., a
wholly-owned  subsidiary  of  the  Bank  ("EAM"),   providing  for  Mr.  Elias's
employment as EAM's  president,  chief  executive  officer and chief  investment
officer until April 3, 2005.  The agreement  requires that Mr. Elias perform his
duties  to the  best of his  abilities  and  devote  his full  working  time and
attention  to the  business  and affairs of EAM. In addition to his base salary,
Mr. Elias is entitled to an annual  incentive  bonus based upon a percentage  of
EAM's annual adjusted net income,  calculated pursuant to a formula set forth in
the agreement. The agreement may be terminated by EAM for "cause" (as defined in
the  agreement)  at any time.  If Mr.  Elias's  employment  is terminated by EAM
without cause,  or if Mr. Elias  terminates his employment for "good reason" (as
defined in the agreement),  EAM must, at its option,  either (i) pay Mr. Elias a
severance benefit equal to the base salary and estimated  incentive bonuses that
he would otherwise have received during the remaining term of the agreement,  or
(ii)  unconditionally  release  Mr.  Elias  from  post-termination   non-compete
provisions  that would  otherwise  apply under the terms of the  agreement.  The
agreement provides that if Mr. Elias's employment is terminated within two years
following  a change of  control,  EAM  shall  pay him,  in a lump sum as soon as
practicable  following  termination,  2.9 times his base salary in effect at the
time of termination  plus 2.9 times his annual incentive bonus earned during the
term of the agreement  (provided,  however,  that if termination occurs prior to
July 1,  2002,  the  average  annual  incentive  bonus  shall  be  deemed  to be
$300,000);  provide him with fringe  benefits,  or the cash  equivalent  of such
benefits,  for a  period  of 24  months  following  termination;  and  treat  as
immediately vested and exercisable all unexpired stock options.






                                      -11-
<PAGE>


SUPPLEMENTAL RETIREMENT PLAN AGREEMENTS

    The Company has  Supplemental  Retirement  Plan Agreements  with Mr. Belden,
Mr. Wallace,  Mr. Patton,  and Mr. Wears.

     Under Mr. Belden's Supplemental Retirement Plan Agreement, the Company must
provide Mr. Belden with an annual  supplemental  retirement benefit equal to the
product of (i) 5% times Mr.  Belden's  number of years of  service,  considering
only the first ten years of service,  plus 2% times Mr. Belden's number of years
of service  in excess of ten years up to a maximum  of 15 years,  times (ii) his
final five year average  salary and cash  incentive  payment.  The  supplemental
retirement benefit is reduced by the benefit payable under the Company's pension
plan, 50% of Mr. Belden's Social Security benefit, and Company  contributions on
Mr. Belden's behalf and earnings attributable thereto under the Company's 401(k)
Employee  Stock  Ownership  Plan and  Deferred  Compensation  Plan  for  Certain
Executive  Employees.  The supplemental  retirement  benefit is payable upon the
later of Mr. Belden's cessation of employment with the Company or his receipt of
the final payment due under his employment  agreement,  generally in the form of
an actuarially  reduced joint and 100% survivor benefit.  Benefits payable prior
to age 62, or in another form, are subject to the same actuarial  adjustments as
benefits under the Company's pension plan.

     Notwithstanding the foregoing, if Mr. Belden's employment is terminated for
reasons  other than  cause,  death or  disability  within two years  following a
change of control, or if Mr. Belden voluntarily resigns during this period based
upon  an  involuntary  and  material  adverse  change  in  his  title,   duties,
responsibilities,  working  conditions,  total  remuneration,  or the geographic
location of his  assignment,  the Company must credit Mr. Belden with additional
years of service  equal to the greater of three years of service or the years of
service  he is  retained  as a  consultant  under  the  terms of his  employment
agreement  for  purposes of  determining  his  supplemental  retirement  benefit
described  above,  credit Mr.  Belden with two  additional  years of service for
purposes of determining his supplemental  retirement benefit,  and determine Mr.
Belden's final five year average  compensation as described above by considering
the years he is  retained  as a  consultant  under  the terms of the  employment
agreement as service that precedes his termination and considering  amounts paid
to him during that period as salary and cash incentive payments. If the Board of
Directors  elects  to pay Mr.  Belden's  change  in  control  benefit  under his
employment  agreement  in a lump  sum,  the  Company  will pay his  supplemental
retirement benefit in an actuarial  equivalent single lump sum payment within 90
days  following the change of control and his  termination  of  employment.  The
amount of any change in control payments made to Mr. Belden will be "grossed up"
to  hold  Mr.  Belden   harmless  from  all  income  and  excise  tax  liability
attributable to the payments.

    Under Mr. Wallace's Supplemental Retirement Plan Agreement, the Company must
contribute  to the  Company's  deferred  compensation  plan,  on  behalf  of Mr.
Wallace, certain additional amounts as of the last day of each calendar year for
which Mr.  Wallace is  credited  with a "Year of  Service"  under the  Company's
pension  plan.  In  addition,  the  Company  shall  pay Mr.  Wallace  an  annual
supplemental  retirement  benefit equal to the excess (if any) of (i) the annual
benefit that he would have earned pursuant to the Company's  pension plan if (a)
75% of Mr.  Wallace's annual  compensation  that is disregarded for pension plan
purposes  solely  because of the limit imposed by Internal  Revenue Code Section
401(a)(17) is added to the amount of his annual compensation actually taken into
account  pursuant to the pension plan and (b) Internal  Revenue Code Section 415
is disregarded,  minus (ii) the annual benefit  actually  payable to Mr. Wallace
pursuant to the pension plan. The benefit described in the preceding sentence is
payable at age 65 in the form of an  actuarially  reduced joint and 50% survivor
benefit,  provided  that  benefits  payable  prior to age 65, or paid in another
form,  are  subject to the same  actuarial  adjustments  as  benefits  under the
Company's pension plan. In the event that Mr. Wallace's employment is terminated
within two years  following  a change in  control,  Mr.  Wallace's  Supplemental
Retirement Plan Agreement provides for crediting for retirement  purposes in the
greater amount of actual years of service or 20 years.

    Under the  Supplemental  Retirement  Plan  Agreements for Mr. Patton and Mr.
Wears,  the Company  shall pay the  employee an annual  supplemental  retirement
benefit equal to the excess (if any) of (i) the annual benefit that the employee
would have  earned  pursuant  to the  Company's  pension  plan if (a) 75% of the
employee's  annual  compensation  that is disregarded  for pension plan purposes
solely because of the limit imposed by Internal Revenue Code Section  401(a)(17)
is added to the amount of the employee's annual compensation actually taken into
account  pursuant to the pension plan and (b) Internal  Revenue Code Section 415
is disregarded,  minus (ii) the annual benefit  actually payable to the employee
pursuant to the pension plan. The benefit described in the preceding sentence is
payable at age 65 in the form of an  actuarially  reduced joint and 50% survivor
benefit,  provided  that  benefits  payable  prior to age 65, or paid in another
form,  are  subject to the same  actuarial  adjustments  as  benefits  under the
Company's pension plan.


                                      -12-
<PAGE>




                        COMPENSATION COMMITTEE INTERLOCKS
                            AND INSIDER PARTICIPATION

    The members of the  Personnel  Committee  of the Bank's  Board of  Directors
during the last fiscal year were  William N. Sloan  (Chair),  Paul M.  Cantwell,
Jr.,  Nicholas A. DiCerbo,  James A. Gabriel and Lee T. Hirschey.  The Personnel
Committee reviews and makes  recommendations  regarding  compensation levels and
employee benefits. As noted on page 17, the law firms of DiCerbo and Palumbo, of
which  Director  DiCerbo is a partner,  Franklin  & Gabriel,  of which  Director
Gabriel is owner, and Cantwell & Cantwell,  of which Director Cantwell is owner,
provided legal services to the Bank during 2001.

                        REPORT OF THE PERSONNEL COMMITTEE
                            ON EXECUTIVE COMPENSATION

    The Company has adopted a multi-faceted approach towards compensating all of
its  employees,  including  senior  management.  The  underlying  philosophy and
description of major components of the total compensation  program are described
below.

PHILOSOPHY

    The total  compensation  program  is  intended  to align  compensation  with
business objectives and enable the Company to attract and retain individuals who
are contributing to the long-term success of the Company. Towards this end:

         THE COMPANY  PAYS  COMPETITIVELY.  The Company  regularly  compares its
cash,  equity and  benefits  based  compensation  practices  with those of other
companies of similar size, operating in similar geographic market areas, many of
which are  represented in the stock  performance  graph included on page 15, and
establishes compensation parameters based on that review.

         THE  COMPANY  ENCOURAGES  TEAMWORK.  The  Company  recognizes  that its
long-term  success  results from the  coordinated  efforts of employees  working
towards common, well established  objectives.  While individual  accomplishments
are  encouraged  and rewarded,  the  performance of the Company is a determining
factor in total compensation opportunities.

         THE COMPANY  STRIVES FOR  FAIRNESS IN THE  ADMINISTRATION  OF PAY.  The
Company strives to ensure that compensation  levels accurately reflect the level
of  accountability  that each  individual has within the Company;  employees are
informed of the total compensation program;  decisions made regarding individual
performance  which  affect  compensation  matters  are based  upon an  objective
assessment  of  performance;  and all  employees  have equal access to positions
within the Company which provide for increased levels of total compensation.

    The process of assessing performance involves the following:

         1. Prior to the  beginning  of each fiscal  year,  the Chief  Executive
Officer establishes and distributes written goals, which must be approved by the
full Board.  Those goals include specific financial targets relative to earnings
and asset quality. The Company strives to achieve financial results which are in
the upper third of the results published by its peer group.

         2. Individuals at each successive level of management establish written
goals, which must be approved by their respective managers.

         3. All goals  are  reviewed  on an  ongoing  basis to  ensure  that the
Company is responding to changes in the  marketplace and economic  climate,  and
that accomplishment of retained goals is ensured.

         4. At the end of the fiscal  year,  performance  is  evaluated  against
goals and other key position responsibilities. Such evaluations affect decisions
on salary, cash incentive, and stock option matters.



                                      -13-
<PAGE>


COMPENSATION PROGRAMS

    The Company defines itself as a super-community bank which provides products
of a more  comprehensive  and  advanced  nature  than  those  offered by smaller
institutions,  while  simultaneously  providing a level of service which exceeds
the service quality delivered by larger regional and money center organizations.
The delivery of those  products and services,  in ways that enhance  shareholder
value,  requires  that the Company  attract key people,  promote  teamwork,  and
reward results. In furtherance of those requirements,  the Company maintains the
following compensation programs.

         CASH-BASED COMPENSATION

                  SALARY  The  Company  sets  base  salaries  for  employees  by
reviewing the total cash compensation opportunities for competitive positions in
the  market.  In  order  to more  closely  align  employee  compensation  to the
Company's  performance,  the Company  uses a  combination  of  competitive  base
salaries  and  performance   incentive   opportunities   to  provide  for  total
compensation that may exceed those in comparable companies which do not generate
comparable financial results.

                  MANAGEMENT  INCENTIVE  PLAN The  Company  maintains  an annual
incentive  plan  in  which  21%  of its  employees  participate.  The  Company's
performance  to targeted  asset  quality,  return on equity,  and CAMELS rating,
which targets are approved by the Board, triggers the payment of cash awards for
all  employees in this group.  Award  levels,  which  amount to a percentage  of
salary,  have been  established for different  organizational  levels within the
Company.  For Mr.  Belden,  100% of his  award is  determined  by the  Company's
performance  relative to the  financial  targets  described  above.  For Messrs.
Wears, Patton, and Wallace, 80% of their respective award opportunities  reflect
the Company's  performance  relative to the financial targets,  and 20% of their
respective award  opportunities  reflect  performance to other  quantitative and
qualitative goals specific to their areas of responsibility. 100% of Mr. Elias's
award  opportunity  reflects the  performance  of Elias Asset  Management,  Inc.
relative to certain financial targets as provided in his employment agreement.

         EQUITY-BASED COMPENSATION

                  STOCK OPTION PROGRAM The purpose of this program is to provide
additional  incentives to employees to work to maximize  shareholder  value. The
option program serves as an effective  tool in recruiting  key  individuals  and
utilizes  vesting  periods to  encourage  these  individuals  to continue in the
employ of the Company. The Board frequently awards options in years during which
the Company has  achieved its  financial  targets.  The number of stock  options
issued generally reflects a percentage of salary;  and various  percentages have
been established for different organizational levels within the Company.

                  RESTRICTED STOCK The Company has, on occasion,  issued limited
amounts of  restricted  stock to  individuals  to support a variety of  business
objectives.  Examples  include:  performance  unit  shares  have been  issued in
start-up and  turnaround  assignments,  with vesting  schedules tied to specific
performance  criteria;  and restricted shares have been issued to newly promoted
and  hired  individuals  who  received  initial  stock  option  awards  with  no
in-the-money exercisable value.

    The Company believes that the use of equity-based compensation such as stock
options and restricted stock is important in that it aligns the interests of key
personnel with those of the Shareholders.  In particular, when personnel receive
equity-based  compensation,  their  overall  compensation  is enhanced  when the
market price of the Company's  common stock increases and is adversely  affected
when the market price of the Company's common stock decreases.

CEO COMPENSATION

    In December 2001, the full Board formally reviewed Mr. Belden's  performance
for fiscal year 2001,  his ninth full year as the  Company's  President and CEO.
Having  determined  that the  Company's  level of  performance  relative  to the
majority of its previously  approved annual and long-term  financial targets had
been surpassed, the Board, operating under the terms of the Management Incentive
Plan disclosed in this Report, authorized the payment of Mr. Belden's cash award
for 2001,  which amounted to $187,200.  Mr. Belden's  $468,000 base salary level
for 2001 is well  supported by  competitive  wage


                                      -14-
<PAGE>



survey data,  and the increase over his 2000 base salary level is well supported
by the Company's strategic  accomplishments and financial performance during the
2000 evaluation period.

    The foregoing report has been provided by William N. Sloan (Chair),  Paul M.
Cantwell,  Jr.,  Nicholas A.  DiCerbo,  James A.  Gabriel  and Lee T.  Hirschey,
members of the Personnel Committee.

                             STOCK PERFORMANCE GRAPH

    The following graph compares  cumulative  total  shareholder  returns on the
Company`s common stock over the last five fiscal years to the Russell 3000 Index
(of which the  Company  became a member in June 2001) and the Nasdaq Bank Stocks
Index.  Total return values were  calculated as of December 31 of each indicated
year  assuming  $100  investment  on  December  31,  1996  and  reinvestment  of
dividends.

<TABLE>
<CAPTION>
                                        1996           1997            1998            1999            2000            2001
                                    -------------- --------------  --------------  --------------  --------------  --------------
<S>                                      <C>          <C>             <C>             <C>             <C>             <C>
  Nasdaq Bank Stocks Index               100          163.59          144.33          132.81          152.30          167.64
  Russell 3000 Index                     100          129.47          158.37          189.14          173.03          151.19
  Community Bank System, Inc.            100          163.84          157.58          129.10          144.17          158.72
</TABLE>



















                                      -15-
<PAGE>



                             AUDIT COMMITTEE REPORT

    In accordance  with its written  charter  adopted by the Board of Directors,
the Bank's Audit/Compliance/Risk  Management Committee (which also serves as the
Company's Audit  Committee)  assists the Board in fulfilling its  responsibility
for  oversight of the quality and  integrity of the  accounting,  auditing,  and
financial reporting practices of the Company and the Bank. The Committee reviews
internal and external audits of the Company and the Bank and the adequacy of the
Company's and the Bank's accounting,  financial,  and compliance  controls,  and
investigates and makes recommendations to the Board regarding the appointment of
independent auditors.

    In discharging  its oversight  responsibility  as to the audit process,  the
Audit/Compliance/Risk   Management   Committee   obtained   from  the  Company's
independent  auditors a formal written  statement  describing all  relationships
between  the  auditors  and  the  Company  that  might  bear  on  the  auditors'
independence  consistent  with  Independence  Standards  Board  Standard  No. 1,
"Independence  Discussions with Audit  Committees,"  discussed with the auditors
any  relationships  that may  impact  their  objectivity  and  independence  and
satisfied itself as to the auditors' independence.  The Committee also discussed
with  management  and the  independent  auditors the quality and adequacy of the
Company's  internal  controls.  The  Committee  reviewed  with  the  independent
auditors their audit plans, audit scope, and identification of audit risks.

    The  Committee  discussed  and reviewed  with the  independent  auditors all
communications  required by generally  accepted  auditing  standards,  including
those  described  in  Statement  on  Auditing  Standards  No.  61,  as  amended,
"Communication with Audit Committees," and, with and without management present,
discussed and reviewed the results of the independent  auditors'  examination of
the financial  statements.  The Committee also reviewed with  management and the
independent  auditors the audited financial  statements of the Company as of and
for the fiscal year ended December 31, 2001.

    Based on the above-mentioned reviews and discussions with management and the
independent  auditors,  the Committee recommended to the Board of Directors that
the Company's audited  financial  statements be included in its Annual Report on
Form 10-K for the fiscal  year ended  December  31,  2001,  for filing  with the
Securities and Exchange Commission.

    The foregoing report has been provided by William M. Dempsey  (Chair),  John
M.  Burgess,  and  William  N.  Sloan,  members  of  the   Audit/Compliance/Risk
Management Committee

                                   AUDIT FEES

    The  following  table sets forth fees billed or expected to be billed to the
Company by  PricewaterhouseCoopers  L.L.P.  for: (i)  services  rendered for the
audit of the  Company's  annual  financial  statements  for fiscal year 2001 and
review of quarterly financial  statements,  (ii) services rendered during fiscal
year  2001  for  provision  of any  financial  information  systems  design  and
implementation,  and (iii) all other services  rendered during fiscal year 2001,
including  acquisition  assistance and services in connection with the Company's
related  equity  offerings,  routine  tax  consulting,  and other  miscellaneous
consulting  services.   The   Audit/Compliance/Risk   Management  Committee  has
considered  whether the  provision  of  non-audit  services is  compatible  with
PricewaterhouseCoopers L.L.P.'s independence.

      Audit Fees.......................................................$ 162,505
      Financial Information Systems Design
      and Implementation Fees..........................................$       0
      All Other Fees:
        Acquisition Assistance and Equity Offerings......$ 278,464
        Routine Tax Consulting...........................$ 212,450
        Miscellaneous Consulting.........................$ 111,977
                                                          --------
      Total All Other Fees.............................................$ 602,891
                                                                        --------
      Total All Fees...................................................$ 765,396











                                      -16-
<PAGE>


                          TRANSACTIONS WITH MANAGEMENT

    Some of the  directors  and  executive  officers of the Company and the Bank
(and the members of their immediate  families and  corporations,  organizations,
trusts, and estates with which these individuals are associated) are indebted to
the Bank. However,  all such loans were made in the ordinary course of business,
do not involve  more than the normal  risk of  collectibility  or present  other
unfavorable features,  and were made on substantially the same terms,  including
interest rate and collateral requirements,  as those prevailing at the same time
for comparable loan  transactions  with  unaffiliated  persons.  No such loan is
nonperforming  at present.  The Company  expects that the Bank will  continue to
have banking  transactions in the ordinary course of business with the Company's
executive  officers and directors and their associates on substantially the same
terms,  including  interest rates and  collateral,  as those then prevailing for
comparable transactions with others.

    Outside of these normal  customer  relationships,  none of the  directors or
executive  officers  of the  Company or the Bank and no 5%  shareholders  of the
Company  (or  members  of the  immediate  families  of any of the  above  or any
corporations,  organizations,  or trusts with which such persons are associated)
maintains any significant business or personal  relationship with the Company or
the Bank,  other  than as arises by  virtue  of his  ownership  interest  in the
Company  or his  position  with the  Company  or the Bank.  The law firms of (i)
Franklin & Gabriel,  owned by Director  Gabriel,  provided legal services to the
Bank's  operations  in its Finger Lakes  Markets,  (ii) DiCerbo and Palumbo,  of
which  Director  DiCerbo is a partner,  provided  legal  services  to the Bank's
operations in its Southern Region Markets, and (iii) Cantwell & Cantwell,  owned
by Director  Cantwell,  provided legal services to the Bank's  operations in its
Northern  Region  Markets.  For  services  rendered  during 2001 and for related
out-of-pocket  disbursements,  DiCerbo and Palumbo  received  $117,279  from the
Bank,  Franklin  and Gabriel  received  $41,069  from the Bank,  and  Cantwell &
Cantwell received $55,142 from the Bank.

             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors,  executive  officers  and  holders of more than 10% of the  Company's
common stock (collectively, "Reporting Persons") to file with the Securities and
Exchange  Commission  initial  reports of  ownership  and  reports of changes in
ownership of the common stock.  Such persons are required by  regulations of the
Securities  and  Exchange  Commission  to furnish the Company with copies of all
such filings.  Based solely on its review of the copies of such filings received
by it and written  representations  of  Reporting  Persons  with  respect to the
fiscal year ended  December 31, 2001,  the Company  believes  that all Reporting
Persons  complied with all Section 16(a) filing  requirements in the fiscal year
ended December 31, 2001.

                              SHAREHOLDER PROPOSALS

    If  shareholder  proposals are to be considered by the Company for inclusion
in a proxy  statement for a future meeting of the Company's  Shareholders,  such
proposals  must be submitted  on a timely  basis and must meet the  requirements
established by the Securities and Exchange Commission for shareholder proposals.
Shareholder proposals for the Company's 2003 Annual Meeting of Shareholders will
not be deemed to be timely  submitted unless they are received by the Company at
its principal executive offices by December 9, 2002. Such shareholder proposals,
together with any supporting statements,  should be directed to the Secretary of
the  Company.  Shareholders  submitting  proposals  are  urged to  submit  their
proposals by certified mail, return receipt requested.

                              INDEPENDENT AUDITORS

    PricewaterhouseCoopers  L.L.P.,  Independent  Certified Public  Accountants,
were  retained by the Company at the  direction of the Board of  Directors.  The
independent  auditors have audited the  financial  statements of the Company for
the fiscal  year ended  December  31,  2001 and  performed  such other  nonaudit
services as the Board requested.

    A representative  of  PricewaterhouseCoopers  L.L.P.  will be present at the
Meeting.  This representative will have the opportunity to make a statement,  if
he so desires,  and will be available to respond to  appropriate  questions from
Shareholders.


                                      -17-
<PAGE>


                                  OTHER MATTERS

    The Board of Directors of the Company is not aware of any other matters that
may  come  before  the  Meeting.   However,   the  Proxies  may  be  voted  with
discretionary authority with respect to any other matters that may properly come
before the Meeting.

Date:  April 8, 2002                  By Order of the Board of Directors


                                      /s/ DONNA J. DRENGEL
                                      --------------------
                                      Donna J. Drengel
                                      Secretary












                                      -18-
<PAGE>



                              [FORM OF PROXY CARD]

                                      PROXY

           THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
                           COMMUNITY BANK SYSTEM, INC.
                             5790 WIDEWATERS PARKWAY
                           DEWITT, NEW YORK 13214-1883

     The  undersigned  hereby  appoints  Charles M. Ertel and Donna J.  Drengel,
proxies, with power to act without the other and with power of substitution, and
hereby  authorizes  them to represent and vote, as designated on the other side,
all the shares of stock of Community Bank System,  Inc.  standing in the name of
the undersigned  with all powers which the undersigned  would possess if present
at the Annual Meeting of  Shareholders of the Company to be held May 15, 2002 or
any adjournment thereof.

       (CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)


--------------------------------------------------------------------------------

[X]    Please mark your votes as indicated in this example



                        ITEM 1:  ELECTION OF DIRECTORS      FOR        WITHHELD
                                                                        FOR ALL
  Nominees: Paul M. Cantwell, Jr., William M. Dempsey,
                         Saul Kaplan, William N. Sloan      [ ]           [ ]

WITHHELD FOR:  (Write that nominee's name in the space
                                      provided below.)

------------------------------------------------------




    In their discretion,  such  attorneys-in-fact  and proxies are authorized to
          vote upon such other business as may properly come before the meeting.

    This Proxy,  when  properly  executed  will be voted in the manner  directed
                                                      herein by the undersigned.

            IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" PROPOSAL 1.

Please check at right to indicate whether you plan to attend the Annual Meeting.
                                             will attend        will not attend
                                                       [ ]                   [ ]




Signature__________________________Signature_______________________Date_________

  Note:  Please sign as name appears  hereon.  Joint owners  should each sign.
         When signing as attorney, executor, administrator, trustee or guardian,
         please give full title as such.


