<SUBMISSION>
<ACCESSION-NUMBER>0001169232-04-005527
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>9
<PERIOD>20040930
<FILING-DATE>20041108
<DATE-OF-FILING-DATE-CHANGE>20041108
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>COMMUNITY BANK SYSTEM INC
<CIK>0000723188
<ASSIGNED-SIC>6021
<IRS-NUMBER>161213679
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>001-13695
<FILM-NUMBER>041124380
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>5790 WIDEWATERS PKWY
<CITY>DEWITT
<STATE>NY
<ZIP>13214
<PHONE>8007242262
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>5790 WIDEWATERS PARKWAY
<CITY>DEWITT
<STATE>NY
<ZIP>13214
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d61135_10-q.txt
<DESCRIPTION>QUARTERLY REPORT
<TEXT>

                                  United States
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                                QUARTERLY REPORT
     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                For the quarterly period ended September 30, 2004
                        Commission file number 001-13695

                     [LOGO]
                           COMMUNITY BANK SYSTEM, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                                16-1213679
(State or other jurisdiction                                  (I.R.S. Employer
     of incorporation)                                       Identification No.)

5790 Widewaters Parkway, DeWitt, New York                    13214-1883
(Address of principal executive offices)                     (Zip Code)

                                 (315) 445-2282
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.). |X| Yes |_| No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). |X| Yes |_| No

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

      Common Stock, $1.00 par value - 30,606,615 shares outstanding as of
                                November 4, 2004

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

Part I.  Financial Information

Item 1.  Financial Statements (Unaudited)

       Consolidated Statements of Condition
       September 30, 2004 and December 31, 2003                                3

       Consolidated Statements of Income
       Three and nine months ended September 30, 2004 and 2003                 4

       Consolidated Statement of Changes in Shareholders' Equity
       Nine months ended September 30, 2004                                    5

       Consolidated Statements of Comprehensive Income
       Three and nine months ended September 30, 2004 and 2003                 6

       Consolidated Statements of Cash Flows
       Nine months ended September 30, 2004 and 2003                           7

       Notes to the Consolidated Financial Statements
       September 30, 2004                                                      8

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                            14

Item 3.  Quantitative and Qualitative Disclosure about Market Risk            28

Item 4.  Controls and Procedures                                              29

Part II. Other Information

Item 1.  Legal Proceedings                                                    30

Item 2.  Changes in Securities, Use of Proceeds and Issuer Repurchases
         of Equity Securities                                                 30

Item 3.  Defaults upon Senior Securities                                      30

Item 4.  Submission of Matters to a Vote of Securities Holders                30

Item 5.  Other Information                                                    30

Item 6.  Exhibits and Reports on Form 8-K                                     30


                                       2
<PAGE>

Part 1. Financial Information
Item 1. Financial Statements

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                         September 30,      December 31,
                                                                                                  2004              2003
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>               <C>
Cash and due from banks                                                                    $   122,329       $   103,923

Available-for-sale investment securities                                                     1,467,328         1,190,882
Held-to-maturity investment securities                                                         137,640           138,652
------------------------------------------------------------------------------------------------------------------------
  Total investment securities (fair value of $1,603,921 and $1,327,120, respectively)        1,604,968         1,329,534

Loans                                                                                        2,373,751         2,128,509
Allowance for loan losses                                                                       32,609            29,095
------------------------------------------------------------------------------------------------------------------------
  Net loans                                                                                  2,341,142         2,099,414

Premises and equipment, net                                                                     63,836            61,705
Accrued interest receivable                                                                     28,905            25,851

Core deposit intangibles, net                                                                   35,932            33,998
Goodwill                                                                                       190,696           159,596
Other intangibles, net                                                                           2,116             2,517
------------------------------------------------------------------------------------------------------------------------
  Intangible assets, net                                                                       228,744           196,111

Other assets                                                                                    34,630            38,859
------------------------------------------------------------------------------------------------------------------------
     Total assets                                                                          $ 4,424,554       $ 3,855,397
========================================================================================================================
Liabilities:
   Non-interest bearing deposits                                                           $   563,699       $   498,195
   Interest bearing deposits                                                                 2,355,389         2,227,293
------------------------------------------------------------------------------------------------------------------------
      Total deposits                                                                         2,919,088         2,725,488
  Federal funds purchased                                                                       50,000            36,300
  Borrowings                                                                                   841,154           551,096
  Subordinated debt held by unconsolidated subsidiary trusts                                    80,432            80,390
  Accrued interest and other liabilities                                                        66,679            57,295
------------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                       3,957,353         3,450,569
------------------------------------------------------------------------------------------------------------------------

Commitment and contingencies (See Note H)

Shareholders' equity:
  Preferred stock $1.00 par value, 500,000 shares authorized, 0 shares issued
  Common stock, $1.00 par value, 50,000,000 shares authorized;
     31,954,442 and 28,746,612 shares issued in 2004 and 2003, respectively                     31,954            28,747
  Additional paid-in capital                                                                   186,843           130,066
  Retained earnings                                                                            241,144           218,628
  Accumulated other comprehensive income                                                        38,000            35,958
  Treasury stock, at cost (1,400,000 and 416,300 shares, respectively)                         (30,199)           (8,490)
  Employee stock plan - unearned                                                                  (541)              (81)
------------------------------------------------------------------------------------------------------------------------
     Total shareholders' equity                                                                467,201           404,828
------------------------------------------------------------------------------------------------------------------------
     Total liabilities and shareholders' equity                                            $ 4,424,554       $ 3,855,397
========================================================================================================================

</TABLE>

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


                                       3
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In Thousands, Except Per-Share Data)

<TABLE>
<CAPTION>
                                                                               Three Months Ended            Nine Months Ended
                                                                                  September 30,                 September 30,
                                                                               ------------------            --------------------
                                                                                 2004          2003           2004           2003
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>            <C>           <C>
Interest income:
  Interest and fees on loans                                                  $35,267      $ 30,883       $101,043      $  93,084
  Interest and dividends on taxable investments                                13,895        11,140         39,266         34,876
  Interest and dividends on non-taxable investments                             6,061         4,653         16,971         14,006
---------------------------------------------------------------------------------------------------------------------------------
     Total interest income                                                     55,223        46,676        157,280        141,966
---------------------------------------------------------------------------------------------------------------------------------

Interest expense:
  Interest on deposits                                                          8,622         8,905         25,777         29,474
  Interest on federal funds purchased                                              95            65            282            234
  Interest on short-term borrowings                                             2,055           573          4,266          1,394
  Interest on subordinated debt held by unconsolidated subsidiary trusts        1,460         1,401          4,244          4,237
  Interest on long-term borrowings                                              3,934         3,193         10,243          9,502
---------------------------------------------------------------------------------------------------------------------------------
     Total interest expense                                                    16,166        14,137         44,812         44,841
---------------------------------------------------------------------------------------------------------------------------------

Net interest income                                                            39,057        32,539        112,468         97,125
Less:  provision for loan losses                                                2,300         2,029          6,650          8,102
---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                            36,757        30,510        105,818         89,023
---------------------------------------------------------------------------------------------------------------------------------

Non-interest income:
  Deposit service fees                                                          6,756         6,080         18,713         17,025
  Other banking services                                                        1,135           (37)         2,059          1,307
  Trust, investment and asset management fees                                   1,935         1,747          5,699          4,954
  Benefit plan administration, consulting and actuarial fees                    2,338         1,986          6,997          4,289
  Gain (loss) on investment securities & debt extinguishment                        0             3            145            (42)
---------------------------------------------------------------------------------------------------------------------------------
     Total non-interest income                                                 12,164         9,779         33,613         27,533
---------------------------------------------------------------------------------------------------------------------------------

Operating expenses:
  Salaries and employee benefits                                               15,638        13,225         46,197         38,243
  Occupancy                                                                     2,570         2,255          7,700          7,004
  Equipment and furniture                                                       2,143         1,885          6,445          5,766
  Amortization of intangible assets                                             2,003         1,269          5,401          3,801
  Legal and professional fees                                                   1,003           672          2,970          2,250
  Data processing                                                               1,973         1,647          5,777          5,006
  Office supplies                                                                 613           455          1,711          1,507
  Acquisition expenses                                                             53           165          1,434            170
  Other                                                                         3,930         3,633         11,822         11,085
---------------------------------------------------------------------------------------------------------------------------------
     Total operating expenses                                                  29,926        25,206         89,457         74,832
---------------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                                     18,995        15,083         49,974         41,724
Income taxes                                                                    4,761         3,354         12,444         10,014
---------------------------------------------------------------------------------------------------------------------------------
Net income                                                                    $14,234      $ 11,729       $ 37,530      $  31,710
=================================================================================================================================

Basic earnings per share                                                      $  0.47      $   0.45       $   1.27      $    1.22
Diluted earnings per share                                                    $  0.45      $   0.44       $   1.23      $    1.19
Dividends declared per share                                                  $  0.18      $   0.16       $   0.50      $    0.45
</TABLE>

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


                                       4
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Nine Months Ended September 30, 2004
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                           Accumulated
                                                  Common Stock                                Other
                                              ---------------------  Additional              Compre-             Employee
                                                 Shares      Amount    Paid-In   Retained    hensive  Treasury  Stock Plan
                                              Outstanding    Issued    Capital   Earnings     Income    Stock   -Unearned   Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>       <C>        <C>         <C>       <C>         <C>     <C>
Balance at December 31, 2003, as previously    14,165,156   $14,373   $144,440   $218,628    $35,958   ($8,490)    ($81)   $404,828
   reported
Two-for-one stock split                        14,165,156    14,374    (14,374)                                                   0
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003, as restated      28,330,312    28,747    130,066    218,628     35,958    (8,490)     (81)    404,828

Net income                                                                         37,530                                    37,530

Other comprehensive income, net of tax                                                         2,042                          2,042

Dividends declared:
  Common, $.50 per share                                                          (15,014)                                  (15,014)

Common stock issued under employee stock plan     615,617       615      4,650                                     (460)      4,805

Stock and options issued for acquisition        2,592,213     2,592     52,127                                               54,719

Treasury stock purchased                         (983,700)                                             (21,709)             (21,709)

-----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004                  30,554,442   $31,954   $186,843   $241,144    $38,000  ($30,199)   ($541)   $467,201
===================================================================================================================================
</TABLE>

See Note B "Stock Split" concerning two-for-one stock split.

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


                                       5
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In Thousands)

<TABLE>
<CAPTION>
                                                                                Three Months Ended            Nine Months Ended
                                                                                   September 30,                September 30,
                                                                              -----------------------       -----------------------
                                                                                2004           2003           2004           2003
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>            <C>            <C>
Other comprehensive income (loss), before tax:
  Change in minimum pension liability adjustment                              $      0       $      0       $      0       $     97
  Unrealized (losses) gains on securities:
     Unrealized holding gains (losses) arising during period                    35,415        (21,053)         3,241            258
     Reclassification adjustment for gains included in net income                    0             (3)          (145)            (3)
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax                                   35,415        (21,056)         3,096            352
Income tax (expense) benefit related to other comprehensive income (loss)      (13,703)         8,200         (1,054)           679
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax                                   21,712        (12,856)         2,042          1,031
Net income                                                                      14,234         11,729         37,530         31,710
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)                                                   $ 35,946       ($ 1,127)      $ 39,572       $ 32,741
===================================================================================================================================
</TABLE>

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


                                       6
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended September 30,
                                                                                      -------------------------------
                                                                                           2004            2003
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                <C>
Operating activities:
  Net income                                                                             $  37,530         $  31,710
  Adjustments to reconcile net income to net cash provided by operating activities
     Depreciation                                                                            5,985             5,263
     Amortization of intangible assets                                                       5,401             3,801
     Net amortization of premiums and discounts on securities and loans                      1,106             1,710
     Amortization of unearned compensation and discount on subordinated debt                   244                96
     Provision for loan losses                                                               6,650             8,102
     (Gain) loss on investment securities and debt extinguishment                             (145)               42
     Loss on loans and other assets                                                            211               379
     Proceeds from the sale of loans held for sale                                               0            67,444
     Origination of loans held for sale                                                          0           (61,036)
     Change in other operating assets and liabilities                                        5,560            (2,385)
---------------------------------------------------------------------------------------------------------------------
  Net cash provided by operating activities                                                 62,542            55,126
---------------------------------------------------------------------------------------------------------------------
Investing activities:
  Proceeds from sales of available-for-sale investment securities                           41,490            14,611
  Proceeds from maturities of held-to-maturity investment securities                         3,937             3,901
  Proceeds from maturities of available-for-sale investment securities                     115,655           196,867
  Purchases of held-to-maturity investment securities                                       (3,035)         (132,242)
  Purchases of available-for-sale investment securities                                   (387,391)          (88,779)
  Net increase in loans outstanding                                                        (44,220)         (116,498)
  Cash received (paid) for acquisition (net of cash paid of $7,023 in 2004 and cash
     acquired of $9,428 in 2003)                                                               409            (1,928)
  Capital expenditures                                                                      (5,461)           (5,334)
---------------------------------------------------------------------------------------------------------------------
     Net cash used by investing activities                                                (278,616)         (129,402)
---------------------------------------------------------------------------------------------------------------------
Financing activities:
  Net change in demand deposits, NOW accounts, and savings accounts                         24,679            80,523
  Net change in time deposits                                                              (43,143)          (56,108)
  Net change in federal funds purchased                                                     13,700            12,000
  Net change in short-term borrowings                                                      101,528            62,455
  Change in long-term borrowings (net of payments of $112 and $5,000)                      168,930            (5,000)
  Issuance of common stock (net of restricted stock awards of $654 and $248)                 4,611             3,986
  Purchase of treasury stock                                                               (21,709)           (8,490)
  Cash dividends paid                                                                      (14,044)          (11,320)
  Other financing activities                                                                   (72)             (111)
---------------------------------------------------------------------------------------------------------------------
     Net cash provided by financing activities                                             234,480            77,935
---------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents                                                         18,406             3,659
  Cash and cash equivalents at beginning of period                                         103,923           113,531
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                               $ 122,329         $ 117,190
=====================================================================================================================

Supplemental disclosures of cash flow information:
  Cash paid for interest                                                                 $  43,335       $  45,280
  Cash paid for income taxes                                                             $   8,889       $   9,996
Supplemental disclosures of non-cash financing and investing activities:
  Dividends declared and unpaid                                                          $   5,499       $   4,147
  Gross change in unrealized gains on available-for-sale investment securities           $   3,096       $     256
  Acquisitions:
     Fair value of assets acquired, excluding acquired cash and intangibles              $ 252,119       $  18,473
     Fair value of liabilities assumed                                                   $ 235,511       $  25,664
     Common stock and options issued                                                     $  54,719       $       0
</TABLE>

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


                                       7
<PAGE>

COMMUNITY BANK SYSTEM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2004

NOTE A: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements may not include all information and
footnotes necessary to constitute a complete set of financial statements under
generally accepted accounting principles applicable to annual periods and
accordingly should be read in conjunction with the financial information
contained in the Form 10-K. Management believes these unaudited consolidated
financial statements reflect all adjustments of a normal recurring nature which
are necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year or any other
interim period.

Certain prior period amounts have been reclassified to conform to the current
year presentation.

NOTE B: ACQUISITION AND OTHER MATTERS

First Heritage Bank

On May 14, 2004, the Company acquired First Heritage Bank ("Heritage"), a
closely held bank headquartered in Wilkes-Barre, PA with three branches in
Luzerne County, Pennsylvania. First Heritage's three branches operate as part of
First Liberty Bank & Trust, a division of Community Bank, N.A. Consideration
included 2,592,213 shares of common stock with a fair value of $52 million,
employee stock options with a fair value of $3.0 million, and $7.0 million of
cash (including capitalized acquisition costs of $1.0 million). The results of
Heritage's operations have been included in the consolidated financial
statements since that date.

The estimated purchase price allocation of the assets acquired and liabilities
assumed, including capitalized acquisition costs, is as follows:

(000's omitted)
----------------------------------------------------------
Cash and due from banks                           $  7,432
Available-for-sale investment securities            43,811
Loans, net of allowance for loan losses            204,120
Premises and equipment, net                          3,074
Other assets                                         1,114
Goodwill                                            30,768
Core deposit intangibles                             6,934
----------------------------------------------------------
  Total assets acquired                            297,253
Deposits                                           212,064
Borrowings                                          19,672
Other liabilities                                    3,775
----------------------------------------------------------
  Total liabilities assumed                        235,511
----------------------------------------------------------
     Net assets acquired                          $ 61,742
==========================================================

Dansville Branch Acquisition

On August 4, 2004, the Company announced it had signed a definitive agreement to
purchase a branch office in Dansville, N.Y. from HSBC Bank USA, N.A., pending
regulatory approval. The acquisition is expected to close during December 2004.

Stock Repurchase Program

During the third quarter of 2004 the Company purchased 280,713 common shares
completing the previously announced 1.4 million-share repurchase program. The
aggregate cost of this program was $30.2 million and the average price per share
is $21.57. The repurchases were for general corporate purposes, including those
related to acquisition and stock plan activities.

Stock Split

At a special meeting of the shareholders held on March 26, 2004, the
shareholders approved an amendment to the certificate of incorporation of the
Company to increase the number of authorized shares of common stock to 50
million. This amendment was effected in connection with the previously announced
two-for-one stock split of the Company's common stock. The stock split was
effected in the form of a 100 percent stock dividend, and was paid on April 12,
2004 to shareholders of record on March 17, 2004.


                                       8
<PAGE>

Accordingly, all share, option and per-share amounts have been adjusted in the
consolidated financial statements to reflect the stock split.

NOTE C: ACCOUNTING POLICIES

Critical Accounting Policies

Allowance for Loan Losses

Management continually evaluates the credit quality of the Company's loan
portfolio, and performs a formal review of the adequacy of the allowance for
loan losses on a quarterly basis. The allowance reflects management's best
estimate of probable losses inherent in the loan portfolio. Determination of the
allowance is subjective in nature and requires significant estimates.

The Company's allowance methodology consists of two broad components. The first
component includes a determination of estimated general losses in accordance
with SFAS No. 5, "Accounting for Contingencies". This general allowance
component reflects inherent probable losses related to pools of homogeneous
loans that are evaluated collectively, including consumer mortgage loans,
consumer direct and indirect loans, and business loans that are not impaired.
Allowance levels for these loan pools are based principally on historical loss
factors, as well as qualitative factors that are expected to affect loss
experience, including delinquency, underwriting and economic trends and
conditions. The second component of the allowance reflects specific losses
related to individual business loans that are both greater than $0.5 million and
in a non-accruing status with respect to interest. Specific losses are based on
discounted estimated cash flows, including any cash flows resulting from the
conversion of collateral.

Income Taxes

Provisions for income taxes are based on taxes currently payable or refundable,
and deferred taxes which are based on temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are reported in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.

Intangible Assets

Intangible assets include core deposit intangibles, customer relationship
intangibles and goodwill arising from acquisitions. Core deposit intangibles and
customer relationship intangibles are amortized on either an accelerated or
straight-line basis over periods ranging from 7 to 20 years. Goodwill is
evaluated at least annually for impairment. The carrying value of goodwill and
other intangible assets is based upon discounted cash flow modeling techniques
that require management to make estimates regarding the amount and timing of
expected future cash flows. It also requires use of a discount rate that
reflects the current return requirements of the market in relation to present
risk-free interest rates, required equity market premiums, and company-specific
risk indicators.

Retirement Benefits

The Company provides defined benefit pension benefits and post-retirement health
and life insurance benefits to eligible employees. The Company also provides
deferred compensation and supplemental executive retirement plans for selected
current and former employees and officers. Expense under these plans is charged
to current operations and consists of several components of net periodic benefit
cost based on various actuarial assumptions regarding future experience under
the plans, including discount rate, rate of future compensation increases and
expected return on plan assets.

Stock-Based Compensation

The Company accounts for stock-based awards issued to directors, officers and
key employees using the intrinsic value method. This method requires that
compensation expense be recognized to the extent that the fair value of the
underlying stock exceeds the exercise price of the stock award at the grant
date. The Company generally does not recognize compensation expense related to
stock awards because the stock awards generally have fixed terms and exercise
prices that are equal to or greater than the fair value of the Company's common
stock at the grant date.

SFAS 123, "Accounting for Stock-Based Compensation," requires companies that use
the "intrinsic value method" to account for stock compensation plans to provide
pro forma disclosures of the net income and earnings per share effect of stock
options using the "fair value method." Under this method, the fair value of the
option on the date of grant is recognized ratably as compensation expense over
the vesting period of the option.

Management estimated the fair value of options granted using the Black-Scholes
option-pricing model. This model was originally developed to estimate the fair
value of exchange-traded equity options, which (unlike employee stock options)
have no vesting period or transferability restrictions. As a result, the
Black-Scholes model is not necessarily a precise indicator of the value of an
option, but it


                                       9
<PAGE>

is commonly used for this purpose. The Black-Scholes model requires several
assumptions, which management developed based on historical trends and current
market observations. These assumptions include:

                                                      2004                 2003
-------------------------------------------------------------------------------
Weighted-average expected life                        7.78                 8.74
Future dividend yield                                3.00%                3.00%
Share price volatility                       25.47%-26.88%        27.29%-27.58%
Weighted average risk-free interest rate       4.02%-4.45%                3.81%
===============================================================================

If these assumptions are not accurate, the estimated fair value used to derive
the information presented in the following table also will be inaccurate.
Moreover, the model assumes that the estimated fair value of an option is
amortized over the option's vesting period and would be included in salaries and
employee benefits on the income statement. The pro forma impact of applying the
fair value method of accounting for the periods shown below may not be
indicative of the pro forma impact in future years.

<TABLE>
<CAPTION>
                                                         Three Months Ended               Nine Months Ended
                                                            September 30,                   September 30,
                                                      --------------------------      --------------------------
(000's omitted except per share amounts)                 2004            2003            2004            2003
----------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>             <C>             <C>
Net income, as reported                               $   14,234      $   11,729      $   37,530      $   31,710
Less: stock-based compensation expense
  determined under fair value method, net of tax             206             158             831             612
----------------------------------------------------------------------------------------------------------------
     Pro forma net income                             $   14,028      $   11,571      $   36,699      $   31,098
================================================================================================================

Earnings per share:
   As reported:
      Basic                                           $     0.47      $     0.45      $     1.27      $     1.22
      Diluted                                         $     0.45      $     0.44      $     1.23      $     1.19
   Pro forma:
      Basic                                           $     0.46      $     0.44      $     1.24      $     1.19
      Diluted                                         $     0.44      $     0.43      $     1.20      $     1.17
</TABLE>

As of September 30, 2004 there were 2,489,458 stock options granted and
outstanding.

New Accounting Pronouncements

In December 2003, a bill was signed into law that expands Medicare benefits,
primarily adding a prescription drug benefit for Medicare-eligible retirees
beginning in 2006. The law also provides a federal subsidy to companies that
sponsor post-retirement benefit plans that provide prescription drug coverage.
In May 2004, the Financial Accounting Standards Board ("FASB") issued Staff
Position No. FAS 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." This
staff position provides guidance on accounting for the effects of the new
Medicare prescription drug legislation by employers whose prescription drug
benefits are actuarially equivalent to the drug benefit under Medicare Part D.
It also contains basic guidance on related income tax accounting and complex
rules for transition that permit various alternative prospective and retroactive
transition approaches. The Company adopted this standard effective July 1, 2004
and determined its plan does not provide a drug benefit that is actuarially
equivalent to the Medicare Part D benefit. As a result, this standard had no
impact on results of operations, financial position, or liquidity of the
Company.

In March 2004, the FASB issued an exposure draft, "Share-Based Payment: an
amendment of FASB No. 123 and 95." This proposed Statement addresses the
accounting for transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. This proposed Statement
would eliminate the accounting for share-based compensation transactions using
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and generally
would require instead that such transactions be accounted for using a
fair-value-based method. A final statement is expected to be issued during the
fourth quarter of 2004. In October 2004, the FASB delayed the effective date of
this statement to periods beginning after June 15, 2005. Management does not
expect the impact of the adoption of this exposure draft if adopted in its
current version to be materially different from the pro forma impacts disclosed
under SFAS No. 123.


                                       10
<PAGE>

NOTE D: EARNINGS PER SHARE

Basic earnings per share are computed based on the weighted-average common
shares outstanding for the period. Diluted earnings per share are based on the
weighted-average shares outstanding adjusted for the dilutive effect of the
assumed exercise of stock options during the year. The dilutive effect of
options is calculated using the treasury stock method of accounting. The
treasury stock method determines the number of common shares that would be
outstanding if all the dilutive options (average market price is greater than
the exercise price) were exercised and the proceeds were used to repurchase
common shares in the open market at the average market price for the applicable
time period. There were 427,114 and 433,622 anti-dilutive stock options
outstanding for the three and nine months ended September 30, 2004,
respectively, compared to zero and 15,000 for the three and nine months ended
September 30, 2003. The following is a reconciliation of basic to diluted
earnings per share for the three and nine months ended September 30, 2004 and
2003.

<TABLE>
<CAPTION>
                                                                                   Per Share
(000's omitted, except per share data)                   Income        Shares        Amount
--------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>
Three Months Ended September 30, 2004
  Basic EPS                                             $14,234        30,580          $0.47
  Stock options                                                           965
-----------------------------------------------------------------------------
     Diluted EPS                                        $14,234        31,545          $0.45
=============================================================================

Three Months Ended September 30, 2003
  Basic EPS                                             $11,729        26,022          $0.45
  Stock options                                                           794
-----------------------------------------------------------------------------
     Diluted EPS                                        $11,729        26,816          $0.44
=============================================================================

Nine Months Ended September 30, 2004
  Basic EPS                                             $37,530        29,664          $1.27
  Stock options                                                           933
-----------------------------------------------------------------------------
     Diluted EPS                                        $37,530        30,597          $1.23
=============================================================================

Nine Months Ended September 30, 2003
  Basic EPS                                             $31,710        26,064          $1.22
  Stock options                                                           617
-----------------------------------------------------------------------------
     Diluted EPS                                        $31,710        26,681          $1.19
=============================================================================
</TABLE>


                                       11
<PAGE>

NOTE E: INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization for each type of
intangible asset are as follows:

<TABLE>
<CAPTION>
                                              As of September 30, 2004                    As of December 31, 2003
                                       -------------------------------------      -------------------------------------
                                         Gross                        Net          Gross                          Net
                                       Carrying     Accumulated     Carrying      Carrying    Accumulated      Carrying
(000's omitted)                         Amount     Amortization      Amount        Amount    Amortization       Amount
                                       -------------------------------------      -------------------------------------
<S>                                    <C>           <C>            <C>           <C>           <C>            <C>
Amortizing intangible assets:
  Core deposit intangibles             $ 62,389      ($26,457)      $ 35,932      $ 55,455      ($21,457)      $ 33,998
  Other intangibles                       2,750          (634)         2,116         2,750          (233)         2,517
                                       -------------------------------------      -------------------------------------
     Total amortizing intangibles        65,139       (27,091)        38,048        58,205       (21,690)        36,515
Non-amortizing intangible assets:
  Goodwill                              190,696             0        190,696       159,596             0        159,596
                                       -------------------------------------      -------------------------------------
     Total intangible assets, net      $255,835      ($27,091)      $228,744      $217,801      ($21,690)      $196,111
                                       =====================================      =====================================
</TABLE>

As described in Note B, the increases in the gross carrying amount of core
deposit intangibles and goodwill primarily relate to the May 2004 acquisition of
First Heritage Bank. No goodwill impairment adjustments were recognized in 2004
and 2003. The estimated aggregate amortization expense for each of the
succeeding fiscal years ending December 31 is as follows:

     (000's omitted)Amount
-------------------------------
        Oct-Dec 2004     $2,013
                2005      6,953
                2006      5,794
                2007      5,440
                2008      5,154
          Thereafter     12,694
                        -------
               Total    $38,048
                        =======

NOTE F: SUBORDINATED DEBT

The Company sponsors three business trusts, Community Capital Trust I, Community
Capital Trust II, and Community Statutory Trust III, of which 100% of the common
securities are owned by the Company. In accordance with FASB Interpretation No.
46, "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51", these business trusts are not consolidated
with the financial statements of the Company. The trusts were formed for the
purpose of issuing company-obligated mandatorily redeemable preferred securities
to third-party investors and investing the proceeds from the sale of such
preferred securities solely in junior subordinated debt securities of the
Company. The debentures held by each trust are the sole assets of that trust and
were $81,439,000 and $82,410,000 at September 30, 2004 and December 31, 2003,
respectively. Distributions on the preferred securities issued by each trust are
payable semi-annually at a rate per annum equal to the interest rate being
earned by the trust on the debentures held by that trust. The preferred
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the debentures. The Company has entered into agreements which,
taken collectively, fully and unconditionally guarantee the preferred securities
subject to the terms of each of the guarantees. The terms of the preferred
securities of each trust are as follows:

<TABLE>
<CAPTION>
       Issuance        Preferred              Interest                Maturity            Call                       Call
Trust    Date          Securities               Rate                    Date           Provision                     Price
------------------------------------------------------------------------------------------------------------------------------------
<S>      <C>        <C>              <C>                             <C>          <C>                       <C>
I         2/3/1997    $30 million    9.75%                           2/03/2027    10 year beginning 2007    104.5400% declining to
                                                                                                            par in 2017
II       7/16/2001    $25 million    Six-month LIBOR plus 3.75%      7/16/2031     5 year beginning 2006    107.6875% declining to
                                                                                                            par in 2011
III      7/31/2001  $24.45 million   Three-month LIBOR plus 3.58%    7/31/2031     5 year beginning 2006    107.5000% declining to
                                                                                                            par in 2011
====================================================================================================================================
</TABLE>


                                       12
<PAGE>

NOTE G: BENEFIT PLANS

The Company provides defined benefit pension benefits and post-retirement health
and life insurance benefits to eligible employees. The Company also provides
supplemental pension retirement benefits for several current and former key
employees. The Company accrues for the estimated cost of these benefits through
charges to expense during the years that employees earn these benefits. The
components of the net periodic benefit cost are as follows:

<TABLE>
<CAPTION>
                                                       Pension Benefits                            Post-retirement Benefits
                                          ----------------------------------------------    --------------------------------------
                                          Three Months Ended         Nine Months Ended      Three Months Ended   Nine Months Ended
                                             September 30,             September 30,            September 30,       September 30,
                                          ------------------       ---------------------    ------------------   -----------------
(000's omitted)                             2004        2003          2004          2003       2004      2003      2004      2003
----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>         <C>           <C>           <C>       <C>       <C>       <C>
Service cost                               $ 480       $ 481       $ 1,440       $ 1,193       $ 78      $ 45      $233      $136
Interest cost                                592         505         1,776         1,448         81        63       244       190
Expected return on plan assets              (790)       (642)       (2,371)       (1,925)         0         0         0         0
Net amortization and deferral                218         298           655           729          9         0        28         0
Amortization of prior service cost           107          (8)          320           (25)         8         8        22        22
Amortization of transition obligation          0          (1)            0            (3)        10        10        31        31
---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost                  $ 607       $ 633       $ 1,820       $ 1,417       $186      $126      $558      $379
=================================================================================================================================

<CAPTION>
                                                   Supplemental Benefits
                                          ---------------------------------------
                                          Three Months Ended    Nine Months Ended
                                             September 30,         September 30,
                                          ------------------    -----------------
(000's omitted)                             2004       2003       2004       2003
---------------------------------------------------------------------------------
<S>                                        <C>         <C>       <C>         <C>
Service cost                               $  88       $ 39      $ 263       $104
Interest cost                                 39         58        116        153
Expected return on plan assets                 0          0          0          0
Net amortization and deferral                 44         40        133         89
Amortization of prior service cost           (34)        40       (101)       121
Amortization of transition obligation          0          0          0          0
---------------------------------------------------------------------------------
Net periodic benefit cost                  $ 137       $177      $ 411       $467
=================================================================================
</TABLE>

The Company is not required for regulatory purposes to make a contribution to
its defined benefit pension plan. However, it may make a discretionary
contribution in the fourth quarter of 2004.

NOTE H: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS

The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend credit
and standby letters of credit. Commitments to extend credit are agreements to
lend to customers, generally having fixed expiration dates or other termination
clauses that may require payment of a fee. These commitments consist principally
of unused commercial and consumer credit lines. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of an underlying contract with a third party. The credit risks
associated with commitments to extend credit and standby letters of credit are
essentially the same as that involved with extending loans to customers and are
subject to normal credit policies. Collateral may be obtained based on
management's assessment of the customer's creditworthiness. The fair value of
these commitments is immaterial for disclosure in accordance with FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". The
contract amount of commitment and contingencies is as follows:

                                                 September 30,     December 31,
(000's omitted)                                     2004               2003
------------------------------------------------------------------------------
Commitments to extend credit                      $440,176           $315,898
Standby letters of credit                           24,310             19,163
-----------------------------------------------------------------------------
     Total                                        $464,486           $335,061
=============================================================================


                                       13
<PAGE>

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

Introduction

This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") primarily reviews the financial condition and results of
operations of Community Bank System, Inc. ("the Company") for the three and nine
months ended September 30, 2004 and 2003, although in some circumstances the
second quarter of 2004 is also discussed in order to more fully explain recent
trends. The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and related notes that appear on
pages 3 through 13 and the Annual Report on Form 10-K for the year ended
December 31, 2003. Unless otherwise stated, all references in the discussion to
the financial condition and results of operations are to those of the Company
and its subsidiaries taken as a whole.

All references to "peer banks" pertain to a group of 79 bank holding companies
nationwide having $3 billion to $10 billion in assets and their associated
composite financial results for the six months ending June 30, 2004 (the most
recently available disclosure) as provided by the Federal Reserve Board in the
Bank Holding Company Performance Report. Unless otherwise noted, the term "this
year" refers to results in calendar year 2004, "third quarter" refers to the
quarter ended September 30, 2004, earnings per share ("EPS") figures refer to
diluted EPS, and net interest income and net interest margin are presented on a
fully tax-equivalent ("FTE") basis. All common share and common share-based
amounts reflect the two-for-one stock split effected as a 100% stock dividend on
April 12, 2004.

This MD&A contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the Company. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those proposed by such
forward-looking statements are set herein under the caption, "Forward-Looking
Statements," on page 27.

Critical Accounting Policies

As a result of the complex and dynamic nature of the Company's business,
management must exercise judgement in selecting and applying the most
appropriate accounting policies for its various areas of operations. The policy
decision process not only ensures compliance with the latest generally accepted
accounting principles, but also reflects on management's discretion with regard
to choosing the most suitable methodology for reporting the Company's financial
performance. It is management's opinion that the accounting estimates covering
certain aspects of the business have more significance than others due to the
relative importance of those areas to overall performance, or the level of
subjectivity in the selection process. These estimates affect the reported
amounts of assets and liabilities and disclosures of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management believes that critical accounting estimates include:

o     Allowance for loan losses - The allowance for loan losses reflects
      management's best estimate of probable losses inherent in the loan
      portfolio. Determination of the allowance is subjective in nature and
      requires significant estimates.

o     Actuarial assumptions associated with pension, post-retirement and other
      employee benefit plans - These assumptions include discount rate, rate of
      future compensation increases and expected return on plan assets.

o     Provision for income taxes - The Company is subject to examinations from
      various taxing authorities. Such examinations may result in challenges to
      the tax return treatment applied by the Company to specific transactions.
      Management believes that the assumptions and judgements used to record
      tax-related assets or liabilities have been appropriate. Should tax laws
      change or the taxing authorities determine that management's assumptions
      were inappropriate, an adjustment may be required which could have a
      material effect on the Company's results of operations.

o     Carrying value of goodwill and other intangible assets - The carrying
      value of goodwill and other intangible assets is based upon discounted
      cash flow modeling techniques that require management to make estimates
      regarding the amount and timing of expected future cash flows. It also
      requires use of a discount rate that reflects the current return
      requirements of the market in relation to present risk-free interest
      rates, required equity market premiums, and company-specific risk
      indicators.

A summary of the accounting policies used by management is disclosed in Note A,
"Summary of Significant Accounting Policies" on pages 61 - 67 of the most recent
Form 10-K (fiscal year ended December 31, 2003).

Executive Summary

The Company's business philosophy is to operate as a community bank with local
decision-making, principally in non-metropolitan markets, providing a broad
array of banking and financial services to retail, commercial and municipal
customers. The Company's branch network operates in New York as Community Bank,
N.A., and in Pennsylvania as First Liberty Bank & Trust. The Company


                                       14
<PAGE>

also operates five financial services businesses, which provide a broad array of
wealth management and benefits administration and consulting services to bank
and non-bank customers.

The Company's core operating objectives are to: (i) grow the branch network,
primarily through a disciplined acquisition and de novo strategy, (ii) build
high-quality, profitable loan portfolios using both organic and acquisition
strategies, (iii) increase the non-interest income component of total revenues
through development of banking-related fee income, growth in existing financial
services business units, and the acquisition of additional financial services
businesses, and (iv) utilize technology to deliver customer-responsive products
and services and to reduce operating costs.

Significant factors management reviews to evaluate achievement of the Company's
operating objectives and its operating results and financial condition include,
but are not limited to: net income and earnings per share, return on assets and
equity, net interest margins, non-interest income, operating expenses, asset
quality, loan and deposit growth, capital management, performance of individual
banking and financial services business units, liquidity and interest rate
sensitivity, enhancements to customer products and services, technology
advancements, market share, peer comparisons, and the performance of acquisition
and integration activities.

Third quarter earnings per share were $0.01 above the prior year's third
quarter, as higher net interest income and non-interest income were partially
offset by higher operating expenses and a greater number of common shares
outstanding. On a year-to-date ("YTD") basis, earnings per share were $0.04
above the first nine months of 2003, resulting from higher net interest income
and non-interest income and a lower loan loss provision, partially offset by
higher operating expenses and a greater number of common shares outstanding. On
an operating basis (see Table 1 and related narrative), third quarter and
September YTD net income increased 21% and 20%, respectively, compared to the
same periods of 2003, while return on equity declined slightly due to higher
capital levels. Excluding acquisition activity, revenue generated by the
financial services businesses was up for the current quarter and first nine
months of the year. Operating expenses for the quarterly and YTD periods
increased primarily due to acquisitions and higher compensation and benefits
costs. The efficiency ratio for the quarter and YTD periods improved as a result
of net interest income and recurring non-interest income growing at a faster
pace than operating expenses (excluding acquisition costs and intangible
amortization).

Asset quality improved over last year, with reductions in delinquency, net
charge-off and non-performing loan ratios. Excluding acquisition activity, the
Company experienced strong year-over-year loan growth in consumer mortgage and
installment lending, with a slight decline in business lending. On a
geographical basis, excluding acquisitions, the New York markets accounted for
all of the Company's loan growth, with a slight decline experienced in the
Pennsylvania markets. Excluding acquisitions, total average deposits for the
quarter and first nine months of 2004 declined slightly from the levels that
existed for the same periods last year.

On May 14, 2004, the Company completed its acquisition of First Heritage Bank
("First Heritage"), a $275 million-asset, three-branch commercial bank based in
Wilkes-Barre, PA. The Company completed three acquisitions in 2003, including:
(1) Harbridge Consulting Group ("Harbridge"), an actuarial and benefits
consulting firm based in Syracuse, NY that was acquired from
PricewaterhouseCoopers in July, (2) Peoples Bankcorp Inc. ("Peoples"), a $29
million-asset single branch bank in Ogdensburg, NY acquired in September, and
(3) Grange National Banc Corp. ("Grange"), a $280 million-asset bank with twelve
branches in five counties of Northeastern PA, acquired in November.

Net Income and Profitability

As shown in Table 2, third quarter earnings per share of $0.45 and September YTD
earnings per share of $1.23 were $0.01 and $0.04 higher, respectively, than the
EPS generated in the same periods of last year. Net income for the quarter of
$14.2 million was up 21% over third quarter 2003, and net income of $37.5
million for the first nine months of 2004 increased 18% from the amount earned
in the equivalent period of last year. Net interest income for the third quarter
of $42.9 million and $123.2 million for the first nine months of 2004, were up
21% and 16% from their respective prior year periods. Third quarter non-interest
income (excluding net gains from investment securities sales and debt prepayment
costs) of $12.2 million was up 24% from third quarter 2003 (15%, excluding a
$0.8 million impairment loss on secondary market mortgage activities recorded in
the third quarter last year), and the YTD amount of $33.5 million rose 21% from
the prior year level. Operating expenses of $29.9 million for the quarter and
$89.5 million for the first nine months of 2004 were up 19% and 20%,
respectively, from the equivalent periods of 2003, a portion of which related to
acquisition expenses, which declined $0.1 million for the quarter, but were $1.3
million higher on a YTD basis.

In addition to the earnings results presented above in accordance with generally
accepted accounting principles ("GAAP"), the Company provides earnings results
on a non-GAAP, or operating basis. The determination of operating earnings
excludes the effects of certain items the Company considers to be non-operating,
including acquisition expenses, the results of securities transactions and debt
restructuring activities. Performance as measured by operating earnings is
considered by management to be a useful measure for gauging the underlying
performance of the Company by eliminating the volatility caused by voluntary,
transaction-based items.

Operating earnings per share for the third quarter were $0.45, up 2.3% from the
$0.44 reported in the equivalent period of 2003. On a year-to-date basis,
operating EPS of $1.25 increased $0.06 or 5.0% versus the first nine months of
2003. As reflected in Table 2, the


                                       15
<PAGE>

primary reasons for the improved earnings were higher net interest income and
non-interest income and a lower loan loss provision (on a YTD basis only),
offset by higher operating expenses and a greater number of weighted average
diluted shares outstanding. Net interest income increased because of higher
earning-asset levels derived from the acquisitions of Peoples, Grange and First
Heritage, organic consumer mortgage and installment loan growth, and investment
leverage. The increase in non-interest income was attributable to incremental
revenue from Harbridge, strong growth at the other financial services units, and
additional banking fees generated in the 16 branches added through the three
whole-bank acquisitions. A significant decrease in net charge-offs and general
improvement in other asset quality metrics were the primary drivers of the
decrease in the YTD loan loss provision, despite a significant increase in the
size of the total loan portfolio. The quarterly and YTD performance improvements
were partially offset by a growth in operating expenses, in most part due to the
four acquisitions made in the intervening time period.

A reconciliation of GAAP-based earnings results to operating-based earnings
results and a condensed income statement are as follows:

       Table 1: Reconciliation of GAAP Net Income to Operating Net Income

<TABLE>
<CAPTION>
                                        Three Months Ended           Nine Months Ended
                                          September 30,                September 30,
                                      ---------------------       -----------------------
(000's omitted)                         2004          2003           2004           2003
-----------------------------------------------------------------------------------------
<S>                                   <C>          <C>            <C>            <C>
Net income                            $14,234      $ 11,729       $ 37,530       $ 31,710
After-tax operating adjustments:
  Net securities gains                      0            (2)           (89)            (2)
  Debt prepayment costs                     0             0              0             27
  Acquisition expenses                     32           101            879            104
-----------------------------------------------------------------------------------------
Net income - operating                $14,266      $ 11,828       $ 38,320       $ 31,839
=========================================================================================
</TABLE>

                       Table 2: Summary Income Statements

<TABLE>
<CAPTION>
                                              Three Months Ended           Nine Months Ended
                                                 September 30,               September 30,
                                            ----------------------      ----------------------
(000's omitted, except per share data)        2004           2003         2004          2003
----------------------------------------------------------------------------------------------
<S>                                         <C>            <C>          <C>           <C>
Net interest income (FTE)                   $ 42,850       $35,548      $123,223      $106,077
Loan loss provision                            2,300         2,029         6,650         8,102
Non-interest income                           12,164         9,776        33,468        27,575
Gain (loss) on investment securities
 & debt extinguishment                             0             3           145           (42)
Operating expenses                            29,873        25,041        88,023        74,662
Acquisition expenses                              53           165         1,434           170
----------------------------------------------------------------------------------------------
Income before taxes (FTE)                     22,788        18,092        60,729        50,676
Fully tax-equivalent adjustment                3,793         3,009        10,755         8,952
Income taxes                                   4,761         3,354        12,444        10,014
----------------------------------------------------------------------------------------------
Net income                                  $ 14,234       $11,729      $ 37,530      $ 31,710
==============================================================================================

Diluted earnings per share                  $   0.45       $  0.44      $   1.23      $   1.19
Diluted earnings per share-operating        $   0.45       $  0.44      $   1.25      $   1.19
</TABLE>

Net Interest Income

Net interest income is the amount that interest and fees on earning assets
(loans and investments) exceeds the cost of funds, primarily interest paid to
the Company's depositors and interest on external borrowings. Net interest
margin is the difference between the gross yield on earning assets and the cost
of interest-bearing funds as a percentage of earning assets.

As shown in Table 3, net interest income (with non-taxable income converted to a
fully tax-equivalent basis) for third quarter 2004 was $42.9 million, up $7.3
million or 21% from the same period last year. An $869 million increase in
average earning-assets more than offset a $751 million increase in
interest-bearing liabilities and a 28 basis point decrease in the net interest
margin. As reflected in Table 4, the volume changes mentioned above drove net
interest income to rise $9.6 million, while the lower net interest margin had a
$2.3 million negative impact on net interest income. September 2004 YTD net
interest income of $123.2 million was up $17.1 million or 16% from the
year-earlier period. A $656 million increase in average earning-asset levels had
a greater positive effect than a $554 million rise in interest-bearing
liabilities and a 22 basis point decline in the net interest margin.
Interest-bearing asset and liability


                                       16
<PAGE>

volume changes resulted in $22.3 million more net interest income, offset by a
lower net interest margin that had a negative $5.1 million impact.

Average loans increased $483 million for the quarter and $392 million for the
nine months ended September 30, 2004 in comparison to the same periods in 2003,
while average investments (book value basis) rose $386 million for the third
quarter and $264 million for the YTD period. The increases in average loans and
investments were the result of acquisitions, organic loan growth and security
purchases. Third quarter and September YTD average deposits were $398 million
and $317 million higher, respectively, than the same periods in the prior year.
These increases were principally due to the deposits added through the Peoples,
Grange and First Heritage acquisitions. External borrowings were increased to
fund organic loan growth and investment purchases over the last 12 months,
resulting in average borrowings that were up $448 million for the quarter and
$324 million for the first nine months of 2004 in comparison to the year-earlier
periods.

The 4.35% net interest margin in the third quarter dropped 28 basis points
versus the same quarter last year, and the September YTD margin of 4.50% was
down 22 basis points from the prior year. The declines in the net interest
margin were primarily attributable to lower interest rates over the last 12
months having a greater impact on earning-asset yields (quarter down 47 basis
points, YTD down 59 basis points), than on the cost of funds (quarter down 19
basis points, YTD down 37 basis points). The reduction of earning-asset yields
was mostly driven by declines in loan yields of 60 basis points for the quarter
and 73 basis points for the YTD period. Loan originations over much of the last
year were at rates that reflected the record-low rates prevalent in the market
at the time, particularly in the mortgage, home equity and auto financing
products. Investment portfolio yields were comparatively more stable (down 28
basis points for the quarter and 35 basis points YTD), and benefited from call
protection and security purchases that were concentrated in periods of higher
long-term rates. The decrease in the cost of funds was caused by deposit costs
dropping 22 basis points for the quarter and 34 basis points YTD, while external
borrowing rates declined 97 basis points for the quarter and 119 basis points
year-to-date. The deposit costs for both time periods were impacted by time
deposits rolling-over at lower rates and shifts in the deposit portfolio towards
demand deposits. The improvements in borrowing costs were primarily driven by a
shift in the mix of external funding from higher-rate, longer-term borrowings to
lower-rate, shorter-term debt. A portion of this change was attributable to the
prepayment of $25 million of longer-term Federal Home Loan Bank ("FHLB")
obligations in the fourth quarter of 2003, which were replaced with short-term
borrowings at much lower rates. In addition, a significant amount of
intermediate-term borrowings at comparable favorable rates were added in the
second quarter of 2004.

The Company's net interest margin for the first six months of 2004 was favorable
to peer companies, driven by a higher earning-asset yield, partially offset by a
slightly larger ratio of interest expense to average earning assets.


                                       17
<PAGE>

Tables 3 and 3A below set forth information relating to average interest-earning
assets and interest-bearing liabilities and their associated yields and rates
for the periods indicated. Interest income and yields are on a fully
tax-equivalent basis using a marginal income tax rate of 38.70% in 2004 and
38.94% in 2003. Average balances are computed by summing the daily ending
balances in a period and dividing by the number of days in that period. Loan
yields and amounts earned include loan fees. Average loan balances include
non-accrual loans.

                    Table 3: Quarterly Average Balance Sheet

<TABLE>
<CAPTION>
                                                                  Three Months Ended                      Three Months Ended
(000's omitted except yields and rates)                           September 30, 2004                      September 30, 2003
----------------------------------------------------------------------------------------------   ----------------------------------
                                                                                       Avg.                                  Avg.
                                                            Average                 Yield/Rate     Average               Yield/Rate
                                                            Balance      Interest      Paid        Balance    Interest      Paid
----------------------------------------------------------------------------------------------   ----------------------------------
<S>                                                       <C>           <C>            <C>       <C>           <C>           <C>
Interest-earning assets:
  Time deposits in other banks                            $      903    $     1        0.44%     $      318    $     1       1.25%
  Taxable investment securities (2)                        1,005,990     14,259        5.64%        764,613     11,443       5.94%
  Non-taxable investment securities (2)                      546,395      9,401        6.85%        402,105      7,215       7.12%
  Loans (net of unearned discount)(1)                      2,362,596     35,355        5.95%      1,879,858     31,026       6.55%
                                                          ---------------------                  ---------------------
     Total interest-earning assets                         3,915,884     59,016        6.00%      3,046,894     49,685       6.47%
Non-interest earning assets                                  482,376                                390,122
                                                          ----------                             ----------
     Total assets                                         $4,398,260                             $3,437,016
                                                          ==========                             ==========

Interest-bearing liabilities:
  Interest checking, savings and money market deposits    $1,169,332      1,627        0.55%       $996,872      1,511       0.60%
  Time deposits                                            1,193,700      6,995        2.33%      1,062,968      7,394       2.76%
  Short-term borrowings                                      512,074      2,150        1.67%        207,925        638       1.22%
  Long-term borrowings                                       439,423      5,394        4.88%        295,509      4,594       6.17%
                                                          ---------------------                  ---------------------
     Total interest-bearing liabilities                    3,314,529     16,166        1.94%      2,563,274     14,137       2.19%
Non-interest bearing liabilities:
  Demand deposits                                            577,949                                483,142
  Other liabilities                                           53,983                                 54,028
Shareholders' equity                                         451,799                                336,572
                                                          ----------                             ----------
     Total liabilities and shareholders' equity           $4,398,260                             $3,437,016
                                                          ==========                             ==========

Net interest earnings                                                   $42,850                                $35,548
                                                                        =======                                =======
Net interest spread                                                                    4.06%                                 4.28%
Net interest margin on interest-earning assets                                         4.35%                                 4.63%

Fully tax-equivalent adjustment on investments and loans                 $3,793                                $ 3,009
</TABLE>

(1)   The impact of interest not recognized on non-accrual loans was immaterial.

(2)   Averages for investment securities are based on historical cost basis and
      the yields do not give effect to changes in fair value that is reflected
      as a component of shareholders' equity and deferred taxes.


                                       18
<PAGE>

                  Table 3A: Year to Date Average Balance Sheet

<TABLE>
<CAPTION>
                                                                 Nine Months Ended                       Nine Months Ended
(000's omitted except yields and rates)                          September 30, 2004                      September 30, 2003
                                                         ------------------------------------   ------------------------------------
                                                                                      Avg.                                   Avg.
                                                          Average                  Yield/Rate    Average                  Yield/Rate
                                                          Balance      Interest       Paid       Balance      Interest       Paid
---------------------------------------------------------------------------------------------   ------------------------------------
<S>                                                      <C>           <C>            <C>       <C>           <C>            <C>
Interest-earning assets:
  Time deposits in other banks                           $      779    $      3       0.51%     $      253    $      2       1.06%
  Taxable investment securities (2)                         924,020      40,378       5.84%        760,743      35,678       6.27%
  Non-taxable investment securities (2)                     502,255      26,323       7.00%        402,037      21,682       7.21%
  Loans (net of unearned discount)(1)                     2,232,746     101,331       6.06%      1,841,049      93,556       6.79%
                                                         ----------------------                 ----------------------
     Total interest-earning assets                        3,659,800     168,035       6.13%      3,004,082     150,918       6.72%
Non-interest earning assets                                 469,624                                392,273
                                                         ----------                             ----------
     Total assets                                        $4,129,424                             $3,396,355
                                                         ==========                             ==========

Interest-bearing liabilities:
  Interest checking, savings and money market deposits   $1,115,642       4,684       0.56%       $989,410       5,245       0.71%
  Time deposits                                           1,188,254      21,094       2.37%      1,084,162      24,229       2.99%
  Short-term borrowings                                     428,640       4,547       1.42%        170,814       1,628       1.27%
  Long-term borrowings                                      362,366      14,487       5.34%        296,268      13,739       6.20%
                                                         ----------------------                 ----------------------
     Total interest-bearing liabilities                   3,094,902      44,812       1.93%      2,540,654      44,841       2.36%
Non-interest bearing liabilities:
  Demand deposits                                           549,933                                462,970
  Other liabilities                                          53,422                                 56,405
Shareholders' equity                                        431,167                                336,328
                                                         ----------                             ----------
     Total liabilities and shareholders' equity          $4,129,424                             $3,396,357
                                                         ==========                             ==========

Net interest earnings                                                  $123,223                               $106,077
                                                                       ========                               ========
Net interest spread                                                                   4.20%                                  4.36%
Net interest margin on interest-earning assets                                        4.50%                                  4.72%

Fully tax-equivalent adjustment                                         $10,755                                 $8,952
</TABLE>

(1)   The impact of interest not recognized on non-accrual loans was immaterial.

(2)   Averages for investment securities are based on historical cost basis and
      the yields do not give effect to changes in fair value that is reflected
      as a component of shareholders' equity and deferred taxes.


                                       19
<PAGE>

As discussed above and disclosed in Table 4 below, the year-over-change in
quarterly and YTD net interest income (fully tax-equivalent basis) may be
analyzed by segregating the volume and rate components of the changes in
interest income and interest expense for each underlying category.

                              Table 4: Rate/Volume

<TABLE>
<CAPTION>
                                                            ------------------------------       --------------------------------
                                                              3rd Quarter 2004 versus 3rd           Nine Months Ended September
                                                                    Quarter 2003                       30, 2004 versus 2003
                                                            ------------------------------       --------------------------------
                                                              Increase (Decrease) Due to            Increase (Decrease) Due to
                                                                    Change in (1)                         Change in (1)
                                                            ------------------------------       --------------------------------
                                                                                     Net                                    Net
(000's omitted)                                              Volume      Rate      Change         Volume      Rate        Change
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>        <C>         <C>           <C>        <C>          <C>
Interest earned on:
  Time deposits in other banks                              $     1    ($    1)    $     0       $     2    ($     1)    $      1
  Taxable investment securities                               3,449       (633)      2,816         7,261      (2,561)       4,700
  Non-taxable investment securities                           2,494       (308)      2,186         5,268        (627)       4,641
  Loans (net of unearned discount)                            7,422     (3,093)      4,329        18,488     (10,713)       7,775
Total interest-earning assets (2)                           $13,322    ($3,991)    $ 9,331       $30,908    ($13,791)    $ 17,117

Interest paid on:
  Interest checking, savings and money market deposits      $   247    ($  131)    $   116       $   616    ($ 1,177)    ($   561)
  Time deposits                                                 847     (1,246)       (399)        2,174      (5,309)      (3,135)
  Short-term borrowings                                       1,208        304       1,512         2,716         203        2,919
  Long-term borrowings                                        1,909     (1,109)        800         2,804      (2,056)         748
Total interest-bearing liabilities (2)                      $ 3,800    ($1,771)    $ 2,029       $ 8,819    ($ 8,848)    ($    29)

Net interest earnings (2)                                   $ 9,622    ($2,320)    $ 7,302       $22,267    ($ 5,121)    $ 17,146
</TABLE>

(1)   The change in interest due to both rate and volume has been allocated in
      proportion to the relationship of the absolute dollar amounts of change in
      each.

(2)   Changes due to volume and rate are computed from the respective changes in
      average balances and rates and are not a summation of the changes of the
      components.


                                       20
<PAGE>

Non-interest Income

The Company has three sources of non-interest income: banking services related
to loans, deposits and other core customer activities typically provided through
the branch network; financial services, comprised of retirement plan
administration and employee benefit trusts (Benefit Plans Administrative
Services or BPA), actuarial and employee benefit consulting services (Harbridge
Consulting Group or Harbridge), personal trust, investment and insurance
products (Community Investment Services, Inc. or CISI) and investment management
(Elias Asset Management or EAM); and periodic transactions, most often net gains
(losses) from the sale of investments and prepayment of term debt.

                          Table 5: Non-interest Income

<TABLE>
<CAPTION>
                                                              Three Months Ended            Nine Months Ended
                                                                 September 30,                September 30,
                                                            ---------------------        ----------------------
(000's omitted)                                               2004          2003           2004           2003
---------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>            <C>           <C>
Banking services:
  Electronic banking                                        $   758       $   812        $ 1,913       $  1,975
  Mortgage banking                                              191          (795)           452            162
  Deposit service charges                                     1,406         1,367          4,098          4,008
  Overdraft fees                                              3,957         3,479         11,091          9,780
  Credit life and disability insurance                        1,000           661          1,141            787
  Commissions and other                                         579           519          2,077          1,620
---------------------------------------------------------------------------------        ----------------------
     Total banking services                                   7,891         6,043         20,772         18,332
---------------------------------------------------------------------------------        ----------------------

Financial services:
  Retirement plan administration and trustee fees             1,441         1,166          4,307          3,469
  Actuarial and benefit plan consulting fees                    897           820          2,690            820
  Asset advisory and management fees                            461           526          1,553          1,404
  Investment and insurance product commissions                1,085           868          2,912          2,469
  Personal trust                                                389           353          1,234          1,081
---------------------------------------------------------------------------------        ----------------------
     Total financial services                                 4,273         3,733         12,696          9,243
---------------------------------------------------------------------------------        ----------------------

Sub-total                                                    12,164         9,776         33,468         27,575
Gain (loss) on investment securities & debt prepayment            0             3            145            (42)
---------------------------------------------------------------------------------        ----------------------
     Total non-interest income                              $12,164       $ 9,779        $33,613       $ 27,533
=================================================================================        ======================

Non-interest income/operating income (FTE)                     22.1%         21.6%          21.4%          20.6%
</TABLE>

As displayed in Table 5, non-interest income (excluding net securities gains and
debt prepayment costs) for the third quarter 2004 was $2.4 million (24%) higher
than third quarter 2003 and $5.9 million (21%) higher than the prior year YTD
period. On a quarterly and year-to-date basis, banking services increased $1.9
million (31%) and $2.4 million (13%), respectively, while financial services
increased $0.5 million (15%) and $3.5 million (37%), respectively.

The quarterly and year-to-date increases in banking services were primarily the
result of a $0.3 million increase in the annual dividend received from the New
York Bankers Association, a $0.8 million impairment loss recognized in the third
quarter of 2004 on mortgage loans commitments which were reclassified from
held-for-sale to portfolio loans, and growth in deposit fees and commissions
mainly caused by the three whole bank acquisitions over the last year.

The majority of the increase in financial services income for the third quarter
of 2004 was driven by BPA and CISI, while Harbridge also impacted the results
for the nine months ended September 30, 2004. BPA generated revenue growth of
$0.3 million (24%) for the quarter and $0.8 million (24%) for first nine months
of 2004 driven by continued strong new business development. CISI had quarterly
and year-to-date revenue growth of $0.2 million (25%) and $0.4 million (18%),
respectively, as it has been positively impacted by improving market conditions.
In addition, CISI has obtained a large number of higher net-worth investors
caused by recent retirees rolling over their 401k plans and/or receiving
inheritances. The growth in Harbridge's revenue for the nine months ended
September 30, 2004 was due to their acquisition on July 31, 2003, resulting in
the inclusion of nine months of revenue in 2004 versus two months in 2003.

The quarterly and year-to-date increase in the ratio of non-interest income to
operating income (FTE basis, excluding net security gains and debt prepayment
costs) resulted from the growth in non-interest income outpacing the growth in
net interest income.


                                       21
<PAGE>

Operating Expenses

The following table sets forth the quarterly and year-to-date components of
operating expenses for the current and prior year, as well as the efficiency
ratio (defined below), a standard measure of overhead utilization used in the
banking industry.

                           Table 6: Operating Expenses

<TABLE>
<CAPTION>
                                         Three Months Ended          Nine Months Ended
                                            September 30,              September 30,
                                       ---------------------       ---------------------
(000's omitted)                          2004          2003          2004          2003
------------------------------------------------------------       ---------------------
<S>                                    <C>           <C>           <C>           <C>
Salaries and employee benefits         $15,638       $13,225       $46,197       $38,243
Occupancy                                2,570         2,255         7,700         7,004
Equipment and furniture                  2,143         1,885         6,445         5,766
Legal and professional fees              1,003           672         2,970         2,250
Data processing                          1,973         1,647         5,777         5,006
Amortization of intangible assets        2,003         1,269         5,401         3,801
Office supplies                            613           455         1,711         1,507
Foreclosed property                        178           155           621           313
Other                                    3,752         3,478        11,201        10,772
------------------------------------------------------------       ---------------------
  Total recurring expenses              29,873        25,041        88,023        74,662
Acquisition expenses                        53           165         1,434           170
------------------------------------------------------------       ---------------------
  Total operating expenses             $29,926       $25,206       $89,457       $74,832
============================================================       =====================

Operating expenses/average assets         2.70%         2.89%         2.85%         2.94%
Efficiency ratio                          50.7%         52.4%         52.7%         53.0%
</TABLE>

The third quarter and the year-to-date operating expenses for 2004 were $4.7
million (19%) and $14.6 million (20%) higher than the expenses in the same
periods of 2003. The increases for both periods were primarily attributable to
the incremental recurring operating expenses associated with the four
acquisitions completed during the last year. More than fifty percent of the
increase for the quarter and year-to-date periods relates to higher personnel
costs that were impacted by the acquisitions, merit increases, hiring activity
and higher benefit costs. The increase in legal and professional fees over the
prior year was caused, in most part, by the additional responsibilities
associated with complying with new governance and regulatory requirements. The
2004 acquisition expenses include $0.9 million of deferred compensation costs
that were recorded in first quarter 2004 but should have been recognized in 1996
by a bank that was acquired by First Liberty Bank & Trust, prior to its
acquisition by the Company in 2001.

The Company's efficiency ratio (recurring operating expenses excluding
intangible amortization divided by the sum of net interest income (FTE) and
recurring non-interest income) improved 1.7 percentage points for the quarter
and 0.3 percentage points on a year-to-date basis when comparing to the same
periods of the prior year. Recurring operating income grew at a faster rate than
core operating expenses. Organic income expansion generated principally through
loan growth, investment leverage and increased revenue from the financial
services businesses resulted in higher margins due to the significant proportion
of fixed costs inherent in the Company's expense structure.

Income Taxes

The September YTD effective income tax rate was 24.9% for 2004 and 24.0% in
2003. The quarterly effective rate of 25.1% was 2.9 percentage points above the
22.2% rate recorded in third quarter of 2003. As in prior periods, the
difference between the Company's effective income tax rate and its statutory
rate for the quarter and year-to-date is due primarily to interest generated
from tax-exempt securities.


                                       22
<PAGE>

Investments

As reflected in Table 7 below, the carrying value of investments increased $275
million from year-end 2003 and $312 million from September 30, 2003. The growth
in the investment portfolio for both time periods was driven by the leveraging
strategy that began in the third quarter of 2003 and ended during the second
quarter of 2004. It was also impacted, to a lesser degree, by the investments
added through the three bank acquisitions over the last twelve months. The
overall mix of securities within the portfolio remained relatively consistent,
with a slight increase towards U.S. treasury securities and agencies. The change
in the carrying value of investments is impacted by the amount of net unrealized
gains in the portfolio at a point in time. The net unrealized gains increased by
$3.1 million since December 31, 2003 but decreased $2.8 million since September
30, 2003, indicative of the interest rate movements during the respective time
periods and the changing composition of the portfolio.

                              Table 7: Investments

<TABLE>
<CAPTION>
                                                         September 30, 2004        December 31, 2003         September 30, 2003
                                                      -----------------------   -----------------------   -----------------------
                                                       Amortized                Amortized                 Amortized
                                                       Cost/Book     Market     Cost/Book      Market     Cost/Book      Market
(000's omitted)                                          Value        Value       Value         Value       Value        Value
-----------------------------------------------------------------------------   -----------------------   -----------------------
<S>                                                   <C>          <C>          <C>          <C>          <C>          <C>
Held-to-Maturity Portfolio:
  U.S. Treasury securities and obligations of U.S.
    government corporations and agencies              $  127,526   $  126,333   $  127,635   $  125,003   $  127,671   $  128,593
  Obligations of state and political subdivisions          6,536        6,682        7,459        7,677        7,545        7,765
  Other securities                                         3,578        3,578        3,558        3,558        3,526        3,526
-----------------------------------------------------------------------------   -----------------------   -----------------------
     Total held-to-maturity portfolio                    137,640      136,593      138,652      136,238      138,742      139,884
-----------------------------------------------------------------------------   -----------------------   -----------------------

Available-for-Sale Portfolio:
  U.S. Treasury securities and obligations of U.S.
    government corporations and agencies                 632,113      656,282      456,913      479,454      425,025      455,428
  Obligations of state and political subdivisions        546,084      576,304      443,930      470,210      401,495      423,484
  Corporate securities                                    42,108       45,346       27,712       30,251       27,608       30,564
  Collateralized mortgage obligations (CMO's)             75,850       77,598       89,566       93,552      117,363      122,846
  Mortgage-backed securities                              54,384       57,000       76,628       80,177       85,115       89,107
-----------------------------------------------------------------------------   -----------------------   -----------------------
    Sub-total                                          1,350,539    1,412,530    1,094,749    1,153,644    1,056,606    1,121,429
  Equity securities                                       44,942       44,942       29,185       29,185       26,858       26,858
  Federal Reserve Bank common stock                        9,856        9,856        8,053        8,053        5,656        5,656
-----------------------------------------------------------------------------   -----------------------   -----------------------
    Total available-for-sale portfolio                 1,405,337    1,467,328    1,131,987    1,190,882    1,089,120    1,153,943
Net unrealized gain on available-for-sale portfolio       61,991            0       58,895            0       64,823            0
-----------------------------------------------------------------------------   -----------------------   -----------------------
     Total carrying value                             $1,604,968   $1,603,921   $1,329,534   $1,327,120   $1,292,685   $1,293,827
=============================================================================   =======================   =======================
</TABLE>

Loans

As shown in Table 8, loans ended the third quarter at $2.4 billion, up $245
million (11.5%) year-to-date and $449 million (23%) higher than one-year
earlier. Most of the YTD and year-over-year increases in loan balances were
attributable to acquisitions, which added $206 million to the loan portfolio in
2004 and $378 million over the last 12 months. Excluding the impact of
acquisitions, total loans grew $39 million or 1.8% in the first nine months of
2004 and $72 million or 3.7% over the past year. All of the organic loan growth
for both periods was produced in the consumer mortgage and installment lines of
business, with slight declines experienced in business lending. The organic loan
growth for the nine and 12-month intervals was generated in the New York
markets, with slight declines in Pennsylvania. Over the last year the mix of
loans has become more weighted towards consumer mortgages because of the strong
growth in that portfolio, and business lending due to the high proportion of
commercial loans in First Heritage's portfolio.

                                 Table 8: Loans

<TABLE>
<CAPTION>
(000's omitted)            September 30, 2004        December 31, 2003        September 30, 2003
---------------------------------------------       -------------------       -------------------
<S>                       <C>              <C>      <C>              <C>      <C>              <C>
Consumer mortgage         $  793,120       33%      $  739,593       35%      $  606,312       32%
Business lending             847,844       36%         689,436       32%         630,886       33%
Consumer installment         732,787       31%         699,480       33%         687,055       35%
---------------------------------------------       -------------------       -------------------
  Total loans             $2,373,751      100%      $2,128,509      100%      $1,924,253      100%
=============================================       ===================       ===================
</TABLE>


                                       23
<PAGE>

Total consumer mortgages increased $54 million in the first nine months of 2004
and $187 million year-over year. Excluding the impact of acquisitions, consumer
mortgages were up $33 million (4.4%) over the last three quarters and $77
million (12.6%) over the last year. Volumes have slowed in the past nine months
as the record levels of refinancing activity that were driven by 40-year low
mortgage rates in 2003 have diminished in a rising interest rate environment.
The growth for both the nine and 12-month time frames was derived principally
from activity in the New York markets.

Business loans rose $158 million over the latest nine months and were up $217
million from one year ago. All of the growth came from the loans acquired in the
First Heritage (May 2004) and Grange (November 2003) transactions. Excluding the
loans acquired from First Heritage and Grange (for the twelve month period
only), business lending was down $12 million or 1.7% from December 2003's level
and declined $21 million or 3.3% over the last 12 months. The New York markets
were slightly higher during the nine-month time period and was flat in the
12-month time frame, while the Pennsylvania markets experienced slight declines
over both periods.

Consumer installment loans, both those originated directly (such as personal
loans and home equity loans and lines of credit), and indirectly (originated
predominantly in automobile, marine and recreational vehicle dealerships), rose
$33 million (4.8%) in the last nine months and $46 million (6.7%) on a
year-over-year basis. Excluding acquisitions, consumer installment loans
increased $17 million (2.5%) in the first nine months of 2004, and $16 million
(2.4%) from one year ago. Historically low interest rates, aggressive dealer and
manufacturer incentives on new vehicles, and very competitive pricing on used
vehicles have existed in these product types for more than a year. Consumer
installment loans increased in the New York markets during the last nine and
12-month time frames, while the Pennsylvania markets were flat.

Asset Quality

Table 9 below exhibits the major components of non-performing loans and assets
and key asset quality metrics for the periods ending September 30, 2004 and 2003
and December 31, 2003.

                         Table 9: Non-performing Assets

<TABLE>
<CAPTION>
                                                                September 30,   December 31,    September 30,
(000's omitted)                                                     2004            2003            2003
-----------------------------------------------------------------------------   ------------    -------------
<S>                                                                <C>             <C>                <C>
Non-accrual loans                                                  $13,511           $11,940          $10,518
Accruing loans 90+ days delinquent                                   1,808             1,307            3,018
Restructured loans                                                     806                28               29
-------------------------------------------------------------------------------------------------------------
     Total non-performing loans                                     16,125          13,275             13,565
Other real estate                                                      734           1,077                812
-------------------------------------------------------------------------------------------------------------
     Total non-performing assets                                   $16,859         $14,352         $14,377
=============================================================================================================

Allowance for loan losses to total loans                              1.37%           1.37%           1.41%
Allowance for loan losses to non-performing loans                      202%            219%            200%
Non-performing loans to total loans                                   0.68%           0.62%           0.70%
Non-performing assets to total loans and other real estate            0.71%           0.67%           0.75%
Delinquent loans (30 days old to non-accruing) to total loans         1.47%           1.77%           1.64%
Net charge-offs to average loans outstanding (quarterly)              0.29%           0.54%           0.53%
Loan loss provision to net charge-offs (quarterly)                     133%            113%             80%
</TABLE>

As displayed in Table 9, non-performing assets at September 30, 2004 were $16.9
million, an increase of $2.5 million versus year-end 2003 and the end of third
quarter 2003. The changes over the last nine and 12-month periods were due
primarily to an increase in commercial non-accrual levels and one restructured
commercial relationship. A small portion of the increase was related to acquired
loans. Non-performing loans were 0.68% of total loans outstanding at the end of
the third quarter versus 0.62% at year-end 2003 and 0.70% at September 30, 2003.
The ratio of non-performing assets to total loans and other real estate remained
below 0.75% for the fourth consecutive quarter. The allowance for loan loss to
non-performing loans ratio, a general measure of coverage adequacy, was 202% at
the end of the third quarter, compared to coverage ratios of 219% at year-end
2003 and 200% at September 30, 2003.

Delinquent loans (30 days through non-accruing and restructured loans) as a
percent of total loans was 1.47% at the end of the third quarter, its lowest
level since first quarter 2001. This ratio improved 30 basis points in
comparison to year-end 2003 and 17 basis points versus September 30, 2003. The
quarterly ratio of loan loss provision to net charge-offs was 133% for the third
quarter of 2004, compared to 80% and 113% for the third and fourth quarters of
2003, respectively.


                                       24
<PAGE>

                   Table 10: Allowance for Loan Loss Activity

<TABLE>
<CAPTION>
                                                        Three Months Ended          Nine Months Ended
                                                          September 30,                September 30,
                                                      ---------------------       ---------------------
(000's omitted)                                         2004          2003          2004          2003
---------------------------------------------------------------------------       ---------------------
<S>                                                   <C>           <C>           <C>           <C>
Allowance for loan losses at beginning of period      $32,040       $27,417       $29,095       $26,331
Charge-offs:
  Business lending                                        504         1,269         2,236         3,971
  Consumer mortgage                                        95            53           225           140
  Consumer installment                                  1,842         2,010         5,491         5,452
---------------------------------------------------------------------------       ---------------------
     Total charge-offs                                  2,441         3,332         7,952         9,563
Recoveries:
  Business lending                                         89           179           668           301
  Consumer mortgage                                        13            34            35            42
  Consumer installment                                    608           587         1,756         1,701
---------------------------------------------------------------------------       ---------------------
     Total recoveries                                     710           800         2,459         2,044
---------------------------------------------------------------------------       ---------------------
Net charge-offs                                         1,731         2,532         5,493         7,519
Provision for loan losses                               2,300         2,029         6,650         8,102
Allowance on acquired loans                                 0           203         2,357           203
---------------------------------------------------------------------------       ---------------------
Allowance for loan losses at end of period            $32,609       $27,117       $32,609       $27,117
===========================================================================       =====================

Net charge-offs to average loans outstanding:
  Business lending                                       0.19%         0.69%         0.27%         0.78%
  Consumer mortgage                                      0.04%         0.01%         0.03%         0.02%
  Consumer installment                                   0.68%         0.83%         0.71%         0.75%
  Total loans                                            0.29%         0.53%         0.33%         0.55%
</TABLE>

As displayed in Table 10, net charge-offs during the third quarter were $1.7
million, $0.8 million less than the equivalent 2003 period, driven by
significant declines in the charge-offs of the business lending portfolio. This
decrease occurred despite a $483 million increase in average loan balances, and
resulted in a 24 basis point drop in the net charge-off ratio (net charge-offs
as a percentage of average loans outstanding) to 0.29%. On a year-to-date basis
net charge-offs were down $2.0 million versus the prior year period, while
average loans were up $392 million for the same period, resulting in a 22 basis
point decline in the YTD net charge-off ratio to 0.33%. Lower business loan net
charge-offs were again the main contributor to this substantial improvement,
reflecting stabilizing economic conditions and the effectiveness of increased
credit risk management resources. The increased proportion of comparatively
low-risk consumer mortgages in the loan portfolio (33% of total average loans as
of September 30, 2004 versus 32% one year earlier) also helped reduce the
overall level of charge-offs in relation to total average loan balances.

A required loan loss allowance of $32.6 million was determined as of September
30, 2004, resulting in a $2.3 million loan loss provision for the quarter
compared to $2.0 million one year earlier. The third quarter loan loss provision
was $0.6 million higher than net charge-offs mainly due to the additional
allowance needed to cover organic loan growth in the quarter, the downgrade of
risk ratings on certain business loans, and a slight increase in the historical
loss factors for installment loans. The loan loss provision for the first nine
months of 2004 of $6.7 million was down $1.5 million or 18% versus the prior
year, driven by the overall improvement in asset quality. The allowance for loan
losses rose $5.5 million or 20% over the last 12 months, versus a 23% increase
in loans outstanding. Consequently, the ratio of allowance for loan loss to
loans outstanding declined four basis points to 1.37%. The reduction in this
ratio reflects a higher proportion of high-credit quality consumer mortgages in
the loan portfolio and improving trends in net charge-off, non-performing and
delinquency ratios.

Deposits

As shown in Table 11, average deposits of $2.9 billion in the third quarter were
up $294 million compared to fourth quarter 2003 and increased $398 million
versus the same quarter of last year. This increase was the result of deposits
obtained through acquisitions. The deposit mix has shifted towards demand
deposits and liquid interest-bearing deposits (interest checking and savings
accounts) with 49% of total deposits in these accounts in the third quarter 2004
versus 47% in the third and fourth quarters of 2003. This shift in mix, combined
with CDs being rolled over at lower interest rates helped reduce the third
quarter cost of deposits.


                                       25
<PAGE>

Excluding the impact of acquisitions, average IPC (individuals, partnerships and
corporations) deposits in the current quarter decreased 1.9% from fourth quarter
2004's level and 2.5% from one year ago. This mostly reflects the relative
attractiveness of alternative funding sources over the last year. Excluding
acquired deposits, average third quarter public funds were up 2.5% from third
quarter 2003 and relatively flat compared to the fourth quarter of 2003.

                           Table 11: Average Deposits

                                           Three Months Ended
                               ---------------------------------------------
                               September 30,   December 31,    September 30,
(000's omitted)                    2004            2003            2003
----------------------------------------------------------------------------
Demand deposits                   $  577,949     $  505,015       $  483,142
Interest checking deposits           302,757        283,752          274,803
Savings deposits                     555,015        448,064          431,414
Money market deposits                311,560        300,558          290,655
Time deposits                      1,193,700      1,109,350        1,062,968
----------------------------------------------------------------------------
  Total deposits                  $2,940,981     $2,646,739       $2,542,982
============================================================================

IPC deposits                      $2,774,231     $2,485,165       $2,388,529
Public fund deposits                 166,750        161,574          154,453
                                  ----------     ----------       ----------
  Total deposits                  $2,940,981     $2,646,739       $2,542,982
                                  ==========     ==========       ==========

Borrowings

At the end of the third quarter, borrowings of $972 million increased $304
million from December 31, 2003 and were up $358 million from the third quarter
of 2003. The increases over both the nine and 12-month periods were dictated by
organic loan growth, investment security purchases and organic deposit declines.
Short-term borrowings increased $135 million and $214 million over the last nine
and 12 months, while long-term borrowings were up $169 million and $144 million
over the same time periods. A higher proportion of short-term borrowings has
been utilized in comparison to one year ago due to the amount of longer-term,
core deposits added through acquisitions, to reduce the Company's sensitivity to
falling interest rates and to provide more flexibility with regard to altering
future debt levels. The amount of long-term borrowings increased in the last
nine months due to the addition of $118 million of eighteen-month FHLB
borrowings that were used to fund securities purchases. These borrowings carry
relatively short maturities and help provide funding cost stability for a period
of time that is complementary to our asset/liability profile.

Shareholders' Equity

Total shareholders' equity increased $62.4 million since December 31, 2003 and
equaled $467 million at September 30, 2004. This increase consisted of $54.7
million of common stock and options issued in the First Heritage acquisition,
net income of $37.5 million, $4.8 million of common stock issued under the
employee stock plan, and a $2.1 million increase in the after-tax market value
adjustment on available-for-sale investments, offset by treasury stock purchases
of $21.7 million and dividends declared of $15.0 million.

The Company's Tier I leverage ratio, a primary measure of regulatory capital for
which 5% is the requirement to be "well-capitalized," was 6.72% at the end of
the third quarter, down 54 basis points from year-end 2003 and 68 basis points
lower than its level one year ago. The tangible equity-to-assets ratio was 5.68%
at September 30, 2004 a decline of two basis points versus year-end 2003 and 20
basis points lower than it was at the end of September 2003. The declines in
these ratios were primarily caused by treasury share purchases made over the
last 12 months.

During the third quarter 2004 the Company completed its purchase of common
shares under its previously announced 1.4 million-share repurchase program with
an aggregate cost of $30.2 million and average price per share of $21.57. In
addition, the Company's Board of Directors declared a 12.5% increase in the
quarterly cash dividend on its common stock to $0.18 per share. As a result of
the increase in the per share dividend amount and the overall increase in the
common shares outstanding, the dividend payout ratio (dividends declared divided
by net income) for the first nine months of 2004 was 40%, up 3.0 percentage
points from one year ago.


                                       26
<PAGE>

Liquidity

Management of the Company's liquidity is critical due to the potential for
unexpected fluctuations in deposits and loans. Adequate sources of both on and
off-balance sheet funding are in place to effectively respond to such unexpected
fluctuations.

The Bank's primary approach to measuring liquidity is known as the Basic
Surplus/Deficit model. It is used to calculate liquidity over two time periods:
first, the amount of cash that could be made available within 30 days
(calculated as liquid assets less short-term liabilities); and second, a
projection of subsequent cash availability over an additional 60 days. The
minimum policy level of liquidity under the Basic Surplus/Deficit approach is
7.5% of total assets for both the 30 and 90-day time horizons. As of September
30, 2004, this ratio for the 30 and 90-day time period was 15.1% and 14.7%,
respectively, excluding the Company's capacity to borrow additional funds from
the Federal Home Loan Bank.

To measure longer-term liquidity, a baseline projection of loan and deposit
growth for five years is made to reflect how current liquidity levels could
change over time. This five-year measure reflects adequate liquidity to fund
loan and other asset growth over the next five years.

New Accounting Pronouncements

See New Accounting Pronouncement section of Note C to the consolidated financial
statements.

Forward-Looking Statements

This document contains comments or information that constitute forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995), which involve significant risks and uncertainties. Actual results may
differ materially from the results discussed in the forward-looking statements.
Moreover, the Company's plans, objectives and intentions are subject to change
based on various factors (some of which are beyond the Company's control).
Factors that could cause actual results to differ from those discussed in the
forward-looking statements include: (1) risks related to credit quality,
interest rate sensitivity and liquidity; (2) the strength of the U.S. economy in
general and the strength of the local economies where the Company conducts its
business; (3) the effect of, and changes in, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal
Reserve System; (4) inflation, interest rate, market and monetary fluctuations;
(5) the timely development of new products and services and customer perception
of the overall value thereof (including features, pricing and quality) compared
to competing products and services; (6) changes in consumer spending, borrowing
and savings habits; (7) technological changes; (8) any acquisitions or mergers
that might be considered or consummated by the Company and the costs and factors
associated therewith; (9) the ability to maintain and increase market share and
control expenses; (10) the effect of changes in laws and regulations (including
laws and regulations concerning taxes, banking, securities and insurance) and
accounting principles generally accepted in the United States; (11) changes in
the Company's organization, compensation and benefit plans and in the
availability of, and compensation levels for, employees in its geographic
markets; (12) the costs and effects of litigation and of any adverse outcome in
such litigation; (13) other risk factors outlined in the Company's filings with
the Securities and Exchange Commission from time to time; and (14) the success
of the Company at managing the risks of the foregoing.

The foregoing list of important factors is not exclusive. Such forward-looking
statements speak only as of the date on which they are made and the Company does
not undertake any obligation to update any forward-looking statement, whether
written or oral, to reflect events or circumstances after the date on which such
statement is made. If the Company does update or correct one or more
forward-looking statements, investors and others should not conclude that the
Company would make additional updates or corrections with respect thereto or
with respect to other forward-looking statements.


                                       27
<PAGE>

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates, prices or credit risk. Credit risk associated with the
Company's loan portfolio has been previously discussed in the asset quality
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations. Management believes that the tax risk of the Company's
municipal investments associated with potential future changes in statutory,
judicial and regulatory actions is minimal. The Company has an insignificant
amount of credit risk in its investment portfolio because essentially all of the
fixed-income securities in the portfolio are AAA-rated (highest possible
rating). Therefore, almost all the market risk in the investment portfolio is
related to interest rates.

The ongoing monitoring and management of both interest rate risk and liquidity,
in the short and long term time horizons is an important component of the
Company's asset/liability management process, which is governed by limits
established in the policies reviewed and approved annually by the Board of
Directors. The Board of Directors delegates responsibility for carrying out the
policies to the Asset/Liability Committee (ALCO) which meets each month and is
made up of the Company's senior management as well as regional and
line-of-business managers who oversee specific earning asset classes and various
funding sources.

As the Company does not believe it is possible to reliably predict future
interest rate movements, it has maintained an appropriate process and set of
measurement tools which enable it to identify and quantify sources of interest
rate risk in varying rate environments. The primary tool used by the Company in
managing interest rate risk is income simulation.

While a wide variety of strategic balance sheet and treasury yield curve
scenarios are tested on an ongoing basis, the following reflects the Company's
one-year net interest income sensitivity based on:

o     Asset and liability levels using September 30, 2004 as a starting point.

o     There are assumed to be conservative levels of balance sheet growth-- low
      to mid single digit growth in loans, investments and deposits, augmented
      by necessary changes in borrowings and retained earnings, with no growth
      in other major components of the balance sheet.

o     The prime rate and federal funds rates are assumed to move up 200 basis
      points and down 100 basis points over a 12-month period while flattening
      the long end of the treasury curve to spreads over federal funds that are
      more consistent with historical norms. Deposit rates are assumed to move
      in a manner that reflects the historical relationship between deposit rate
      movement and changes in the federal funds rate, generally reflecting
      10%-75% of the movement of the federal funds rate.

o     Cash flows are based on contractual maturity, optionality and amortization
      schedules along with applicable prepayments derived from internal
      historical data and external sources.

                      Net Interest Income Sensitivity Model

                                          Calculated annualized
                                         increase (decrease) in
            Change in interest        projected net interest income
                  rates                   at September 30, 2004
         -----------------------------------------------------------
           + 200 basis points                   (3.1%)
           - 100 basis points                   (1.1%)

In the model, both the rising and falling rate environments reflect a reduction
in net interest income (NII) from a flat rate environment due to the assumed
flattening of the yield curve. The modeled NII in a falling rate environment is
initially more favorable than if rates were to rise due to a faster initial
reaction from core deposit pricing and short-term capital market borrowing
rates. Over a longer time period, however, the growth in NII improves in a
rising rate environment as a result of lower yielding earning assets running off
and being replaced at increased rates.

The analysis does not represent a Company forecast and should not be relied upon
as being indicative of expected operating results. These hypothetical estimates
are based upon numerous assumptions: the nature and timing of interest rate
levels (including yield curve shape), prepayments on loans and securities,
deposit decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cash flows, and other factors.
While the assumptions are developed based upon current economic and local market
conditions, the Company cannot make any assurances as to the predictive nature
of these assumptions, including how customer preferences or competitor
influences might change. Furthermore, the sensitivity analysis does not reflect
actions that ALCO might take in responding to or anticipating changes in
interest rates.


                                       28
<PAGE>

Item 4. Controls and Procedures

As of September 30, 2004, the Chief Executive Officer and Chief Financial
Officer of the Company evaluated the Company's disclosure controls and
procedures related to the recording, processing, summarization and reporting of
information in the Company's reports that it files with the Securities and
Exchange Commission (SEC). These disclosure controls and procedures have been
designed to ensure that (a) material information relating to the Company,
including its consolidated subsidiaries, is made known to the Company's
management, including their officers, by other employees of the Company and its
subsidiaries, and (b) this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
SEC's rules and forms. Based upon this evaluation, these officers concluded that
the design and effectiveness of the disclosure controls and procedures is
sufficient to accomplish their purpose.

There have been no significant changes in the Company's internal controls or
other factors that could significantly affect these controls during the quarter
ended September 30, 2004, including any corrective actions with regard to
significant deficiencies and material weaknesses.


                                       29
<PAGE>

Part II. Other Information

Item 1. Legal Proceedings.

The Company and its subsidiaries are subject in the normal course of business to
various pending and threatened legal proceedings in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate that the aggregate liability, if any, arising out of litigation
pending against the Company or its subsidiaries will have a material effect on
the Company's consolidated financial position or results of operations.

Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity
Securities.

(e) During the third quarter of 2004 the Company purchased 280,713 common shares
completing the previously announced 1.4 million-share repurchase program. The
aggregate cost of this program was $30.2 million and the average price per share
is $21.57. The repurchases were for general corporate purposes, including those
related to acquisition and stock plan activities. The following table shows
treasury stock purchases under this authorization during the first nine months
2004.

<TABLE>
<CAPTION>
                                                             Total Number        Number of Shares
                         Number of          Average Price      of Shares         Remaining to be
                     Shares Purchased         Per Share        Purchased            Purchased
------------------------------------------------------------------------------------------------
<S>                       <C>                   <C>             <C>                      <C>
January 2004                    0               $ 0.00            416,300                983,700
February 2004                   0                 0.00            416,300                983,700
March 2004                122,800                22.29            539,100                860,900
April 2004                 40,958                22.69            580,058                819,942
May 2004                  131,642                21.07            711,700                688,300
June 2004                 407,587                21.88          1,119,287                280,713
July 2004                  48,800                22.47          1,168,087                231,913
August 2004               231,913                22.65          1,400,000                      0
September 2004                  0                               1,400,000                      0
------------------------------------------------------------------------------------------------
  Total                   983,700               $22.07          1,400,000                      0
================================================================================================
</TABLE>

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Securities Holders.

There were no matters submitted to a vote of the shareholders during the quarter
ending September 30, 2004.

Item 5. Other Information.

Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits

Exhibit No.                           Description
-----------                           -----------

10.1              Employment Agreement, effective August 1, 2004, by and between
                  Community Bank System, Inc., Community Bank, N.A. and Brian D.
                  Donahue. * **

10.2              Employment Agreement, effective September 1, 2002, by and
                  between Community Bank System, Inc., Community Bank, N.A. and
                  Timothy J. Baker. * **

10.3              Employment Agreement, effective October 1, 2004, by and
                  between Community Bank System, Inc., Community Bank, N.A. and
                  J. David Clark. * **

10.4              Employment Agreement, effective September 1, 2002, by and
                  between Community Bank System, Inc., Community Bank, N.A. and
                  Joseph J. Lemchak. * **


                                       30
<PAGE>

31.1              Certification of Sanford A. Belden, President and Chief
                  Executive Officer of the Registrant, pursuant to Rule
                  13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act
                  of 1934, as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

31.2              Certification of Scott A. Kingsley, Treasurer, Chief Financial
                  Officer of the Registrant, pursuant to Rule 13a-15(e) or Rule
                  15d-15(e) under the Securities Exchange Act of 1934, as
                  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.

32.1              Certification of Sanford A. Belden, President and Chief
                  Executive Officer of the Registrant, pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

32.2              Certification of Scott A. Kingsley, Treasurer, Chief Financial
                  Officer of the Registrant, pursuant to 18 U.S.C. Section 1350,
                  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                  of 2002.

*     Filed herewith

**    Denotes management contract or compensatory plan or arrangement

(b)   Reports on Form 8-K:

o     Form 8-K related to quarterly earnings press release was filed on July 23,
      2004.


                                       31
<PAGE>

                                   SIGNATURES

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

                           Community Bank System, Inc.




Date: November 5, 2004                        /s/ Sanford A. Belden
                                              ---------------------
                                        Sanford A. Belden, President, Chief
                                        Executive Officer and Director




Date: November 5, 2004                       /s/ Scott A. Kingsley
                                              ---------------------
                                        Scott A. Kingsley, Treasurer and Chief
                                        Financial Officer


                                       32

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>d61135_ex10-1.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

                                                                    Exhibit 10.1

                              EMPLOYMENT AGREEMENT

            This sets forth the terms of the Employment Agreement made effective
as of August 1, 2004 between (i) COMMUNITY BANK SYSTEM, INC., a Delaware
corporation and registered bank holding company, and COMMUNITY BANK, N.A., a
national banking association, both having offices located in Dewitt, New York
(collectively, the "Employer"), and (ii) BRIAN D. DONAHUE, an individual
currently residing at Olean, New York ("Employee"). This Agreement is effective
as of August 1, 2004 and supersedes the Employment Agreement between the parties
dated September 1, 2002.

                                   WITNESSETH

            IN CONSIDERATION of the promises and mutual agreements and covenants
contained herein, and other good and valuable consideration, the parties agree
as follows:

            1. Employment.

                  (a) Term. Employer shall employ Employee, and Employee shall
serve, as Chief Banking Officer and Executive Vice President of Employer for a
term commencing on August 1, 2004 and ending on December 31, 2009 ("Period of
Employment"), subject to termination as provided in paragraph 3 hereof.

                  (b) Salary. During the period August 1, 2004 through December
31, 2004, Employer shall pay Employee base salary at the annual rate of
$200,000.00 ("Base Salary"). For calendar year 2005, Employer shall pay Employee
Base Salary at the annual rate of $230,000.00. Employee's Base Salary for
calendar years after 2005 shall be determined by the Board of Directors of
Employer ("Board"), or an authorized committee of the Board, in

<PAGE>

accordance with Employer's regular practice for reviewing and adjusting base
salary for executive employees. Employee's Base Salary is payable in accordance
with Employer's regular payroll practices for executive employees.

                  (c) Incentive Compensation. Employee shall be entitled to
annual incentive compensation opportunities pursuant to the terms of the
"Management Incentive Plan" (which term includes any successor plan or incentive
compensation arrangement) which has been approved by the Board to cover Employee
and other key personnel of Employer. Upon termination of Employee's employment
pursuant to subparagraph 3(a), 3(b), 3(c) or paragraph 6, Employee shall be
entitled to a pro rata portion (based on Employee's complete months of active
employment in the applicable year) of the annual incentive award that is payable
with respect to the year during which the termination occurs or, in the case of
a termination upon Employee's disability pursuant to subparagraph 3(c), the date
the Disability Period began.

                  (d) Until such time as Employee relocates his principal
residence to the Syracuse, New York area, which relocation shall occur by a date
to be agreed upon by the parties (but in no event shall such date be earlier
than January 1, 2009), Employee shall be entitled to perform his services for
Employer from offices in Dewitt, New York and Olean, New York. After such
mutually agreed-upon date, Employee shall perform his services for Employer from
an office in Dewitt, New York.

            2. Duties during the Period of Employment. Employee shall have full
responsibility, subject to the control of the Board and Employer's President and
Chief Executive Officer or authorized designee, for the supervision of all
aspects of Employer's banking business and operations, and the discharge of such
other duties and responsibilities to Employer as may from time to time be
reasonably assigned to Employee by the Board or Employer's President and


                                       2
<PAGE>

Chief Executive Officer. Employee shall report to the President and Chief
Executive Officer of Employer or the President and Chief Executive Officer's
designee. Employee shall devote Employee's best efforts to the affairs of
Employer, serve faithfully and to the best of Employee's ability and devote all
of Employee's working time and attention, knowledge, experience, energy and
skill to the business of Employer, except that Employee may affiliate with
professional associations, business and civic organizations. Employee shall
serve on the Board of Directors of, or as an officer of Employer's affiliates,
without additional compensation if requested to do so by the Board of Directors
of Employer. Employee shall receive only the compensation and other benefits
described in this Agreement for Employee's duties as a Director of Employer.

            3. Termination. Employee's employment by Employer shall be subject
to termination as follows:

                  (a) Expiration of the Term. This Agreement shall terminate
automatically at the expiration of the Period of Employment unless the parties
enter into a written agreement extending Employee's employment, except for the
continuing obligations of the parties as specified hereunder.

                  (b) Termination Upon Death. This Agreement shall terminate
upon Employee's death. In the event this Agreement is terminated as a result of
Employee's death, Employer shall continue payments of Employee's Base Salary for
a period of 90 days following Employee's death to the beneficiary designated by
Employee on the "Beneficiary Designation Form" attached to this Agreement as
Appendix A. Employee's beneficiary shall be free to dispose of any restricted
stock previously granted to Employee by Employer. Additionally, Employer shall
treat as immediately exercisable all unexpired stock options issued by Employer
and held by Employee that are not exercisable or that have not been exercised,
so as to permit the


                                       3
<PAGE>

Beneficiary to purchase the balance of Community Bank System, Inc. ("CBSI")
Stock not yet purchased pursuant to said options until the end of the full
exercise period provided in the original grant of the option right, determined
without regard to Employee's death or termination of employment.

                  (c) Termination Upon Disability. Employer may terminate this
Agreement upon Employee's disability. For the purpose of this Agreement,
Employee's inability to perform Employee's duties hereunder by reason of
physical or mental illness or injury for a period of 26 successive weeks, or
such longer waiting/elimination period provided pursuant to Employer's group
long-term disability policy (the "Disability Period") shall constitute
disability. The determination of disability shall be made by a majority vote of
a physician selected by Employer, a physician selected by Employee and a third
physician selected by the other two physicians. During the Disability Period,
Employee shall be entitled to 100% of Employee's Base Salary otherwise payable
during that period, reduced by any other benefits to which Employee may be
entitled for the Disability Period on account of such disability (including, but
not limited to, benefits provided under any disability insurance policy or
program, worker's compensation law, or any other benefit program or
arrangement). Thereafter, upon termination pursuant to this disability
provision, Employee shall be free to dispose of any restricted stock granted to
Employee. Additionally, Employer shall treat as immediately exercisable all
unexpired stock options issued by Employer and held by Employee that are not
exercisable or that have not been exercised, so as to permit the Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right, determined without regard to Employee's disability or termination
of employment.


                                       4
<PAGE>

                  (d) Termination for Cause. Employer may terminate Employee's
employment immediately for "cause" by written notice to Employee. For purposes
of this Agreement, a termination shall be for "cause" if the termination results
from any of the following events:

                        (i) Material breach of this Agreement;

                        (ii) Documented misconduct as an executive of Employer,
or any subsidiary or affiliate of Employer for which Employee is performing
services hereunder including, but not limited to, misappropriating any funds or
property of any such company, or attempting to obtain any personal profit (A)
from any transaction to which such company is a party or (B) from any
transaction with any third party in which Employee has an interest which is
adverse to the interest of any such company, unless, in either case, Employee
shall have first obtained the written consent of the Board;

                        (iii) Unreasonable neglect or refusal to perform the
duties assigned to Employee under or pursuant to this Agreement, unless cured
within 60 days following Employee's receipt of written notice to Employee of
such neglect or refusal;

                        (iv) Conviction of a crime involving moral turpitude;

                        (v) Adjudication as a bankrupt, which adjudication has
not been contested in good faith, unless bankruptcy is caused directly by
Employer's unexcused failure to perform its obligations under this Agreement;

                        (vi) Documented and material failure to follow the
reasonable, written instructions of the Board or the President and Chief
Executive Officer of Employer or authorized designee, provided that the
instructions do not require Employee to engage in unlawful conduct; or


                                       5
<PAGE>

                        (vii) Any material and documented violation of the rules
or regulations of the Office of the Comptroller of the Currency or of any other
regulatory agency.

            Notwithstanding any other term or provision of this Agreement to the
contrary, if Employee's employment is terminated for cause, Employee shall
forfeit all rights to payments and benefits otherwise provided pursuant to this
Agreement; provided, however, that Base Salary shall be paid through the date of
termination.

                  (e) Termination For Reasons Other Than Cause. In the event
Employer terminates Employee prior to December 31, 2009 for reasons other than
cause, Employee shall be entitled to a severance benefit equal to the greater of
(i) the sum of the annual Base Salary in effect at the time of termination and
the most recent payment to Employee under the Management Incentive Plan, payable
in equal biweekly installments over the 12-month period following Employee's
termination, or (ii) amounts of Base Salary and expected Management Incentive
Plan payments that otherwise would have been payable through the balance of the
unexpired term of this Agreement, payable in biweekly installments over the
12-month period following Employee's termination. In addition, Employer shall:
(iii) permit Employee to dispose of any restricted stock granted to Employee;
and (iv) treat as immediately exercisable all unexpired stock options held by
Employee that are not exercisable or that have not been exercised, so as to
permit Employee to purchase the balance of CBSI Stock not yet purchased pursuant
to said options until the end of the full exercise period provided in the
original grant of the option right determined without regard to Employee's
termination of employment.

                  (f) Expiration of Term Without Renewal. In the event that
Employee's employment ends on December 31, 2009 solely because Employer chooses
not to


                                       6
<PAGE>

renew or extend this Agreement beyond December 31, 2009 for reasons other than
cause, then Employee shall be entitled to a severance benefit equal to the sum
of (i) 175 percent of the annual Base Salary in effect at the time of
termination, and (ii) the most recent payment to Employee under the Management
Incentive Plan, such sum to be payable in equal biweekly installments over the
6-month period following Employee's termination of employment.

                  (g) Employer shall have the right of first refusal to purchase
from Employee, or from Employee's beneficiary or estate, shares of CBSI Stock
(but not outstanding options) acquired pursuant to the exercise of stock options
after the date of Employee's termination of employment for any reason, in the
event Employee, or Employee's beneficiary or estate, elects to dispose or
transfer such acquired shares. Any purchase made pursuant to this subparagraph
shall be made at a price per share equal to the closing price per share of CBSI
Stock (on the principal public market on which CBSI Stock is traded; currently
the New York Stock Exchange) on the trading day that immediately precedes the
date of purchase. The right of first refusal described in this subparagraph
shall expire ten years from the date of Employee's termination of employment.

            4. Fringe Benefits.

                  (a) Benefit Plans. During the Period of Employment, Employee
shall be eligible to participate in any employee pension benefit plans (as that
term is defined under Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended), Employer-paid group life insurance plans, medical
plans, dental plans, long-term disability plans, business travel insurance
programs and other fringe benefit programs maintained by Employer for the
benefit of its executive employees. Participation in any of Employer's benefit
plans and programs shall be based on, and subject to satisfaction of, the
eligibility requirements and other


                                       7
<PAGE>

conditions of such plans and programs. Employer may require Employee to submit
to an annual physical, to be performed by a physician of his own choosing.
Employee shall be reimbursed for related expenses not covered by Employer's
health insurance plan, or any other plan in which Employee is enrolled. Employee
shall not be eligible to participate in Employer's Severance Pay Plan maintained
for other employees not covered by employment agreements.

                  (b) Expenses. Upon submission to Employer of vouchers or other
required documentation, Employee shall be reimbursed for Employee's actual
out-of-pocket travel and other expenses reasonably incurred and paid by Employee
in connection with Employee's duties hereunder (including, but not limited to,
expenses incurred while performing duties outside the general geographic area of
Employee's principle residence). Reimbursable expenses must be submitted to the
President and Chief Executive Officer of Employer for review on a quarterly
basis.

                  (c) Other Benefits. During the Period of Employment, Employee
also shall be entitled to receive the following benefits:

                        (i) Paid vacation of four weeks during each calendar
year (with no carry over of unused vacation to a subsequent year) and any
holidays that may be provided to all employees of Employer in accordance with
Employer's holiday policy;

                        (ii) Reasonable sick leave;

                        (iii) Employer paid memberships for Employee at a golf
club and a social club, subject to the approval of the President and Chief
Executive Officer of Employer and subject to nondeductible tax treatment by
Employer or a reimbursement to Employee for taxes owed by Employee in connection
with such benefit;


                                       8
<PAGE>

                        (iv) Reimbursement of the purchase price of a cellular
telephone and all Employer-related business charges incurred in connection with
the use of such telephone; and

                        (v) The use of an Employer-owned or Employer-leased
automobile, the selection and replacement of which shall be subject to the
approval of Employer's President and Chief Executive Officer (or the President
and Chief Executive Officer's designee).

                  (d) Supplemental Retirement Benefits. The terms and conditions
for the payment of supplemental retirement benefits shall be set forth in a
separate written agreement between the parties.

            5. Stock Options. Employer shall cause the Compensation Committee of
the Board to review whether Employee should be granted options to purchase
shares of common stock of CBSI. Such review may be conducted pursuant to the
terms of the Community Bank System, Inc. 2004 Long-Term Incentive Compensation
Program, a successor plan, or independently, as the Compensation Committee shall
determine. Reviews shall be conducted no less frequently than annually.

            6. Change of Control.

                  (a) If Employee's employment with Employer (as an employee)
shall cease for any reason, including Employee's voluntary termination for "good
reason" (as defined in paragraph 6(e) below), but not including Employee's
termination for "cause" (as described in paragraph 3(d)) or Employee's voluntary
termination without "good reason," within 2 years following a "Change of
Control" that occurs during the Period of Employment, Employer shall:


                                       9
<PAGE>

                        (i) Retain the services of Employee, on an independent
contractor basis, as a consultant to Employer for a period of no less than 36
months at an annual consulting fee rate equal to the total of Employee's Base
Salary in effect at the time of Employee's termination plus an amount equal to
the Management Incentive paid to the Employee in the year prior to the "Change
of Control";

                        (ii) Provide Employee with fringe benefits, or the cash
equivalent of such benefits (equal to Employer's cost for such benefits),
identical to those described in paragraph 4(a) for the period during which Base
Salary is payable to Employee pursuant to (i) above. To the extent the benefits
provided to Employee in this paragraph 6(a)(ii) are deemed taxable benefits,
Employer shall reimburse Employee for taxes owed by Employee on the benefits and
tax reimbursement;

                        (iii) Treat as immediately exercisable all unexpired
stock options issued by Employer and held by Employee that are not otherwise
exercisable or that have not been exercised (so as to permit Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right, determined without regard to Employee's termination of
employment);

                        (iv) Permit Employee to dispose of any restricted stock
granted to Employee; and

                        (v) Pay to Employee the difference between 94% of the
market value of Employee's principle residence at the time of termination and
the proceeds of the sale of such home by Employee following his termination of
employment not later than twelve months following such termination, if Employee
elects to move outside of the general geographic area of


                                       10
<PAGE>

his principle residence at the time of termination to take other employment.
Employee must establish that Employee was unable, despite reasonable efforts, to
sell the home for a sum equal to the market value, and Employer reserves the
right to purchase the home for a sum equal to 94% of the established market
value. For the purposes of this subparagraph 6(a)(v), the market value of the
principle residence shall be established by averaging the values established by
two independent appraisals. If the two appraisals differ by more than 5%, a
third appraisal shall be secured and the value shall be established by averaging
the value of the three appraisals. Market value shall be the greater of (A)
market value determined by the appraisal and averaging process described above
as of the date of Employee's termination of employment, or (B) market value
determined by the appraisal and averaging process described above as of the date
the sale is consummated.

                  (b) Subject to Employer's right to make the single lump sum
payment described in paragraph 6(c) below, if any portion of the amounts paid
to, or value received by, Employee following a "Change of Control" (whether paid
or received pursuant to this paragraph 6 or otherwise) constitutes an "excess
parachute payment" within the meaning of Internal Revenue Code Section 280G,
then the parties shall negotiate a restructuring of payment dates and/or methods
(but not payment amounts) to minimize or eliminate the application of Internal
Revenue Code Section 280G. If an agreement to restructure payments cannot be
reached within 60 days of the date the first payment is due under this paragraph
6, then payments shall be made without restructuring. Subject to paragraph 6(c),
Employee shall be responsible for all taxes that are payable by Employee as a
result of Employee's receipt of an "excess parachute payment."

                  (c) Notwithstanding the foregoing of this paragraph 6, the
Board may elect, in its sole discretion, to pay all benefits due Employee
pursuant to this paragraph 6 in a


                                       11
<PAGE>

single lump sum payment following a Change of Control and Employee's termination
of employment with Employer. Subject to the limitation described in paragraph
6(b), in the event a single lump sum payment is made pursuant to the foregoing
sentence, the amount of the payment shall be increased to the extent necessary
to hold Employee harmless from any marginal income and employment tax liability
created by the single lump sum payment (i.e., the income and employment tax
liability that exceeds the income and employment tax liability that would have
been incurred by Employee if payments were made in the manner and during the
periods otherwise described in this paragraph 6).

                  (d) For purposes of this paragraph 6, a "Change of Control"
shall be deemed to have occurred if:

                        (i) any "person," including a "group" as determined in
accordance with the Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of Employer representing 30% or more of the combined voting power of
Employer's then outstanding securities;

                        (ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination (a "Transaction"),
the persons who were directors of Employer before the Transaction shall cease to
constitute a majority of the Board or the board of directors of any successor to
Employer;

                        (iii) Employer is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation shall
then be owned in the aggregate by the former stockholders of Employer, other
than (A) affiliates within the meaning of the Exchange Act, or (B) any party to
the merger or consolidation;


                                       12
<PAGE>

                        (iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of Employer representing 30% or more
of the combined voting power of Employer's then outstanding voting securities;
or

                        (v) Employer transfers substantially all of its assets
to another corporation which is not controlled by Employer.

                  (e) For purposes of this paragraph 6, "good reason" shall mean
action taken by Employer that results in:

                        (i) An involuntary and material adverse change in
Employee's title, duties, responsibilities, or total remuneration;

                        (ii) An involuntary and material relocation of the
office from which Employee is expected to perform his duties; or

                        (iii) An involuntary and material adverse change in the
general working conditions (including travel requirements and clerical support)
applicable to Employee.

            By way of example, and not limitation, the following changes, if
involuntary, would constitute "good reason" for purposes of this Agreement: (A)
reducing or eliminating Employee's authority and responsibility to implement the
duties of Chief Banking Officer as described in paragraph 2; and (B) requiring
Employee to perform his services for Employer at an office located outside of
Onondaga County and Cattaraugus County, New York prior to Employee's relocation
to the Syracuse, New York area pursuant to subparagraph 1(d) or outside of
Onondaga County, New York after such relocation.

            7. Withholding. Employer shall deduct and withhold from compensation
and benefits provided under this Agreement all necessary income and employment
taxes and any other similar sums required by law to be withheld.


                                       13
<PAGE>

            8. Covenants.

                  (a) Confidentiality. Employee shall not, without the prior
written consent of Employer, disclose or use in any way, either during his
employment by Employer or thereafter, except as required in the course of his
employment by Employer, any confidential business or technical information or
trade secret acquired in the course of Employee's employment by Employer.
Employee acknowledges and agrees that it would be difficult to fully compensate
Employer for damages resulting from such disclosure or use and, accordingly,
that Employer shall be entitled to temporary preliminary injunctions and
permanent injunctions to enforce this provision. This provision with respect to
injunctive relief shall not, however, diminish Employer's right to claim and
recover damages. Employee covenants to use his best efforts to prevent the
publication or disclosure of any trade secret or any confidential information
concerning the business or finances of Employer or Employer's affiliates, or any
of its or their dealings, transactions or affairs which may come to Employee's
knowledge in the pursuance of his duties or employment.

                  (b) No Competition. Employee's employment is subject to the
condition that during the term of his employment hereunder and for the period
specified in paragraph 8(c) below, Employee shall not, directly or indirectly,
own, manage, operate, control or participate in the ownership, management,
operation or control of, or be connected as an officer, employee, partner,
director, individual proprietor, lender, consultant or otherwise with, or have
any financial interest in, or aid or assist anyone else in the conduct of, any
entity or business (a "Competitive Operation") which competes in the banking
industry or with any other business conducted by Employer or by any group,
affiliate, division or subsidiary of Employer, in the states of New York and
Pennsylvania. Employee shall keep Employer fully advised as to any


                                       14
<PAGE>

activity, interest, or investment Employee may have in any way related to the
banking industry. It is understood and agreed that, for the purposes of the
foregoing provisions of this paragraph, (i) no business shall be deemed to be a
business conducted by Employer or any group, division, affiliate or subsidiary
of Employer unless 5% or more of Employer's consolidated gross sales or
operating revenues is derived from, or 5% or more of Employer's consolidated
assets are devoted to, such business; (ii) no business conducted by any entity
by which Employee is employed or in which he is interested or with which he is
connected or associated shall be deemed competitive with any business conducted
by Employer or any group, division or subsidiary of Employer unless it is one
from which 2% or more of its consolidated gross sales or operating revenues is
derived, or to which 2% or more of its consolidated assets are devoted; and
(iii) no business which is conducted by Employer at the Date of Termination and
which subsequently is sold by Employer shall, after such sale, be deemed to be a
Competitive Operation within the meaning of this paragraph. Ownership of not
more than 5% of the voting stock of any publicly held corporation shall not
constitute a violation of this paragraph.

                  (c) Non-Competition Period. If Employee's employment with
Employer shall cease for any reason during the Period of Employment as defined
in paragraph 1(a) of this Agreement, the "non-competition period" shall begin on
the date the first payment is made pursuant to the terms of this Agreement and
shall end on the date the final payment is made pursuant to the terms of this
Agreement; provided, however, that the non-competition period shall end on the
date Employee's employment ends in the event of Employee's termination for "good
reason" (as defined in paragraph 6(e)), or Employee's termination without cause
(as defined in paragraph 3(d)), within two years following a Change of Control
that occurs during the Period of Employment.


                                       15
<PAGE>

                  (d) Certain Affiliates of Employer. It is understood that
Employee may have access to technical knowledge, trade secrets and customer
lists of affiliates of Employer or companies which Employer's parent may acquire
in the future and may serve as a member of the board of directors or as an
officer or employee of an affiliate of Employer. Employee covenants that he
shall not, during the term of his employment by Employer or for the period
specified in 8(c) above, in any way, directly or indirectly, own, manage,
operate, control or participate in the ownership, management, operation or
control of, or be connected as an officer, employee, partner, director,
individual proprietor, lender, consultant or otherwise aid or assist anyone else
in any business or operation which competes with or engages in the business of
such an affiliate.

                  (e) Termination of Payments. Upon Employee's receipt of
written notice to Employee of the breach by Employee of any covenant under this
paragraph 8, Employer may offset and/or recover from Employee immediately any
and all amounts paid to Employee under this Agreement in addition to any and all
other remedies available to Employer under the law or in equity.

            9. Notices. Any notice which may be given hereunder shall be
sufficient if in writing and mailed by certified mail, return receipt requested,
to Employee at his residence and to Employer at 5790 Widewaters Parkway, Dewitt,
New York 13214, or at such other addresses as either Employee or Employer may,
by similar notice, designate.

            10. Rules, Regulations and Policies. Employee shall abide by and
comply with all of the rules, regulations, and policies of Employer, including
without limitation Employer's policy of strict adherence to, and compliance
with, any and all requirements of the banking, securities, and antitrust laws
and regulations.


                                       16
<PAGE>

            11. No Prior Restrictions. Employee affirms and represents that
Employee is under no obligations to any former employer or other third party
which is in any way inconsistent with, or which imposes any restriction upon,
the employment of Employee by Employer, or Employee's undertakings under this
Agreement.

            12. Return of Employer's Property. After Employee has received
notice of termination or at the end of the term hereof, whichever first occurs,
Employee shall promptly return to Employer all documents and other property in
his possession belonging to Employer.

            13. Construction and Severability. The invalidity of any one or more
provisions of this Agreement or any part thereof, all of which are inserted
conditionally upon their being valid in law, shall not affect the validity of
any other provisions to this Agreement; and, in the event that one or more
provisions contained herein shall be invalid, as determined by a court of
competent jurisdiction, the court shall have authority to modify such provision
in a manner that most closely reflects the intent of the parties and is valid.

            14. Governing Law. This Agreement was executed and delivered in New
York and shall be construed and governed in accordance with the laws of the
State of New York.

            15. Assignability and Successors. This Agreement may not be assigned
by Employee or Employer, except that this Agreement shall be binding upon and
shall inure to the benefit of the successor of Employer through merger or
corporate reorganization.

            16. Miscellaneous. This Agreement constitutes the entire
understanding and agreement between the parties with respect to the subject
matter hereof and shall supersede all prior understandings and agreements,
including the Change of Control Agreement between the parties that is scheduled
to expire effective December 31, 2005. This Agreement cannot be amended,
modified, or supplemented in any respect, except by a subsequent written
agreement


                                       17
<PAGE>

entered into by the parties hereto. The services to be performed by Employee are
special and unique; it is agreed that any breach of this Agreement by Employee
shall entitle Employer (or any successor or assigns of Employer), in addition to
any other legal remedies available to it, to apply to any court of competent
jurisdiction to enjoin such breach. The provisions of paragraphs 6 and 8 hereof
shall survive the termination of this Agreement.

      17. Counterparts. This Agreement may be executed in counterparts (each of
which need not be executed by each of the parties), which together shall
constitute one and the same instrument.

      18. Jurisdiction, Venue and Fees. The jurisdiction of any proceeding
between the parties arising out of, or with respect to, this Agreement shall be
in a court of competent jurisdiction in New York State, and venue shall be in
Onondaga County. Each party shall be subject to the personal jurisdiction of the
courts of New York State. If Employee is the prevailing party in a proceeding to
collect payments due pursuant to this Agreement, Employer shall reimburse
Employee for reasonable attorneys' fees incurred by Employee in connection with
such proceeding.


                                       18
<PAGE>

            The foregoing is established by the following signatures of the
parties.


                                         COMMUNITY BANK SYSTEM, INC.

                                         By:____________________________

                                         Its:___________________________


                                         COMMUNITY BANK, N.A.

                                         By:___________________________

                                         Its:__________________________


                                         ______________________________
                                                 BRIAN D. DONAHUE


                                       19
<PAGE>

                                   APPENDIX A

                          BENEFICIARY DESIGNATION FORM

            Pursuant to the Employment Agreement between (i) Community Bank
System, Inc. and Community Bank, N.A., and (ii) Brian D. Donahue, dated as of
August 1, 2004 ("Agreement"), I, Brian D. Donahue, hereby designate
___________________________, my ____________________________, as the beneficiary
of amounts payable upon my death in accordance with paragraph 3(b) of the
Agreement. My beneficiary's current address is _________________________,
________, New York.

            My contingent beneficiary is _______________, my __________________.

My contingent beneficiary's address is ________________________________.


Dated: _____________                                  __________________________
                                                           Brian D. Donahue


__________________________

         Witness


                                       20

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>d61135_ex10-2.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

                                                                    Exhibit 10.2

                              EMPLOYMENT AGREEMENT

      This sets forth the terms of the Employment Agreement made effective as of
September 1, 2002 between (i) COMMUNITY BANK SYSTEM, INC., a Delaware
corporation and registered bank holding company, and COMMUNITY BANK, N.A., a
national banking association, both having offices located in Dewitt, New York
(collectively, the "Employer"), and (ii) TIMOTHY J. BAKER, an individual
currently residing at Ogdensburg, New York ("Employee").

                               W I T N E S S E T H

      IN CONSIDERATION of the promises and mutual agreements and covenants
contained herein, and other good and valuable consideration, the parties agree
as follows:

      1. Employment.

            (a) Term. Employer shall continue to employ Employee, and Employee
shall continue to serve, as Senior Operations Officer of Employer for a
forty-month term commencing on September 1, 2002 and ending on December 31, 2005
("Period of Employment"), subject to termination as provided in paragraph 3
hereof.

            (b) Salary. During the period of September 1, 2002 through December
31, 2002, Employer shall pay Employee base salary at the annual rate in effect
for Employee on August 31, 2002 ("Base Salary"). Employee's Base Salary for
calendar years after 2002 shall be determined by the Board of Directors of
Employer ("Board"), or an authorized committee of the Board, in accordance with
Employer's regular practice for reviewing and adjusting base salary


<PAGE>

for executive employees. Employee's Base Salary is payable in accordance with
Employer's regular payroll practices for executive employees.

            (c) Incentive Compensation. Employee shall be entitled to annual
incentive compensation opportunities pursuant to the terms of the "Management
Incentive Plan" (which term includes any successor plan or incentive
compensation arrangement) which has been approved by the Board to cover Employee
and other key personnel of Employer. Upon termination of Employee's employment
pursuant to subparagraph 3(a), 3(b), 3(c) or 6, Employee shall be entitled to a
pro rata portion (based on Employee's complete months of active employment in
the applicable year) of the annual incentive award that is payable with respect
to the year during which the termination occurs or, in the case of a termination
upon Employee's disability pursuant to subparagraph 3(c), the date the
Disability Period began.

      2. Duties during the Period of Employment. Employee shall have full
responsibility, subject to the control of the Board and Employer's President and
Chief Executive Officer, for the supervision of all aspects of Employer's
operations function, and the discharge of such other duties and responsibilities
to Employer as may from time to time be reasonably assigned to Employee by the
Board or Employer's President and Chief Executive Officer. Employee shall report
to the President and Chief Executive Officer of Employer or the President and
Chief Executive Officer's designee. Employee shall devote Employee's best
efforts to the affairs of Employer, serve faithfully and to the best of
Employee's ability and devote all of Employee's working time and attention,
knowledge, experience, energy and skill to the business of Employer, except that
Employee may affiliate with professional associations, business and civic
organizations.


                                       2
<PAGE>

      3. Termination. Employee's employment by Employer shall be subject to
termination as follows:

            (a) Expiration of the Term. This Agreement shall terminate
automatically at the expiration of the Period of Employment unless the parties
enter into a written agreement extending Employee's employment, except for the
continuing obligations of the parties as specified hereunder.

            (b) Termination Upon Death. This Agreement shall terminate upon
Employee's death. In the event this Agreement is terminated as a result of
Employee's death, Employer shall continue payments of Employee's Base Salary for
a period of 90 days following Employee's death to the beneficiary designated by
Employee on the "Beneficiary Designation Form" attached to this Agreement as
Appendix A. Employee's beneficiary shall be free to dispose of any restricted
stock previously granted to Employee by Employer. Additionally, Employer shall
treat as immediately exercisable all unexpired stock options issued by Employer
and held by Employee that are not exercisable or that have not been exercised,
so as to permit the Beneficiary to purchase the balance of Community Bank
System, Inc. ("CBSI") Stock not yet purchased pursuant to said options until the
end of the full exercise period provided in the original grant of the option
right, determined without regard to Employee's death or termination of
employment.

            (c) Termination Upon Disability. Employer may terminate this
Agreement upon Employee's disability. For the purpose of this Agreement,
Employee's inability to perform Employee's duties hereunder by reason of
physical or mental illness or injury for a period of 26 successive weeks (the
"Disability Period") shall constitute disability. The determination of
disability shall be made by a physician selected by Employer and a physician


                                       3
<PAGE>

selected by Employee; provided, however, that if the two physicians so selected
shall disagree, the determination of disability shall be submitted to
arbitration in accordance with the rules of the American Arbitration Association
and the decision of the arbitrator shall be binding and conclusive on Employee
and Employer. During the Disability Period, Employee shall be entitled to 100%
of Employee's Base Salary otherwise payable during that period, reduced by any
other benefits to which Employee may be entitled for the Disability Period on
account of such disability (including, but not limited to, benefits provided
under any disability insurance policy or program, worker's compensation law, or
any other benefit program or arrangement). Upon termination pursuant to this
disability provision, Employee shall be free to dispose of any restricted stock
granted to Employee. Additionally, Employer shall treat as immediately
exercisable all unexpired stock options issued by Employer and held by Employee
that are not exercisable or that have not been exercised, so as to permit the
Employee to purchase the balance of CBSI Stock not yet purchased pursuant to
said options until the end of the full exercise period provided in the original
grant of the option right, determined without regard to Employee's disability or
termination of employment.

            (d) Termination for Cause. Employer may terminate Employee's
employment immediately for "cause" by written notice to Employee. For purposes
of this Agreement, a termination shall be for "cause" if the termination results
from any of the following events:

                  (i) Material breach of this Agreement;

                  (ii) Documented misconduct as an executive of Employer, or any
subsidiary or affiliate of Employer for which Employee is performing services
hereunder including, but not limited to, misappropriating any funds or property
of any such company, or


                                       4
<PAGE>

attempting to obtain any personal profit (x) from any transaction to which such
company is a party or (y) from any transaction with any third party in which
Employee has an interest which is adverse to the interest of any such company,
unless, in either case, Employee shall have first obtained the written consent
of the Board;

                  (iii) Unreasonable neglect or refusal to perform the duties
assigned to Employee under or pursuant to this Agreement, unless cured within 60
days following written notice to Employee of such neglect or refusal;

                  (iv) Conviction of a crime involving moral turpitude;

                  (v) Adjudication as a bankrupt, which adjudication has not
been contested in good faith, unless bankruptcy is caused directly by Employer's
unexcused failure to perform its obligations under this Agreement;

                  (vi) Documented failure to follow the reasonable, written
instructions of the Board or the President and Chief Executive Officer of
Employer, provided that the instructions do not require Employee to engage in
unlawful conduct; or

                  (vii) Any material and documented violation of the rules or
regulations of the Office of the Comptroller of the Currency or of any other
regulatory agency.

      Notwithstanding any other term or provision of this Agreement to the
contrary, if Employee's employment is terminated for cause, Employee shall
forfeit all rights to payments and benefits otherwise provided pursuant to this
Agreement; provided, however, that Base Salary shall be paid through the date of
termination.

            (e) Termination For Reasons Other Than Cause. In the event Employer
terminates Employee prior to December 31, 2005 for reasons other than cause,
Employee shall be entitled to a severance benefit equal to the greater of (i)
the sum of the annual


                                       5
<PAGE>

Base Salary in effect at the time of termination and the most recent payment to
Employee under the Management Incentive Plan, payable in equal biweekly
installments over the 12-month period following Employee's termination, or (ii)
amounts of Base Salary and expected Management Incentive Plan payments that
otherwise would have been payable through the balance of the unexpired term of
this Agreement, payable in biweekly installments through the balance of the
unexpired term of this Agreement. In addition, Employer shall: (iii) permit
Employee to dispose of any restricted stock granted to Employee; and (iv) treat
as immediately exercisable all unexpired stock options held by Employee that are
not exercisable or that have not been exercised, so as to permit Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right determined without regard to Employee's termination of employment.

            (f) Expiration of Term Without Renewal. In the event that Employee's
employment ends on December 31, 2005 solely because Employer chooses not to
renew or extend this Agreement beyond December 31, 2005 for reasons other than
cause, then Employee shall be entitled to a severance benefit equal to the sum
of the annual Base Salary in effect at the time of termination and the most
recent payment to Employee under the Management Incentive Plan, payable in equal
biweekly installments over the 12-month period following Employee's termination
of employment.

            (g) Employer shall have the right of first refusal to purchase from
Employee, or from Employee's beneficiary or estate, shares of CBSI stock
acquired pursuant to the exercise of stock options after the date of Employee's
termination of employment for any reason, in the event Employee, or Employee's
beneficiary or estate, elects to dispose or transfer


                                       6
<PAGE>

such acquired shares. Any purchase made pursuant to this subparagraph shall be
made at a price per share equal to the closing price per share of CBSI Stock (on
the principal public market on which CBSI Stock is traded; currently the New
York Stock Exchange) on the trading day that immediately precedes the date of
purchase. The right of first refusal described in this subparagraph shall expire
ten years from the date of Employee's termination of employment.

      4. Fringe Benefits.

            (a) Benefit Plans. During the Period of Employment, Employee shall
be eligible to participate in any employee pension benefit plans (as that term
is defined under Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended), Employer-paid group life insurance plans, medical plans,
dental plans, long-term disability plans, business travel insurance programs and
other fringe benefit programs maintained by Employer for the benefit of its
executive employees. Participation in any of Employer's benefit plans and
programs shall be based on, and subject to satisfaction of, the eligibility
requirements and other conditions of such plans and programs. Employer may
require Employee to submit to an annual physical, to be performed by a physician
of his own choosing. Employee shall be reimbursed for related expenses not
covered by Employer's health insurance plan, or any other plan in which Employee
is enrolled. Employee shall not be eligible to participate in Employer's
Severance Pay Plan maintained for other employees not covered by employment
agreements.

            (b) Expenses. Upon submission to Employer of vouchers or other
required documentation, Employee shall be reimbursed for Employee's actual
out-of-pocket travel and other expenses reasonably incurred and paid by Employee
in connection with Employee's duties hereunder. Reimbursable expenses must be
submitted to the Personnel Committee of the Board for review on a quarterly
basis.


                                       7
<PAGE>

            (c) Other Benefits. During the Period of Employment, Employee also
shall be entitled to receive the following benefits:

                  (i) Paid vacation of four weeks during each calendar year
(with no carry over of unused vacation to a subsequent year) and any holidays
that may be provided to all employees of Employer in accordance with Employer's
holiday policy; and

                  (ii) Reasonable sick leave.

      5. Stock Options. Employer shall cause the Personnel Committee of the
Board to review whether Employee should be granted options to purchase shares of
common stock of CBSI. Such review may be conducted pursuant to the terms of the
Community Bank System, Inc. 1994 Long-Term Incentive Compensation Program or
independently, as the Personnel Committee shall determine. Reviews shall be
conducted no less frequently than annually.

      6. Change of Control.

            (a) If Employee's employment with Employer (as an employee) shall
cease for any reason, including Employee's voluntary termination for "good
reason" (as defined in paragraph 6(e) below), but not including Employee's
termination for "cause" (as described in paragraph 3(d)) or Employee's voluntary
termination without "good reason," within 2 years following a "Change of
Control" that occurs during the Period of Employment, Employer shall:

                  (i) Pay to Employee the greater of (A) 200% of the sum of the
annual Base Salary in effect at the time of termination and the most recent
payment to Employee under the Management Incentive Plan, payable in equal
biweekly installments over the 24-month period following Employee's termination,
or (B) amounts of Base Salary and expected Management Incentive Plan payments
that otherwise would have been payable through the


                                       8
<PAGE>

balance of the unexpired term of this Agreement, payable in biweekly
installments through the balance of the unexpired term of this Agreement;

                  (ii) Provide Employee with fringe benefits, or the cash
equivalent of such benefits (equal to Employer's cost for such benefits),
identical to those described in paragraph 4(a) for the period during which Base
Salary is payable to Employee pursuant to (i) above. To the extent the benefits
provided to Employee in this paragraph 6(a)(ii) are deemed taxable benefits,
Employer shall reimburse Employee for taxes owed by Employee on the benefits and
tax reimbursement;

                  (iii) Treat as immediately exercisable all unexpired stock
options issued by Employer and held by Employee that are not otherwise
exercisable or that have not been exercised (so as to permit Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right, determined without regard to Employee's termination of
employment); and

                  (iv) Permit Employee to dispose of any restricted stock
granted to Employee.

            (b) If any portion of the amounts paid to, or value received by,
Employee following a "Change of Control" (whether paid or received pursuant to
this paragraph 6 or otherwise) constitutes an "excess parachute payment" within
the meaning of Internal Revenue Code Section 280G, then payments to Employee
pursuant to this Agreement shall be limited or modified to the extent necessary
to eliminate the application of Internal Revenue Code Section 280G.


                                       9
<PAGE>

            (c) Notwithstanding the foregoing of this paragraph 6, the Board may
elect, in its sole discretion, to pay all benefits due Employee pursuant to this
paragraph 6 in a single lump sum payment following a Change of Control and
Employee's termination of employment with Employer. Subject to the limitation
described in paragraph 6(b), in the event a single lump sum payment is made
pursuant to the foregoing sentence, the amount of the payment shall be increased
to the extent necessary to hold Employee harmless from any marginal income and
employment tax liability created by the single lump sum payment (i.e., the
income and employment tax liability that exceeds the income and employment tax
liability that would have been incurred by Employee if payments were made in the
manner and during the periods otherwise described in this paragraph 6).

            (d) For purposes of this paragraph 6, a "Change of Control" shall be
deemed to have occurred if:

                  (i) any "person," including a "group" as determined in
accordance with the Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of Employer representing 30% or more of the combined voting power of
Employer's then outstanding securities;

                  (ii) as a result of, or in connection with, any tender offer
or exchange offer, merger or other business combination (a "Transaction"), the
persons who were directors of Employer before the Transaction shall cease to
constitute a majority of the Board or the board of directors of any successor to
Employer;

                  (iii) Employer is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation shall
then be owned in the aggregate by the


                                       10
<PAGE>

former stockholders of Employer, other than (A) affiliates within the meaning of
the Exchange Act, or (B) any party to the merger or consolidation;

                  (iv) a tender offer or exchange offer is made and consummated
for the ownership of securities of Employer representing 30% or more of the
combined voting power of Employer's then outstanding voting securities; or

                  (v) Employer transfers substantially all of its assets to
another corporation which is not controlled by Employer.

            (e) For purposes of this paragraph 6, "good reason" shall mean
action taken by Employer that results in:

                  (i) An involuntary and material adverse change in Employee's
title, duties, responsibilities, or total remuneration;

                  (ii) An involuntary and material relocation of the office from
which Employee is expected to perform his duties; or

                  (iii) An involuntary and material adverse change in the
general working conditions (including travel requirements and clerical support)
applicable to Employee.

      By way of example, and not limitation, the following changes, if
involuntary, would constitute "good reason" for purposes of this Agreement: (A)
reducing or eliminating Employee's authority and responsibility to implement the
duties of the Senior Operations Officer as described in paragraph 2; (B)
requiring Employee to perform his services for Employer at an office located
outside of St. Lawrence County, New York; and (C) reducing or eliminating
authority to develop and implement strategies to achieve department goals.


                                       11
<PAGE>

      7. Withholding. Employer shall deduct and withhold from compensation and
benefits provided under this Agreement all necessary income and employment taxes
and any other similar sums required by law to be withheld.

      8. Covenants.

            (a) Confidentiality. Employee shall not, without the prior written
consent of Employer, disclose or use in any way, either during his employment by
Employer or thereafter, except as required in the course of his employment by
Employer, any confidential business or technical information or trade secret
acquired in the course of Employee's employment by Employer. Employee
acknowledges and agrees that it would be difficult to fully compensate Employer
for damages resulting from the breach or threatened breach of the foregoing
provision and, accordingly, that Employer shall be entitled to temporary
preliminary injunctions and permanent injunctions to enforce such provision.
This provision with respect to injunctive relief shall not, however, diminish
Employer's right to claim and recover damages. Employee covenants to use his
best efforts to prevent the publication or disclosure of any trade secret or any
confidential information concerning the business or finances of Employer or
Employer's affiliates, or any of its or their dealings, transactions or affairs
which may come to Employee's knowledge in the pursuance of his duties or
employment.

            (b) No Competition. Employee's employment is subject to the
condition that during the term of his employment hereunder and for the period
specified in paragraph 8(c) below, Employee shall not, directly or indirectly,
own, manage, operate, control or participate in the ownership, management,
operation or control of, or be connected as an officer, employee, partner,
director, individual proprietor, lender, consultant or otherwise with, or have
any financial interest in, or aid or assist anyone else in the conduct of, any
entity or business


                                       12
<PAGE>

(a "Competitive Operation") which competes in the banking industry or with any
other business conducted by Employer or by any group, affiliate, division or
subsidiary of Employer, in the states of New York and Pennsylvania. Employee
shall keep Employer fully advised as to any activity, interest, or investment
Employee may have in any way related to the banking industry. It is understood
and agreed that, for the purposes of the foregoing provisions of this paragraph,
(i) no business shall be deemed to be a business conducted by Employer or any
group, division, affiliate or subsidiary of Employer unless 5% or more of
Employer's consolidated gross sales or operating revenues is derived from, or 5%
or more of Employer's consolidated assets are devoted to, such business; (ii) no
business conducted by any entity by which Employee is employed or in which he is
interested or with which he is connected or associated shall be deemed
competitive with any business conducted by Employer or any group, division or
subsidiary of Employer unless it is one from which 2% or more of its
consolidated gross sales or operating revenues is derived, or to which 2% or
more of its consolidated assets are devoted; and (iii) no business which is
conducted by Employer at the Date of Termination and which subsequently is sold
by Employer shall, after such sale, be deemed to be a Competitive Operation
within the meaning of this paragraph. Ownership of not more than 5% of the
voting stock of any publicly held corporation shall not constitute a violation
of this paragraph.

            (c) Non-Competition Period. If Employee's employment with Employer
shall cease for any reason during the Period of Employment as defined in
paragraph 1(a) of this Agreement, the "non-competition period" shall begin on
the date the first payment is made pursuant to the terms of this Agreement and
shall end on the date the final payment is made pursuant to the terms of this
Agreement.


                                       13
<PAGE>

            (d) Certain Affiliates of Employer. It is understood that Employee
may have access to technical knowledge, trade secrets and customer lists of
affiliates of Employer or companies which Employer's parent may acquire in the
future and may serve as a member of the board of directors or as an officer or
employee of an affiliate of Employer. Employee covenants that he shall not,
during the term of his employment by Employer or for the period specified in
8(c) above, in any way, directly or indirectly, own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director, individual proprietor,
lender, consultant or otherwise aid or assist anyone else in any business or
operation which competes with or engages in the business of such an affiliate.

            (e) Termination of Payments. Upon written notice to Employee of the
breach by Employee of any covenant under this paragraph 8, Employer may offset
and/or recover from Employee immediately any and all amounts paid to Employee
under this Agreement in addition to any and all other remedies available to
Employer under the law or in equity.

      9. Notices. Any notice which may be given hereunder shall be sufficient if
in writing and mailed by certified mail, return receipt requested, to Employee
at his residence and to Employer at 5790 Widewaters Parkway, Dewitt, New York
13214, or at such other addresses as either Employee or Employer may, by similar
notice, designate.

      10. Rules, Regulations and Policies. Employee shall abide by and comply
with all of the rules, regulations, and policies of Employer, including without
limitation Employer's policy of strict adherence to, and compliance with, any
and all requirements of the banking, securities, and antitrust laws and
regulations.


                                       14
<PAGE>

      11. No Prior Restrictions. Employee affirms and represents that Employee
is under no obligations to any former employer or other third party which is in
any way inconsistent with, or which imposes any restriction upon, the employment
of Employee by Employer, or Employee's undertakings under this Agreement.

      12. Return of Employer's Property. After Employee has received notice of
termination or at the end of the term hereof, whichever first occurs, Employee
shall promptly return to Employer all documents and other property in his
possession belonging to Employer.

      13. Construction and Severability. The invalidity of any one or more
provisions of this Agreement or any part thereof, all of which are inserted
conditionally upon their being valid in law, shall not affect the validity of
any other provisions to this Agreement; and in the event that one or more
provisions contained herein shall be invalid, as determined by a court of
competent jurisdiction, the court shall have authority to modify such provision
in a manner that most closely reflects the intent of the parties and is valid.

      14. Governing Law. This Agreement was executed and delivered in New York
and shall be construed and governed in accordance with the laws of the State of
New York.

      15. Assignability and Successors. This Agreement may not be assigned by
Employee or Employer, except that this Agreement shall be binding upon and shall
inure to the benefit of the successor of Employer through merger or corporate
reorganization.

      16. Miscellaneous. This Agreement constitutes the entire understanding and
agreement between the parties with respect to the subject matter hereof and
shall supersede all prior understandings and agreements, including the Change of
Control Agreement between the parties that is scheduled to expire effective
December 31, 2005. This Agreement cannot be amended, modified, or supplemented
in any respect, except by a subsequent written agreement


                                       15
<PAGE>

entered into by the parties hereto. The services to be performed by Employee are
special and unique; it is agreed that any breach of this Agreement by Employee
shall entitle Employer (or any successor or assigns of Employer), in addition to
any other legal remedies available to it, to apply to any court of competent
jurisdiction to enjoin such breach. The provisions of paragraphs 6 and 8 hereof
shall survive the termination of this Agreement.

      17. Counterparts. This Agreement may be executed in counterparts (each of
which need not be executed by each of the parties), which together shall
constitute one and the same instrument.

      18. Arbitration and Fees. Any dispute between the parties relating to the
terms of this Agreement, or any interpretation, construction or enforcement
hereof, shall first be submitted to non-binding arbitration in Syracuse, New
York in accordance with the rules and regulations of the American Arbitration
Association then in effect. Each party shall be responsible for its own costs
and expenses in pursuing non-binding arbitration, and any arbitration fees or
costs shall be shared equally between the parties. However, if Employee is a
party in an arbitration to collect payments due pursuant to this Agreement and
prevails in collecting payments due in the arbitration or settlement of the
arbitration, Employer shall reimburse Employee for reasonable attorneys' fees
incurred by Employee in connection with such arbitration.


                                       16
<PAGE>

      The foregoing is established by the following signatures of the parties.

                                                 COMMUNITY BANK SYSTEM, INC.


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

                                                 Its:
                                                     ---------------------------


                                                 COMMUNITY BANK, N.A.


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

                                                 Its:
                                                     ---------------------------


                                                 -------------------------------
                                                        TIMOTHY J. BAKER


                                       17
<PAGE>

                                   APPENDIX A

                          BENEFICIARY DESIGNATION FORM

      Pursuant to the Employment Agreement between (i) Community Bank System,
Inc. and Community Bank, N.A., and (ii) Timothy J. Baker, dated as of September
1, 2002 ("Agreement"), I, Timothy J. Baker, hereby designate
__________________________, my ___________, as the beneficiary of amounts
payable upon my death in accordance with paragraph 3(b) of the Agreement. My
beneficiary's current address is ______________, ________, New York.

      My contingent beneficiary is __________________, my __________________. My
contingent beneficiary's address is ________________________________.


Dated: _____________
                                                  ------------------------------
                                                         Timothy J. Baker


--------------------------
         Witness


                                       18

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>4
<FILENAME>d61135_ex10-3.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

                                                                    Exhibit 10.3

                              EMPLOYMENT AGREEMENT

      This sets forth the terms of the Employment Agreement made effective as of
October 1, 2004 between (i) COMMUNITY BANK SYSTEM, INC., a Delaware corporation
and registered bank holding company, and COMMUNITY BANK, N.A., a national
banking association, both having offices located in Dewitt, New York
(collectively, the "Employer"), and (ii) J. DAVID CLARK, an individual currently
residing at Campbell, New York ("Employee"). This Agreement is effective as of
October 1, 2004 and supersedes the Change of Control Agreement between the
parties dated November 30, 2001.

                               W I T N E S S E T H

      IN CONSIDERATION of the promises and mutual agreements and covenants
contained herein, and other good and valuable consideration, the parties agree
as follows:

      1. Employment.

            (a) Term. Employer shall employ Employee, and Employee shall serve,
as Chief Credit Officer and Senior Vice President of Employer from Employer's
office in Corning, New York for a term commencing on October 1, 2004 and ending
on December 31, 2009 ("Period of Employment"), subject to termination as
provided in paragraph 3 hereof.

            (b) Salary. During the period October 1, 2004 through December 31,
2004, Employer shall pay Employee base salary at the annual rate of $175,000.00
("Base Salary"). Employee's Base Salary for calendar years after 2004 shall be
determined by the Board of Directors of Employer ("Board"), or an authorized
committee of the Board, in accordance with Employer's regular practice for
reviewing and adjusting base salary for executive


<PAGE>

employees. Employee's Base Salary is payable in accordance with Employer's
regular payroll practices for executive employees.

            (c) Incentive Compensation. Employee shall be entitled to annual
incentive compensation opportunities pursuant to the terms of the "Management
Incentive Plan" (which term includes any successor plan or incentive
compensation arrangement) which has been approved by the Board to cover Employee
and other key personnel of Employer. Upon termination of Employee's employment
pursuant to subparagraph 3(a), 3(b), 3(c) or paragraph 6, Employee shall be
entitled to a pro rata portion (based on Employee's complete months of active
employment in the applicable year) of the annual incentive award that is payable
with respect to the year during which the termination occurs or, in the case of
a termination upon Employee's disability pursuant to subparagraph 3(c), the date
the Disability Period began.

      2. Duties during the Period of Employment. Employee shall have full
responsibility, subject to the control of the Board and Employer's President and
Chief Executive Officer or authorized designee, for the supervision of all
aspects of Employer's lending and credit operations, and the discharge of such
other duties and responsibilities to Employer as may from time to time be
reasonably assigned to Employee by the Board or Employer's President and Chief
Executive Officer. Employee shall report to the Chief Banking Officer of
Employer or to such other officer as designated by Employer's President and
Chief Executive Officer. Employee shall devote Employee's best efforts to the
affairs of Employer, serve faithfully and to the best of Employee's ability and
devote all of Employee's working time and attention, knowledge, experience,
energy and skill to the business of Employer, except that Employee may affiliate
with professional associations, business and civic organizations. Subject to
Employee's consent, which consent may not be unreasonably withheld, Employee
shall serve on the board of


                                       2
<PAGE>

directors of, or as an officer of Employer's affiliates, without additional
compensation if requested to do so by the Board. Employee shall receive only the
compensation and other benefits described in this Agreement for Employee's
duties as a Director of Employer. Employee may reasonably withhold consent to
appointment, or may resign from any such position, if Employer fails to provide
and maintain in force continuously throughout the term of the Employee's service
in any such capacity, indemnity insurance coverage for directors' and officers'
liability with such coverage limits and carriers as are satisfactory to the
reasonable requirements of Employee.

      3. Termination. Employee's employment by Employer shall be subject to
termination as follows:

            (a) Expiration of the Term. This Agreement shall terminate
automatically at the expiration of the Period of Employment unless the parties
enter into a written agreement extending Employee's employment, except for the
continuing obligations of the parties as specified hereunder.

            (b) Termination Upon Death. This Agreement shall terminate upon
Employee's death. In the event this Agreement is terminated as a result of
Employee's death, Employer shall continue payments of Employee's Base Salary for
a period of 90 days following Employee's death to the beneficiary designated by
Employee on the "Beneficiary Designation Form" attached to this Agreement as
Appendix A. Employee's beneficiary shall be free to dispose of any restricted
stock previously granted to Employee by Employer. Additionally, Employer shall
treat as immediately exercisable all unexpired stock options issued by Employer
and held by Employee that are not exercisable or that have not been exercised,
so as to permit the Beneficiary to purchase the balance of Community Bank
System, Inc. ("CBSI") Stock not yet


                                       3
<PAGE>

purchased pursuant to said options until the end of the full exercise period
provided in the original grant of the option right, determined without regard to
Employee's death or termination of employment.

            (c) Termination Upon Disability. Employer may terminate this
Agreement upon Employee's disability. For the purpose of this Agreement,
Employee's inability to perform substantially all of Employee's duties hereunder
by reason of physical or mental illness or injury for a period of 26 successive
weeks, or such longer waiting/elimination period provided pursuant to Employer's
group long-term disability policy (the "Disability Period") shall constitute
disability. The determination of disability shall be made by a majority vote of
a physician selected by Employer, a physician selected by Employee and a third
physician selected by the other two physicians. During the Disability Period,
Employee shall be entitled to 100% of Employee's Base Salary otherwise payable
during that period, reduced by any other benefits to which Employee may be
entitled for the Disability Period on account of such disability (including, but
not limited to, benefits provided under any disability insurance policy or
program, worker's compensation law, or any other benefit program or
arrangement). Thereafter, upon termination pursuant to this disability
provision, Employee shall be free to dispose of any restricted stock granted to
Employee. Additionally, Employer shall treat as immediately exercisable all
unexpired stock options issued by Employer and held by Employee that are not
exercisable or that have not been exercised, so as to permit the Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right, determined without regard to Employee's disability or termination
of employment.


                                       4
<PAGE>

            (d) Termination for Cause. Employer may terminate Employee's
employment immediately for "cause" by written notice to Employee. For purposes
of this Agreement, a termination shall be for "cause" if the termination results
from any of the following events:

                  (i) Material breach of this Agreement;

                  (ii) Documented misconduct as an executive of Employer, or any
subsidiary or affiliate of Employer for which Employee is performing services
hereunder including, but not limited to, misappropriating any funds or property
of any such company, or attempting to obtain any personal profit (A) from any
transaction to which such company is a party or (B) from any transaction with
any third party in which Employee has an interest which is adverse to the
interest of any such company, unless, in either case, Employee shall have first
obtained the written consent of the Board;

                  (iii) Unreasonable neglect or refusal to perform the duties
assigned to Employee under or pursuant to this Agreement, unless cured within 60
days following Employee's receipt of written notice to Employee of such neglect
or refusal;

                  (iv) Conviction of a crime involving moral turpitude;

                  (v) Adjudication as a bankrupt, which adjudication has not
been contested in good faith, unless bankruptcy is caused directly by Employer's
unexcused failure to perform its obligations under this Agreement;

                  (vi) Documented and material failure to follow the reasonable,
written instructions of the Board, the Chief Banking Officer of Employer, or the
President and Chief Executive Officer of Employer or authorized designee,
provided that the instructions do not require Employee to engage in unlawful
conduct; or


                                       5
<PAGE>

                  (vii) Any material and documented violation by Employee of the
rules or regulations of the Office of the Comptroller of the Currency or of any
other regulatory agency that Employee knew or should have known was a violation
of such rules or regulations.

      Notwithstanding any other term or provision of this Agreement to the
contrary, if Employee's employment is terminated for cause, Employee shall
forfeit all rights to payments and benefits otherwise provided pursuant to this
Agreement; provided, however, that Base Salary shall be paid through the date of
termination.

            (e) Termination For Reasons Other Than Cause. In the event Employer
terminates Employee prior to December 31, 2009 for reasons other than cause,
Employee shall be entitled to a severance benefit equal to the greater of (i)
the sum of the annual Base Salary in effect at the time of termination and the
most recent payment to Employee under the Management Incentive Plan, payable in
equal biweekly installments over the 12-month period following Employee's
termination, or (ii) amounts of Base Salary and expected Management Incentive
Plan payments that otherwise would have been payable through the balance of the
unexpired term of this Agreement, payable in biweekly installments over the
12-month period following Employee's termination. In addition, Employer shall:
(iii) permit Employee to dispose of any restricted stock granted to Employee;
and (iv) treat as immediately exercisable all unexpired stock options held by
Employee that are not exercisable or that have not been exercised, so as to
permit Employee to purchase the balance of CBSI Stock not yet purchased pursuant
to said options until the end of the full exercise period provided in the
original grant of the option right determined without regard to Employee's
termination of employment.


                                       6
<PAGE>

            (f) Expiration of Term Without Renewal. In the event that Employee's
employment ends on December 31, 2009 solely because Employer chooses not to
renew or extend this Agreement beyond December 31, 2009 for reasons other than
cause, then Employee shall be entitled to a severance benefit equal to the sum
of (i) 175 percent of the annual Base Salary in effect at the time of
termination, and (ii) the most recent payment to Employee under the Management
Incentive Plan, such sum to be payable in equal biweekly installments over the
6-month period following Employee's termination of employment.

            (g) Amounts payable to Employee pursuant to paragraphs 3(e) or 3(f)
shall be reduced by payments made to Employee pursuant to paragraphs 6(a)(i) and
(ii).

            (h) Employer shall have the right of first refusal to purchase from
Employee, or from Employee's beneficiary or estate, shares of CBSI Stock (but
not outstanding options) acquired pursuant to the exercise of stock options
after the date of Employee's termination of employment for any reason, in the
event Employee, or Employee's beneficiary or estate, elects to dispose or
transfer such acquired shares. Any purchase made pursuant to this subparagraph
shall be made at a price per share equal to the closing price per share of CBSI
Stock (on the principal public market on which CBSI Stock is traded; currently
the New York Stock Exchange) on the trading day that immediately precedes the
date of purchase. The right of first refusal described in this subparagraph
shall expire ten years from the date of Employee's termination of employment.

      4. Fringe Benefits.

            (a) Benefit Plans. During the Period of Employment, Employee shall
be eligible to participate in any employee pension benefit plans (as that term
is defined under Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended), Employer-


                                       7
<PAGE>

paid group life insurance plans, medical plans, dental plans, long-term
disability plans, business travel insurance programs and other fringe benefit
programs maintained by Employer for the benefit of its executive employees.
Participation in any of Employer's benefit plans and programs shall be based on,
and subject to satisfaction of, the eligibility requirements and other
conditions of such plans and programs. Employer may require Employee to submit
to an annual physical, to be performed by a physician of his own choosing.
Employee shall be reimbursed for related expenses not covered by Employer's
health insurance plan, or any other plan in which Employee is enrolled. Employee
shall not be eligible to participate in Employer's Severance Pay Plan maintained
for other employees not covered by employment agreements.

            (b) Expenses. Upon submission to Employer of vouchers or other
required documentation, Employee shall be reimbursed for Employee's actual
out-of-pocket travel and other expenses reasonably incurred and paid by Employee
in connection with Employee's duties hereunder. Reimbursable expenses must be
submitted to the Chief Banking Officer of Employer for review on a quarterly
basis.

            (c) Other Benefits. During the Period of Employment, Employee also
shall be entitled to receive the following benefits:

                  (i) Paid vacation of four weeks during each calendar year
(with no carry over of unused vacation to a subsequent year) and any holidays
that may be provided to all employees of Employer in accordance with Employer's
holiday policy;

                  (ii) Reasonable sick leave;

                  (iii) Employer paid memberships for Employee at a golf club
and a social club, subject to the approval of the President and Chief Executive
Officer of


                                       8
<PAGE>

Employer and subject to nondeductible tax treatment by Employer or a
reimbursement to Employee for taxes owed by Employee in connection with such
benefit;

                  (iv) Reimbursement of the purchase price of a cellular
telephone and all Employer-related business charges incurred in connection with
the use of such telephone; and

                  (v) The use of an Employer-owned or Employer-leased
automobile, the selection and replacement of which shall be subject to the
approval of Employer's President and Chief Executive Officer (or the President
and Chief Executive Officer's designee).

      5. Stock Options. Employer shall cause the Compensation Committee of the
Board to review whether Employee should be granted options to purchase shares of
common stock of CBSI. Such review may be conducted pursuant to the terms of the
Community Bank System, Inc. 2004 Long-Term Incentive Compensation Program, a
successor plan, or independently, as the Compensation Committee shall determine.
Reviews shall be conducted no less frequently than annually.

      6. Change of Control.

            (a) If Employee's employment with Employer (as an employee) shall
cease for any reason, including Employee's voluntary termination for "good
reason" (as defined in paragraph 6(e) below), but not including Employee's
termination for "cause" (as described in paragraph 3(d)) or Employee's voluntary
termination without "good reason," within 2 years following a "Change of
Control" that occurs during the Period of Employment, Employer shall:

                  (i) Retain the services of Employee, on an independent
contractor basis, as a consultant to Employer for a period of no less than 36
months at an annual


                                       9
<PAGE>

consulting fee rate equal to the total of Employee's Base Salary in effect at
the time of Employee's termination plus an amount equal to the Management
Incentive paid to the Employee in the year prior to the "Change of Control";

                  (ii) Provide Employee with fringe benefits, or the cash
equivalent of such benefits (equal to Employer's cost for such benefits),
identical to those described in paragraph 4(a) for the period during which Base
Salary is payable to Employee pursuant to (i) above. To the extent the benefits
provided to Employee in this paragraph 6(a)(ii) are deemed taxable benefits,
Employer shall reimburse Employee for taxes owed by Employee on the benefits and
tax reimbursement;

                  (iii) Treat as immediately exercisable all unexpired stock
options issued by Employer and held by Employee that are not otherwise
exercisable or that have not been exercised (so as to permit Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right, determined without regard to Employee's termination of
employment); and

                  (iv) Permit Employee to dispose of any restricted stock
granted to Employee.

            (b) Subject to Employer's right to make the single lump sum payment
described in paragraph 6(c) below, if any portion of the amounts paid to, or
value received by, Employee following a "Change of Control" (whether paid or
received pursuant to this paragraph 6 or otherwise) constitutes an "excess
parachute payment" within the meaning of Internal Revenue Code Section 280G,
then the parties shall negotiate a restructuring of payment dates and/or methods
(but not payment amounts) to minimize or eliminate the application of Internal


                                       10
<PAGE>

Revenue Code Section 280G. If an agreement to restructure payments cannot be
reached within 60 days of the date the first payment is due under this paragraph
6, then payments shall be made without restructuring. Subject to paragraph 6(c),
Employee shall be responsible for all taxes that are payable by Employee as a
result of Employee's receipt of an "excess parachute payment."

            (c) Notwithstanding the foregoing of this paragraph 6, the Board may
elect, in its sole discretion, to pay all benefits due Employee pursuant to this
paragraph 6 in a single lump sum payment following a Change of Control and
Employee's termination of employment with Employer. Subject to the limitation
described in paragraph 6(b), in the event a single lump sum payment is made
pursuant to the foregoing sentence, the amount of the payment shall be increased
to the extent necessary to hold Employee harmless from any marginal income and
employment tax liability created by the single lump sum payment (i.e., the
income and employment tax liability that exceeds the income and employment tax
liability that would have been incurred by Employee if payments were made in the
manner and during the periods otherwise described in this paragraph 6).

            (d) For purposes of this paragraph 6, a "Change of Control" shall be
deemed to have occurred if:

                  (i) any "person," including a "group" as determined in
accordance with the Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of Employer representing 30% or more of the combined voting power of
Employer's then outstanding securities;

                  (ii) as a result of, or in connection with, any tender offer
or exchange offer, merger or other business combination (a "Transaction"), the
persons who were


                                       11
<PAGE>

directors of Employer before the Transaction shall cease to constitute a
majority of the Board or the board of directors of any successor to Employer;

                  (iii) Employer is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation shall
then be owned in the aggregate by the former stockholders of Employer, other
than (A) affiliates within the meaning of the Exchange Act, or (B) any party to
the merger or consolidation;

                  (iv) a tender offer or exchange offer is made and consummated
for the ownership of securities of Employer representing 30% or more of the
combined voting power of Employer's then outstanding voting securities; or

                  (v) Employer transfers substantially all of its assets to
another corporation which is not controlled by Employer.

            (e) For purposes of this paragraph 6, "good reason" shall mean
action taken by Employer that results in:

                  (i) An involuntary and material adverse change in Employee's
title, duties, responsibilities, or total remuneration;

                  (ii) An involuntary and material relocation of the office from
which Employee is expected to perform his duties; or

                  (iii) An involuntary and material adverse change in the
general working conditions (including travel requirements and clerical support)
applicable to Employee.

      7. Withholding. Employer shall deduct and withhold from compensation and
benefits provided under this Agreement all necessary income and employment taxes
and any other similar sums required by law to be withheld.


                                       12
<PAGE>

      8. Covenants.

            (a) Confidentiality. Employee shall not, without the prior written
consent of Employer, disclose or use in any way, either during his employment by
Employer or thereafter, except as required in the course of his employment by
Employer, any confidential business or technical information or trade secret
acquired in the course of Employee's employment by Employer. Employee
acknowledges and agrees that it would be difficult to fully compensate Employer
for damages resulting from such disclosure or use and, accordingly, that
Employer shall be entitled to temporary preliminary injunctions and permanent
injunctions to enforce this provision. This provision with respect to injunctive
relief shall not, however, diminish Employer's right to claim and recover
damages. Employee covenants to use his best efforts to prevent the publication
or disclosure of any trade secret or any confidential information concerning the
business or finances of Employer or Employer's affiliates, or any of its or
their dealings, transactions or affairs which may come to Employee's knowledge
in the pursuance of his duties or employment.

            (b) No Competition. Employee's employment is subject to the
condition that during the term of his employment hereunder and for the period
specified in paragraph 8(c) below, Employee shall not, directly or indirectly,
own, manage, operate, control or participate in the ownership, management,
operation or control of, or be connected as an officer, employee, partner,
director, individual proprietor, lender, consultant or otherwise with, or have
any financial interest in, or aid or assist anyone else in the conduct of, any
entity or business (a "Competitive Operation") which competes in the banking
industry or with any other business conducted by Employer or by any group,
affiliate, division or subsidiary of Employer, in the states of New York and
Pennsylvania. Employee shall keep Employer fully advised as to any


                                       13
<PAGE>

activity, interest, or investment Employee may have in any way related to the
banking industry. It is understood and agreed that, for the purposes of the
foregoing provisions of this paragraph, (i) no business shall be deemed to be a
business conducted by Employer or any group, division, affiliate or subsidiary
of Employer unless 5% or more of Employer's consolidated gross sales or
operating revenues is derived from, or 5% or more of Employer's consolidated
assets are devoted to, such business; (ii) no business conducted by any entity
by which Employee is employed or in which he is interested or with which he is
connected or associated shall be deemed competitive with any business conducted
by Employer or any group, division or subsidiary of Employer unless it is one
from which 2% or more of its consolidated gross sales or operating revenues is
derived, or to which 2% or more of its consolidated assets are devoted; and
(iii) no business which is conducted by Employer at the Date of Termination and
which subsequently is sold by Employer shall, after such sale, be deemed to be a
Competitive Operation within the meaning of this paragraph. Ownership of not
more than 5% of the voting stock of any publicly held corporation shall not
constitute a violation of this paragraph.

            (c) Non-Competition Period. If Employee's employment with Employer
shall cease for any reason during the Period of Employment as defined in
paragraph 1(a) of this Agreement, the "non-competition period" shall begin on
the date the first payment is made pursuant to the terms of this Agreement and
shall end on the date the final payment is made pursuant to the terms of this
Agreement; provided, however, that the non-competition period shall end on the
date Employee's employment ends in the event of Employee's termination for "good
reason" (as defined in paragraph 6(e)), or Employee's termination without cause
(as defined in paragraph 3(d)), within two years following a Change of Control
that occurs during the Period of Employment.


                                       14
<PAGE>

            (d) Certain Affiliates of Employer. It is understood that Employee
may have access to technical knowledge, trade secrets and customer lists of
affiliates of Employer or companies which Employer's parent may acquire in the
future and may serve as a member of the board of directors or as an officer or
employee of an affiliate of Employer. Employee covenants that he shall not,
during the term of his employment by Employer or for the period specified in
8(c) above, in any way, directly or indirectly, own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director, individual proprietor,
lender, consultant or otherwise aid or assist anyone else in any business or
operation which competes with or engages in the business of such an affiliate.

            (e) Termination of Payments. Upon Employee's receipt of written
notice to Employee of the breach by Employee of any covenant under this
paragraph 8, Employer may offset and/or recover from Employee immediately any
and all amounts paid to Employee under this Agreement in addition to any and all
other remedies available to Employer under the law or in equity.

      9. Notices. Any notice which may be given hereunder shall be sufficient if
in writing and mailed by certified mail, return receipt requested, to Employee
at his residence and to Employer at 5790 Widewaters Parkway, Dewitt, New York
13214, or at such other addresses as either Employee or Employer may, by similar
notice, designate.

      10. Rules, Regulations and Policies. Employee shall abide by and comply
with all of the rules, regulations, and policies of Employer, including without
limitation Employer's policy of strict adherence to, and compliance with, any
and all requirements of the banking, securities, and antitrust laws and
regulations.


                                       15
<PAGE>

      11. No Prior Restrictions. Employee affirms and represents that Employee
is under no obligations to any former employer or other third party which is in
any way inconsistent with, or which imposes any restriction upon, the employment
of Employee by Employer, or Employee's undertakings under this Agreement.

      12. Return of Employer's Property. After Employee has received notice of
termination or at the end of the term hereof, whichever first occurs, Employee
shall promptly return to Employer all documents and other property in his
possession belonging to Employer.

      13. Construction and Severability. The invalidity of any one or more
provisions of this Agreement or any part thereof, all of which are inserted
conditionally upon their being valid in law, shall not affect the validity of
any other provisions to this Agreement; and, in the event that one or more
provisions contained herein shall be invalid, as determined by a court of
competent jurisdiction, the court shall have authority to modify such provision
in a manner that most closely reflects the intent of the parties and is valid.

      14. Governing Law. This Agreement was executed and delivered in New York
and shall be construed and governed in accordance with the laws of the State of
New York.

      15. Assignability and Successors. This Agreement may not be assigned by
Employee or Employer, except that this Agreement shall be binding upon and shall
inure to the benefit of the successor of Employer through merger or corporate
reorganization.

      16. Miscellaneous. This Agreement constitutes the entire understanding and
agreement between the parties with respect to the subject matter hereof and
shall supersede all prior understandings and agreements, including the Change of
Control Agreement between the parties that is scheduled to expire effective
December 31, 2005. This Agreement cannot be


                                       16
<PAGE>

amended, modified, or supplemented in any respect, except by a subsequent
written agreement entered into by the parties hereto. The services to be
performed by Employee are special and unique; it is agreed that any breach of
this Agreement by Employee shall entitle Employer (or any successor or assigns
of Employer), in addition to any other legal remedies available to it, to apply
to any court of competent jurisdiction to enjoin such breach. The provisions of
paragraphs 3(e), 6 and 8 hereof shall survive the termination of this Agreement.

      17. Counterparts. This Agreement may be executed in counterparts (each of
which need not be executed by each of the parties), which together shall
constitute one and the same instrument.

      18. Jurisdiction, Venue and Fees. The jurisdiction of any proceeding
between the parties arising out of, or with respect to, this Agreement shall be
in a court of competent jurisdiction in New York State, and venue shall be in
Onondaga County. Each party shall be subject to the personal jurisdiction of the
courts of New York State. If Employee is the prevailing party in a proceeding to
collect payments due pursuant to this Agreement, Employer shall reimburse
Employee for reasonable attorneys' fees incurred by Employee in connection with
such proceeding.


                                       17
<PAGE>

      The foregoing is established by the following signatures of the parties.

                                               COMMUNITY BANK SYSTEM, INC.


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

                                               Its:
                                                   -----------------------------


                                               COMMUNITY BANK, N.A.


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

                                               Its:
                                                   -----------------------------


                                               ---------------------------------
                                                        J. DAVID CLARK


                                       18
<PAGE>

                                   APPENDIX A

                          BENEFICIARY DESIGNATION FORM

      Pursuant to the Employment Agreement between (i) Community Bank System,
Inc. and Community Bank, N.A., and (ii) J. David Clark, dated as of October 1,
2004 ("Agreement"), I, J. David Clark, hereby designate
___________________________, my ____________________________, as the beneficiary
of amounts payable upon my death in accordance with paragraph 3(b) of the
Agreement. My beneficiary's current address is _________________________,
________, New York.

      My contingent beneficiary is __________________, my __________________. My
contingent beneficiary's address is ________________________________.


Dated: _____________
                                                   -----------------------------
                                                          J. David Clark


--------------------------
         Witness


                                       19

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>5
<FILENAME>d61135_ex10-4.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

                                                                    Exhibit 10.4

                              EMPLOYMENT AGREEMENT

      This sets forth the terms of the Employment Agreement made effective as of
September 1, 2002 between (i) COMMUNITY BANK SYSTEM, INC., a Delaware
corporation and registered bank holding company, and COMMUNITY BANK, N.A., a
national banking association, both having offices located in Dewitt, New York
(collectively, the "Employer"), and (ii) JOSEPH J. LEMCHAK, an individual
currently residing at Syracuse, New York ("Employee").

                               W I T N E S S E T H

      IN CONSIDERATION of the promises and mutual agreements and covenants
contained herein, and other good and valuable consideration, the parties agree
as follows:

      1. Employment.

            (a) Term. Employer shall continue to employ Employee, and Employee
shall continue to serve, as Chief Investment Officer of Employer for a
forty-month term commencing on September 1, 2002 and ending on December 31, 2005
("Period of Employment"), subject to termination as provided in paragraph 3
hereof.

            (b) Salary. During the period of September 1, 2002 through December
31, 2002, Employer shall pay Employee base salary at the annual rate in effect
for Employee on August 31, 2002 ("Base Salary"). Employee's Base Salary for
calendar years after 2002 shall be determined by the Board of Directors of
Employer ("Board"), or an authorized committee of the Board, in accordance with
Employer's regular practice for reviewing and adjusting base salary


<PAGE>

for executive employees. Employee's Base Salary is payable in accordance with
Employer's regular payroll practices for executive employees.

            (c) Incentive Compensation. Employee shall be entitled to annual
incentive compensation opportunities pursuant to the terms of the "Management
Incentive Plan" (which term includes any successor plan or incentive
compensation arrangement) which has been approved by the Board to cover Employee
and other key personnel of Employer. Upon termination of Employee's employment
pursuant to subparagraph 3(a), 3(b), 3(c) or 6, Employee shall be entitled to a
pro rata portion (based on Employee's complete months of active employment in
the applicable year) of the annual incentive award that is payable with respect
to the year during which the termination occurs or, in the case of a termination
upon Employee's disability pursuant to subparagraph 3(c), the date the
Disability Period began.

      2. Duties during the Period of Employment. Employee shall have full
responsibility, subject to the control of the Board and Employer's President and
Chief Executive Officer, for the supervision of all aspects of Employer's
investment operations, and the discharge of such other duties and
responsibilities to Employer as may from time to time be reasonably assigned to
Employee by the Board or Employer's President and Chief Executive Officer.
Employee shall report to the President and Chief Executive Officer of Employer
or the President and Chief Executive Officer's designee. Employee shall devote
Employee's best efforts to the affairs of Employer, serve faithfully and to the
best of Employee's ability and devote all of Employee's working time and
attention, knowledge, experience, energy and skill to the business of Employer,
except that Employee may affiliate with professional associations, business and
civic organizations.


                                       2
<PAGE>

      3. Termination. Employee's employment by Employer shall be subject to
termination as follows:

            (a) Expiration of the Term. This Agreement shall terminate
automatically at the expiration of the Period of Employment unless the parties
enter into a written agreement extending Employee's employment, except for the
continuing obligations of the parties as specified hereunder.

            (b) Termination Upon Death. This Agreement shall terminate upon
Employee's death. In the event this Agreement is terminated as a result of
Employee's death, Employer shall continue payments of Employee's Base Salary for
a period of 90 days following Employee's death to the beneficiary designated by
Employee on the "Beneficiary Designation Form" attached to this Agreement as
Appendix A. Employee's beneficiary shall be free to dispose of any restricted
stock previously granted to Employee by Employer. Additionally, Employer shall
treat as immediately exercisable all unexpired stock options issued by Employer
and held by Employee that are not exercisable or that have not been exercised,
so as to permit the Beneficiary to purchase the balance of Community Bank
System, Inc. ("CBSI") Stock not yet purchased pursuant to said options until the
end of the full exercise period provided in the original grant of the option
right, determined without regard to Employee's death or termination of
employment.

            (c) Termination Upon Disability. Employer may terminate this
Agreement upon Employee's disability. For the purpose of this Agreement,
Employee's inability to perform Employee's duties hereunder by reason of
physical or mental illness or injury for a period of 26 successive weeks (the
"Disability Period") shall constitute disability. The determination of
disability shall be made by a physician selected by Employer and a physician


                                       3
<PAGE>

selected by Employee; provided, however, that if the two physicians so selected
shall disagree, the determination of disability shall be submitted to
arbitration in accordance with the rules of the American Arbitration Association
and the decision of the arbitrator shall be binding and conclusive on Employee
and Employer. During the Disability Period, Employee shall be entitled to 100%
of Employee's Base Salary otherwise payable during that period, reduced by any
other benefits to which Employee may be entitled for the Disability Period on
account of such disability (including, but not limited to, benefits provided
under any disability insurance policy or program, worker's compensation law, or
any other benefit program or arrangement). Upon termination pursuant to this
disability provision, Employee shall be free to dispose of any restricted stock
granted to Employee. Additionally, Employer shall treat as immediately
exercisable all unexpired stock options issued by Employer and held by Employee
that are not exercisable or that have not been exercised, so as to permit the
Employee to purchase the balance of CBSI Stock not yet purchased pursuant to
said options until the end of the full exercise period provided in the original
grant of the option right, determined without regard to Employee's disability or
termination of employment.

            (d) Termination for Cause. Employer may terminate Employee's
employment immediately for "cause" by written notice to Employee. For purposes
of this Agreement, a termination shall be for "cause" if the termination results
from any of the following events:

                  (i) Material breach of this Agreement;

                  (ii) Documented misconduct as an executive of Employer, or any
subsidiary or affiliate of Employer for which Employee is performing services
hereunder including, but not limited to, misappropriating any funds or property
of any such company, or


                                       4
<PAGE>

attempting to obtain any personal profit (x) from any transaction to which such
company is a party or (y) from any transaction with any third party in which
Employee has an interest which is adverse to the interest of any such company,
unless, in either case, Employee shall have first obtained the written consent
of the Board;

                  (iii) Unreasonable neglect or refusal to perform the duties
assigned to Employee under or pursuant to this Agreement, unless cured within 60
days following written notice to Employee of such neglect or refusal;

                  (iv) Conviction of a crime involving moral turpitude;

                  (v) Adjudication as a bankrupt, which adjudication has not
been contested in good faith, unless bankruptcy is caused directly by Employer's
unexcused failure to perform its obligations under this Agreement;

                  (vi) Documented failure to follow the reasonable, written
instructions of the Board or the President and Chief Executive Officer of
Employer, provided that the instructions do not require Employee to engage in
unlawful conduct; or

                  (vii) Any material and documented violation of the rules or
regulations of the Office of the Comptroller of the Currency or of any other
regulatory agency.

      Notwithstanding any other term or provision of this Agreement to the
contrary, if Employee's employment is terminated for cause, Employee shall
forfeit all rights to payments and benefits otherwise provided pursuant to this
Agreement; provided, however, that Base Salary shall be paid through the date of
termination.

            (e) Termination For Reasons Other Than Cause. In the event Employer
terminates Employee prior to December 31, 2005 for reasons other than cause,
Employee shall be entitled to a severance benefit equal to the greater of (i)
the sum of the annual


                                       5
<PAGE>

Base Salary in effect at the time of termination and the most recent payment to
Employee under the Management Incentive Plan, payable in equal biweekly
installments over the 12-month period following Employee's termination, or (ii)
amounts of Base Salary and expected Management Incentive Plan payments that
otherwise would have been payable through the balance of the unexpired term of
this Agreement, payable in biweekly installments through the balance of the
unexpired term of this Agreement. In addition, Employer shall: (iii) permit
Employee to dispose of any restricted stock granted to Employee; and (iv) treat
as immediately exercisable all unexpired stock options held by Employee that are
not exercisable or that have not been exercised, so as to permit Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right determined without regard to Employee's termination of employment.

            (f) Expiration of Term Without Renewal. In the event that Employee's
employment ends on December 31, 2005 solely because Employer chooses not to
renew or extend this Agreement beyond December 31, 2005 for reasons other than
cause, then Employee shall be entitled to a severance benefit equal to the sum
of the annual Base Salary in effect at the time of termination and the most
recent payment to Employee under the Management Incentive Plan, payable in equal
biweekly installments over the 12-month period following Employee's termination
of employment.

            (g) Employer shall have the right of first refusal to purchase from
Employee, or from Employee's beneficiary or estate, shares of CBSI stock
acquired pursuant to the exercise of stock options after the date of Employee's
termination of employment for any reason, in the event Employee, or Employee's
beneficiary or estate, elects to dispose or transfer


                                       6
<PAGE>

such acquired shares. Any purchase made pursuant to this subparagraph shall be
made at a price per share equal to the closing price per share of CBSI Stock (on
the principal public market on which CBSI Stock is traded; currently the New
York Stock Exchange) on the trading day that immediately precedes the date of
purchase. The right of first refusal described in this subparagraph shall expire
ten years from the date of Employee's termination of employment.

      4. Fringe Benefits.

            (a) Benefit Plans. During the Period of Employment, Employee shall
be eligible to participate in any employee pension benefit plans (as that term
is defined under Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended), Employer-paid group life insurance plans, medical plans,
dental plans, long-term disability plans, business travel insurance programs and
other fringe benefit programs maintained by Employer for the benefit of its
executive employees. Participation in any of Employer's benefit plans and
programs shall be based on, and subject to satisfaction of, the eligibility
requirements and other conditions of such plans and programs. Employer may
require Employee to submit to an annual physical, to be performed by a physician
of his own choosing. Employee shall be reimbursed for related expenses not
covered by Employer's health insurance plan, or any other plan in which Employee
is enrolled. Employee shall not be eligible to participate in Employer's
Severance Pay Plan maintained for other employees not covered by employment
agreements.

            (b) Expenses. Upon submission to Employer of vouchers or other
required documentation, Employee shall be reimbursed for Employee's actual
out-of-pocket travel and other expenses reasonably incurred and paid by Employee
in connection with Employee's duties hereunder. Reimbursable expenses must be
submitted to the Personnel Committee of the Board for review on a quarterly
basis.


                                       7
<PAGE>

            (c) Other Benefits. During the Period of Employment, Employee also
shall be entitled to receive the following benefits:

                  (i) Paid vacation of four weeks during each calendar year
(with no carry over of unused vacation to a subsequent year) and any holidays
that may be provided to all employees of Employer in accordance with Employer's
holiday policy; and

                  (ii) Reasonable sick leave.

      5. Stock Options. Employer shall cause the Personnel Committee of the
Board to review whether Employee should be granted options to purchase shares of
common stock of CBSI. Such review may be conducted pursuant to the terms of the
Community Bank System, Inc. 1994 Long-Term Incentive Compensation Program or
independently, as the Personnel Committee shall determine. Reviews shall be
conducted no less frequently than annually.

      6. Change of Control.

            (a) If Employee's employment with Employer (as an employee) shall
cease for any reason, including Employee's voluntary termination for "good
reason" (as defined in paragraph 6(e) below), but not including Employee's
termination for "cause" (as described in paragraph 3(d)) or Employee's voluntary
termination without "good reason," within 2 years following a "Change of
Control" that occurs during the Period of Employment, Employer shall:

                  (i) Pay to Employee the greater of (A) 200% of the sum of the
annual Base Salary in effect at the time of termination and the most recent
payment to Employee under the Management Incentive Plan, payable in equal
biweekly installments over the 24-month period following Employee's termination,
or (B) amounts of Base Salary and expected Management Incentive Plan payments
that otherwise would have been payable through the


                                       8
<PAGE>

balance of the unexpired term of this Agreement, payable in biweekly
installments through the balance of the unexpired term of this Agreement;

                  (ii) Provide Employee with fringe benefits, or the cash
equivalent of such benefits (equal to Employer's cost for such benefits),
identical to those described in paragraph 4(a) for the period during which Base
Salary is payable to Employee pursuant to (i) above. To the extent the benefits
provided to Employee in this paragraph 6(a)(ii) are deemed taxable benefits,
Employer shall reimburse Employee for taxes owed by Employee on the benefits and
tax reimbursement;

                  (iii) Treat as immediately exercisable all unexpired stock
options issued by Employer and held by Employee that are not otherwise
exercisable or that have not been exercised (so as to permit Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right, determined without regard to Employee's termination of
employment); and

                  (iv) Permit Employee to dispose of any restricted stock
granted to Employee.

            (b) If any portion of the amounts paid to, or value received by,
Employee following a "Change of Control" (whether paid or received pursuant to
this paragraph 6 or otherwise) constitutes an "excess parachute payment" within
the meaning of Internal Revenue Code Section 280G, then payments to Employee
pursuant to this Agreement shall be limited or modified to the extent necessary
to eliminate the application of Internal Revenue Code Section 280G.


                                       9
<PAGE>

            (c) Notwithstanding the foregoing of this paragraph 6, the Board may
elect, in its sole discretion, to pay all benefits due Employee pursuant to this
paragraph 6 in a single lump sum payment following a Change of Control and
Employee's termination of employment with Employer. Subject to the limitation
described in paragraph 6(b), in the event a single lump sum payment is made
pursuant to the foregoing sentence, the amount of the payment shall be increased
to the extent necessary to hold Employee harmless from any marginal income and
employment tax liability created by the single lump sum payment (i.e., the
income and employment tax liability that exceeds the income and employment tax
liability that would have been incurred by Employee if payments were made in the
manner and during the periods otherwise described in this paragraph 6).

            (d) For purposes of this paragraph 6, a "Change of Control" shall be
deemed to have occurred if:

                  (i) any "person," including a "group" as determined in
accordance with the Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of Employer representing 30% or more of the combined voting power of
Employer's then outstanding securities;

                  (ii) as a result of, or in connection with, any tender offer
or exchange offer, merger or other business combination (a "Transaction"), the
persons who were directors of Employer before the Transaction shall cease to
constitute a majority of the Board or the board of directors of any successor to
Employer;

                  (iii) Employer is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation shall
then be owned in the aggregate by the


                                       10
<PAGE>

former stockholders of Employer, other than (A) affiliates within the meaning of
the Exchange Act, or (B) any party to the merger or consolidation;

                  (iv) a tender offer or exchange offer is made and consummated
for the ownership of securities of Employer representing 30% or more of the
combined voting power of Employer's then outstanding voting securities; or

                  (v) Employer transfers substantially all of its assets to
another corporation which is not controlled by Employer.

            (e) For purposes of this paragraph 6, "good reason" shall mean
action taken by Employer that results in :

                  (i) An involuntary and material adverse change in Employee's
title, duties, responsibilities, or total remuneration;

                  (ii) An involuntary and material relocation of the office from
which Employee is expected to perform his duties; or

                  (iii) An involuntary and material adverse change in the
general working conditions (including travel requirements and clerical support)
applicable to Employee.

      By way of example, and not limitation, the following changes, if
involuntary, would constitute "good reason" for purposes of this Agreement: (A)
reducing or eliminating Employee's authority and responsibility to implement the
duties of the Chief Investment Officer as described in paragraph 2; (B)
requiring Employee to perform his services for Employer at an office located
outside of Onondaga County, New York; and (C) reducing or eliminating Employee's
authority and responsibility to manage Employer's interest rate risk and
liquidity.


                                       11
<PAGE>

      7. Withholding. Employer shall deduct and withhold from compensation and
benefits provided under this Agreement all necessary income and employment taxes
and any other similar sums required by law to be withheld.

      8. Covenants.

            (a) Confidentiality. Employee shall not, without the prior written
consent of Employer, disclose or use in any way, either during his employment by
Employer or thereafter, except as required in the course of his employment by
Employer, any confidential business or technical information or trade secret
acquired in the course of Employee's employment by Employer. Employee
acknowledges and agrees that it would be difficult to fully compensate Employer
for damages resulting from the breach or threatened breach of the foregoing
provision and, accordingly, that Employer shall be entitled to temporary
preliminary injunctions and permanent injunctions to enforce such provision.
This provision with respect to injunctive relief shall not, however, diminish
Employer's right to claim and recover damages. Employee covenants to use his
best efforts to prevent the publication or disclosure of any trade secret or any
confidential information concerning the business or finances of Employer or
Employer's affiliates, or any of its or their dealings, transactions or affairs
which may come to Employee's knowledge in the pursuance of his duties or
employment.

            (b) No Competition. Employee's employment is subject to the
condition that during the term of his employment hereunder and for the period
specified in paragraph 8(c) below, Employee shall not, directly or indirectly,
own, manage, operate, control or participate in the ownership, management,
operation or control of, or be connected as an officer, employee, partner,
director, individual proprietor, lender, consultant or otherwise with, or have
any financial interest in, or aid or assist anyone else in the conduct of, any
entity or business


                                       12
<PAGE>

(a "Competitive Operation") which competes in the banking industry or with any
other business conducted by Employer or by any group, affiliate, division or
subsidiary of Employer, in the states of New York and Pennsylvania. Employee
shall keep Employer fully advised as to any activity, interest, or investment
Employee may have in any way related to the banking industry. It is understood
and agreed that, for the purposes of the foregoing provisions of this paragraph,
(i) no business shall be deemed to be a business conducted by Employer or any
group, division, affiliate or subsidiary of Employer unless 5% or more of
Employer's consolidated gross sales or operating revenues is derived from, or 5%
or more of Employer's consolidated assets are devoted to, such business; (ii) no
business conducted by any entity by which Employee is employed or in which he is
interested or with which he is connected or associated shall be deemed
competitive with any business conducted by Employer or any group, division or
subsidiary of Employer unless it is one from which 2% or more of its
consolidated gross sales or operating revenues is derived, or to which 2% or
more of its consolidated assets are devoted; and (iii) no business which is
conducted by Employer at the Date of Termination and which subsequently is sold
by Employer shall, after such sale, be deemed to be a Competitive Operation
within the meaning of this paragraph. Ownership of not more than 5% of the
voting stock of any publicly held corporation shall not constitute a violation
of this paragraph.

            (c) Non-Competition Period. If Employee's employment with Employer
shall cease for any reason during the Period of Employment as defined in
paragraph 1(a) of this Agreement, the "non-competition period" shall begin on
the date the first payment is made pursuant to the terms of this Agreement and
shall end on the date the final payment is made pursuant to the terms of this
Agreement.


                                       13
<PAGE>

            (d) Certain Affiliates of Employer. It is understood that Employee
may have access to technical knowledge, trade secrets and customer lists of
affiliates of Employer or companies which Employer's parent may acquire in the
future and may serve as a member of the board of directors or as an officer or
employee of an affiliate of Employer. Employee covenants that he shall not,
during the term of his employment by Employer or for the period specified in
8(c) above, in any way, directly or indirectly, own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director, individual proprietor,
lender, consultant or otherwise aid or assist anyone else in any business or
operation which competes with or engages in the business of such an affiliate.

            (e) Termination of Payments. Upon written notice to Employee of the
breach by Employee of any covenant under this paragraph 8, Employer may offset
and/or recover from Employee immediately any and all amounts paid to Employee
under this Agreement in addition to any and all other remedies available to
Employer under the law or in equity.

      9. Notices. Any notice which may be given hereunder shall be sufficient if
in writing and mailed by certified mail, return receipt requested, to Employee
at his residence and to Employer at 5790 Widewaters Parkway, Dewitt, New York
13214, or at such other addresses as either Employee or Employer may, by similar
notice, designate.

      10. Rules, Regulations and Policies. Employee shall abide by and comply
with all of the rules, regulations, and policies of Employer, including without
limitation Employer's policy of strict adherence to, and compliance with, any
and all requirements of the banking, securities, and antitrust laws and
regulations.


                                       14
<PAGE>

      11. No Prior Restrictions. Employee affirms and represents that Employee
is under no obligations to any former employer or other third party which is in
any way inconsistent with, or which imposes any restriction upon, the employment
of Employee by Employer, or Employee's undertakings under this Agreement.

      12. Return of Employer's Property. After Employee has received notice of
termination or at the end of the term hereof, whichever first occurs, Employee
shall promptly return to Employer all documents and other property in his
possession belonging to Employer.

      13. Construction and Severability. The invalidity of any one or more
provisions of this Agreement or any part thereof, all of which are inserted
conditionally upon their being valid in law, shall not affect the validity of
any other provisions to this Agreement; and in the event that one or more
provisions contained herein shall be invalid, as determined by a court of
competent jurisdiction, the court shall have authority to modify such provision
in a manner that most closely reflects the intent of the parties and is valid.

      14. Governing Law. This Agreement was executed and delivered in New York
and shall be construed and governed in accordance with the laws of the State of
New York.

      15. Assignability and Successors. This Agreement may not be assigned by
Employee or Employer, except that this Agreement shall be binding upon and shall
inure to the benefit of the successor of Employer through merger or corporate
reorganization.

      16. Miscellaneous. This Agreement constitutes the entire understanding and
agreement between the parties with respect to the subject matter hereof and
shall supersede all prior understandings and agreements, including the Change of
Control Agreement between the parties that is scheduled to expire effective
December 31, 2005. This Agreement cannot be amended, modified, or supplemented
in any respect, except by a subsequent written agreement


                                       15
<PAGE>

entered into by the parties hereto. The services to be performed by Employee are
special and unique; it is agreed that any breach of this Agreement by Employee
shall entitle Employer (or any successor or assigns of Employer), in addition to
any other legal remedies available to it, to apply to any court of competent
jurisdiction to enjoin such breach. The provisions of paragraphs 6 and 8 hereof
shall survive the termination of this Agreement.

      17. Counterparts. This Agreement may be executed in counterparts (each of
which need not be executed by each of the parties), which together shall
constitute one and the same instrument.

      18. Arbitration and Fees. Any dispute between the parties relating to the
terms of this Agreement, or any interpretation, construction or enforcement
hereof, shall first be submitted to non-binding arbitration in Syracuse, New
York in accordance with the rules and regulations of the American Arbitration
Association then in effect. Each party shall be responsible for its own costs
and expenses in pursuing non-binding arbitration, and any arbitration fees or
costs shall be shared equally between the parties. However, if Employee is a
party in an arbitration to collect payments due pursuant to this Agreement and
prevails in collecting payments due in the arbitration or settlement of the
arbitration, Employer shall reimburse Employee for reasonable attorneys' fees
incurred by Employee in connection with such arbitration.


                                       16
<PAGE>

      The foregoing is established by the following signatures of the parties.

                                                COMMUNITY BANK SYSTEM, INC.


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

                                                Its:
                                                    ----------------------------


                                                COMMUNITY BANK, N.A.


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

                                                Its:
                                                    ----------------------------


                                                --------------------------------
                                                       JOSEPH J. LEMCHAK


                                       17
<PAGE>

                                   APPENDIX A

                          BENEFICIARY DESIGNATION FORM

      Pursuant to the Employment Agreement between (i) Community Bank System,
Inc. and Community Bank, N.A., and (ii) Joseph J. Lemchak, dated as of September
1, 2002 ("Agreement"), I, Joseph J. Lemchak, hereby designate
_________________________, my _____, as the beneficiary of amounts payable upon
my death in accordance with paragraph 3(b) of the Agreement. My beneficiary's
current address is ______________, ________, New York.

      My contingent beneficiary is __________________, my __________________. My
contingent beneficiary's address is ________________________________.


Dated: _____________
                                                 -------------------------------
                                                        Joseph J. Lemchak


--------------------------
         Witness


                                       18

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>6
<FILENAME>d61135_ex31-1.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

                                                                    Exhibit 31.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Sanford A. Belden, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Community Bank System,
Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15e and 15d-15e) for the registrant and we have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.


Date: November 5, 2004


/s/ Sanford A. Belden
---------------------
Sanford A. Belden,
President, Chief Executive Officer and Director


                                       33

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>7
<FILENAME>d61135_ex31-2.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

                                                                    Exhibit 31.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott A. Kingsley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Community Bank System,
Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15e and 15d-15e) for the registrant and we have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Dated: November 5, 2004


/s/ Scott A. Kingsley
---------------------
Scott A. Kingsley,
Treasurer and Chief Financial Officer


                                       34

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>8
<FILENAME>d61135_ex32-1.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

                                                                    Exhibit 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Community Bank System, Inc. (the
"Company") on Form 10-Q for the quarter ended September 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Sanford A. Belden, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)   the Report fully complies with the requirements of Section 13(a) or 15(d)
      of the Securities Exchange Act of 1934; and

(2)   the information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.


/s/ Sanford A. Belden
---------------------
Sanford A. Belden
President, Chief Executive Officer and Director
November 5, 2004


                                       35

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>9
<FILENAME>d61135_ex32-2.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

                                                                    Exhibit 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Community Bank System, Inc. (the
"Company") on Form 10-Q for the quarter ended September 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Scott A. Kingsley, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:

(1)   the Report fully complies with the requirements of Section 13(a) or 15(d)
      of the Securities Exchange Act of 1934; and

(2)   the information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.


/s/ Scott A. Kingsley
---------------------
Scott A. Kingsley,
Treasurer and Chief Financial Officer
November 5, 2004


                                       36

</TEXT>
</DOCUMENT>
</SUBMISSION>
