SCHEDULE 14A INFORMATION

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

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Community Bank System, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
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COMMUNITY BANK SYSTEM, INC.

5790 Widewaters Parkway
DeWitt, New York 13214-1883

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

April 13, 2006

     To the Shareholders of Community Bank System, Inc.:

     At the direction of the Board of Directors of Community Bank System, Inc., a Delaware corporation (the “Company”), NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of the Company (the “Meeting”) will be held at 1:00 p.m. on Tuesday, May 16, 2006 at the Wyndham Hotel in East Syracuse, New York for the purpose of considering and voting upon the following matters:

	1.		The election of four directors to hold office for a term of three years and until their successors have been duly elected.
	2.		The transaction of any other business which may properly be brought before the Meeting or any adjournment thereof.

By Order of the Board of Directors

Donna J. Drengel
Secretary

COMMUNITY BANK SYSTEM, INC.

5790 Widewaters Parkway
DeWitt, New York 13214-1883

PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS, MAY 16, 2006

     This Proxy Statement is furnished as part of the solicitation of proxies by the Board of Directors of Community Bank System, Inc. (the “Company”), the holding company for Community Bank, N.A. (the “Bank”), for use at the Annual Meeting of Shareholders of the Company (the “Meeting”) to be held at 1:00 p.m. on Tuesday, May 16, 2006, at the Wyndham Hotel in East Syracuse, New York. This Proxy Statement and the form of Proxy are first being sent to Shareholders on approximately April 13, 2006.

     At the Meeting, the Shareholders will be asked to vote for the election of directors. Three of the total of eleven directors who serve on the Company’s Board of Directors (excluding current directors whose terms will not continue after the Meeting) will stand for re-election to the Board at the Meeting. In addition, Mark E. Tryniski, the Executive Vice President and Chief Operating Officer of the Company, is standing for election for the first time. Voting will also be conducted on any other matters which are properly brought before the Meeting.

VOTING RIGHTS AND PROXIES

     The Board of Directors of the Company has fixed the close of business on March 30, 2006 as the record date for determining which Shareholders are entitled to notice of and to vote at the Meeting. At the close of business on the record date, 29,908,452 shares of common stock, $1.00 par value, were outstanding and entitled to vote at the Meeting. This is the Company’s only class of voting stock outstanding. Each share of outstanding common stock is entitled to one vote with respect to each item to come before the Meeting. There will be no cumulative voting of shares for any matter voted upon at the Meeting. The Bylaws of the Company provide that one-third of the outstanding shares of the Company, represented in person or by proxy, shall constitute a quorum at a Shareholder meeting.

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

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

     The Company will bear all costs of soliciting Proxies. The solicitation of Proxies will be by mail, but Proxies may also be solicited by telephone, telegram, or in person by directors, officers, and other regular employees of the Company or of the Bank. Should the Company, in order to solicit Proxies, request the

assistance of other financial institutions, brokerage houses, or other custodians, nominees, or fiduciaries, the Company will reimburse such persons for their reasonable expenses in forwarding proxy materials to Shareholders and obtaining their Proxies.

     The Annual Report of the Company for the fiscal year ended December 31, 2005, incorporating the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission, is being sent to Shareholders with this Proxy Statement.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table sets forth certain information with respect to persons known to the Company to own beneficially more than 5% of the outstanding shares of common stock of the Company as of March 30, 2006 (except as otherwise indicated).

		Number of Shares
Name and Address		of Common Stock
of Beneficial Owner		Beneficially Owned		Percent of Class
Dimensional Fund Advisors Inc. 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401		1,891,055 (1)			6.32	%
Barclays Global Investors, NA/ Barclays Global Fund Advisors 45 Freemont Street San Francisco, CA 94105		1,694,235 (2)			5.66	%

ITEM 1: ELECTION OF DIRECTORS AND INFORMATION WITH
RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS

     The first Item to be acted upon at the Meeting is the election of four directors, each to hold office for three years and until his or her successor shall have been duly elected and qualified. Directors David C. Patterson and Sally A. Steele, whose terms are scheduled to expire as of the date of the Meeting, will stand for re-election. In addition, Mark E. Tryniski, the Executive Vice President and Chief Operating Officer of the Company, will stand for election for the first time. Finally, Sanford A. Belden and Peter A. Sabia, whose terms of office expire as of the date of the Meeting, will not stand for re-election at the Meeting. As a result, John M. Burgess, who is presently serving a term of office to expire in 2007, will stand for election with Messrs. Patterson and Tryniski and Ms. Steele in order to maintain membership among the three classes as nearly equal as possible in accordance with the Company’s Certificate of Incorporation and Bylaws. The nominees receiving a plurality of the votes represented in person or by proxy at the Meeting will be elected directors.

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

     The information set forth below is furnished for each nominee for director to be elected at the Meeting and each director of the Company whose term of office continues after the Meeting. The share ownership numbers for certain directors include shares that would be issuable upon exercise of “Offset Options” granted to these directors in order to reduce the Company’s liability under its Stock Balance Plan. The purpose of the Offset Options is explained on page 11. See footnote “(e)” on page 7 for the number of currently exercisable stock options (including, without limitation, Offset Options) held by specific directors.

NOMINEES FOR DIRECTOR AND DIRECTORS CONTINUING IN OFFICE

Shares of Company Common

Director of

Business

Stock Beneficially Owned (c)

Name and

the Company

Experience During

as of March 30, 2006 (d)

Age (a)

Since

Past Five Years (b)

Number(e)

Percent

Nominees (for terms to expire at Annual Meeting in 2009):

John M. Burgess Age 69

1991

Retired. Prior to 1991, President of Kinney Drugs, Inc., a drug and retail chain with stores located throughout Upstate New York and Vermont.

89,488

.30

%

								Shares of Company Common
		Director of				Business		Stock Beneficially Owned (c)
Name and		the Company				Experience During		as of March 30, 2006 (d)
Age (a)		Since				Past Five Years (b)		Number(e)				Percent
David C. Patterson Age 64			1991			President and owner of Wight and Patterson, Inc., manufacturer and seller of livestock feed located in Canton, New York.			126,643				.42	%
Sally A. Steele (f) Age 50			2003			Attorney, self-employed as general practitioner with concentration in real estate and elder law, Tunkhannock, Pennsylvania.			64,725				.22	%
Mark E. Tryniski Age 45			N/A			Executive Vice President and Chief Operating Officer of the Company. Prior to February 2004, Executive Vice President and Chief Financial Officer of the Company. Prior to 2003, a partner at the accounting firm of PricewaterhouseCoopers, LLP in Syracuse, New York.			26,448				.09	%
Directors Continuing in Office:
Terms expiring at Annual Meeting in 2007:
Nicholas A. DiCerbo Age 59			1984			Partner, law firm of DiCerbo and Palumbo, Olean, New York.			284,663				.95	%
James A. Gabriel Age 58			1984			Owner, law firm of Franklin & Gabriel, Ovid, New York.			175,294				.58	%
Harold Kaplan (h) Age 72			2001			Co-owner, M.C.F., Inc., and Partner, D&T Real Estate, Scranton, Pennsylvania. Prior to April 2003, Co-Owner, Montage Foods, Inc., Scranton, Pennsylvania.			297,250				.99	%

								Shares of Company Common
		Director of				Business		Stock Beneficially Owned (c)
Name and		the Company				Experience During		as of March 30, 2006 (d)
Age (a)		Since				Past Five Years (b)		Number(e)				Percent
Charles E. Parente (g) Age 65			2004			Chief Executive Officer of Pagnotti Enterprises, Inc., a diversified holding company whose primary business includes workers’ compensation insurance, real estate, anthracite coal mining preparation and sales, and cable television.			215,882				.72	%
Terms expiring at Annual Meeting in 2008:
Brian R. Ace (f) Age 51			2003			Owner, Laceyville Hardware, Laceyville, Pennsylvania.			68,469				.23	%
Paul M. Cantwell, Jr. Age 64			2001			Owner, law firm of Cantwell & Cantwell, Malone, New York. Prior to January 2001, Chairman and President, The Citizens National Bank of Malone.			146,148				.49	%
William M. Dempsey Age 67			1984			Retired. Prior to 2001, Assistant to the President, Rochester Institute of Technology, Rochester, New York; President/ Dean, American College of Management and Technology (RIT), Dubrovnik, Croatia (August 1997 — July 1999); prior to August 1997, Vice President of Finance and Administration, RIT.			115,119				.38	%
Lee T. Hirschey Age 70			1991			Chairman and Chief Executive Officer, Climax Manufacturing Company, converter and manufacturer of paper products with facilities in Castorland, Lowville, and West Carthage, New York.			92,798				.31	%

In addition to the information provided above, the following summarizes the security ownership of the highest paid executive officers during the fiscal year ended December 31, 2005 who are not also directors continuing in office or nominees:

				Shares of Company Common
				Stock Beneficially Owned (c)
				as of March 30, 2006(d)
				Number (e)				Percent
Sanford A. Belden (i) Age 63		President and Chief Executive Officer			137,648				.46	%
James A. Wears Age 56		Retired; former President, New York Banking			134,169				.45	%
Michael A. Patton Age 60		Retired; former President, Financial Services			145,124				.48	%
Scott A. Kingsley Age 41		Executive Vice President, Chief Financial Officer			7,027				.02	%
Number of shares of Company common stock beneficially owned by all directors, persons chosen to become directors and executive officers of the Company as a group (18 persons)					2,456,448				7.94	%

BOARD COMPOSITION, MEETINGS, COMMITTEES, AND COMPENSATION

Independence

     The Company has adopted a set of Corporate Governance Guidelines, a copy of which is available on the Company’s website at www.communitybankna.com and in print to any Shareholder who requests it. The Corporate Governance Guidelines require that the Company’s Board of Directors have at all times a majority of directors who meet the criteria for independence established by the New York Stock Exchange (“NYSE”), and the Board currently meets this requirement.

     Under the NYSE rules, to be considered independent, the Board must determine that a director does not have a direct or indirect material relationship with the Company. In making determinations of independence, the Board of Directors uses categorical standards to assist it in making independence determinations. Under these standards, absent other material relationships, a director will be deemed to be independent unless within the preceding three years: (i) the director was employed by the Company or receives $100,000 per year in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service, (ii) the director was a partner of or employed by the Company’s independent auditor, (iii) the director is part of an interlocking directorate in which an executive officer of the Company serves on the compensation committee of another company that employs the director, (iv) the director is an executive officer or employee of another company that makes payments to, or receives payments from, the Company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million or 2% of the other company’s consolidated gross revenues, or (v) the director had an immediate family member in any of the categories in (i)-(iv).

     The Board has determined that 11 of the 13 current directors are independent under the NYSE standards. The independent directors are Brian R. Ace, John M. Burgess, Paul M. Cantwell, Jr., William M. Dempsey, James A. Gabriel, Lee T. Hirschey, Harold S. Kaplan, Charles E. Parente, David C. Patterson, Peter A. Sabia, and Sally A. Steele. In determining whether a director is independent, the Board relies on the stated categorical standards as the primary factor in determining whether a director has any material relationship with the Company, but also considers whether a director has any other relationships that would otherwise interfere with the exercise of his or her independent judgment. During the course of a year, directors are expected to inform the Board of any material changes in their circumstances or relationships that may impact their status or designation by the Board as independent.

     Pursuant to the Corporate Governance Guidelines, the Company’s independent directors meet in executive session at least quarterly, without the Company’s management and non-independent directors present. The director who presides at these meetings is determined by the Board on the recommendation of the Nominating and Corporate Governance Committee.

Director Meeting Attendance

     The Board of Directors held 12 regularly scheduled meetings and one special meeting during the fiscal year ended December 31, 2005. During this period, each director of the Company attended at least 75% of the aggregate of the total number of meetings of the Board and the total number of meetings held by committees of the Board on which he or she served.

     The Company encourages all directors to attend each annual meeting of Shareholders. All of the then 13 incumbent directors attended the Company’s last annual meeting of Shareholders held on May 11, 2005.

Board Committees

     Among its standing committees, the Board of the Bank has an Audit/Compliance/Risk Management Committee which also serves as the Company’s Audit Committee. As described more fully on page 24, the Audit/Compliance/Risk Management Committee reviews internal and external audits of the Company and the Bank and the adequacy of the Company’s and the Bank’s accounting, financial, and compliance controls, and investigates and makes recommendations to the Company’s Board and the Bank’s Board regarding the appointment of independent auditors. The Audit/Compliance/Risk Management Committee held eight meetings during 2005, and its present members are Directors William M. Dempsey (Chair), John M. Burgess, Lee T. Hirschey, and Charles E. Parente.

     The Bank’s Board also has a Compensation Committee which reviews and makes recommendations to the Bank’s Board regarding compensation adjustments and employee benefits to be instituted, and which also serves as the Company’s Compensation Committee. As described more fully on pages 20-22, the Compensation Committee reviews the compensation of nonofficer employees in the aggregate, and the salaries and performance of executive officers are reviewed individually. The Compensation Committee held eight meetings in 2005, and its present members are Directors Lee T. Hirschey (Chair), Brian R. Ace, David C. Patterson, and Peter A. Sabia.

     The Company has a Nominating and Corporate Governance Committee which makes recommendations to the Board for nominees to serve as directors. The Nominating and Corporate Governance Committee held one meeting in 2005, and its present members are Directors William M. Dempsey (Chair), Brian R. Ace, John M. Burgess, Lee T. Hirschey, and David C. Patterson. The Board has determined that each of the Nominating and Corporate Governance Committee’s members is “independent” as defined by the NYSE Rules.

     The Nominating and Corporate Governance Committee will consider written recommendations from Shareholders for nominees to serve on the Board that are sent to the Secretary of the Company at the Company’s main office. In considering candidates for the Board, the Nominating and Corporate Governance Committee and the Board consider the entirety of each candidate’s credentials and do not have any specific minimum qualifications that must be met by a nominee. Factors considered include, but are not necessarily limited to, outstanding achievement in a candidate’s personal career; broad experience; wisdom; integrity; ability to make independent, analytical inquiries; understanding of the business environment; and willingness to devote adequate time to Board duties. The Board believes that each director should have a basic understanding of (i) the principal operational and financial objectives and plans and strategies of the Company, (ii) the results of operations and financial condition of the Company and of any significant subsidiaries or business segments, and (iii) the relative standing of the Company and its business segments in relation to its competitors. Prior to nominating an existing director for re-election to the Board, the Board and the Nominating and Corporate Governance Committee consider and review, among other relevant factors, the existing director’s meeting attendance and performance, length of Board service, ability to meet regulatory independence requirements, and the experience, skills, and contributions that the director brings to the Board. The Nominating and Corporate Governance Committee has adopted a written charter setting forth its composition and responsibilities, a copy of which is available at the Company’s website at www.communitybankna.com and in print to any Shareholder who requests it.

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

Committees except the Audit/Compliance/Risk Management Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee.

Communication with Directors

     Shareholders may communicate directly with the Board of Directors of the Company by sending correspondence to the address shown below. The receipt of any such correspondence addressed to the Board of Directors and the nature of its content will be reported at the next Board meeting and appropriate action, if any, will be taken. If a Shareholder desires to communicate with a specific director, the correspondence should be addressed to that director. Correspondence addressed to a specific director will be delivered to the director promptly after receipt by the Company. The director will review the correspondence received and, if appropriate, report the receipt of the correspondence and the nature of its content to the Board of Directors at its next meeting, so that the appropriate action, if any, may be taken.

     Correspondence should be addressed to:

Community Bank System, Inc.
Attention: [Board of Directors or Specific Director]
5790 Widewaters Parkway
DeWitt, New York 13214-1883

Compensation of Directors

     As directors of both the Company and the Bank, Board members receive an annual retainer of $10,000, $750 for each Board meeting they attend, and $500 for each committee meeting they attend. Mr. Belden does not receive an annual retainer or compensation for attending Board and committee meetings. The Chair of the Board receives an all inclusive $55,000 retainer for serving in that capacity. The Chair of the Audit/Compliance/Risk Management Committee receives an annual retainer of $5,000; the Chairs of the Loan Committee, the Compensation Committee, and the Strategic/Executive Committee each receive an annual retainer of $3,500; and the Chairs of the Investment Committee, the Nominating and Corporate Governance Committee, the Operations/Technology Committee, and the Trust Committee each receive an annual retainer of $1,000. The Company pays the travel expenses incurred by each director in attending meetings of the Board.

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

     Consistent with the “Blue Ribbon Report” issued by the National Association of Corporate Directors, which suggests that director compensation be structured so that it is specifically aligned with the long-term interests of Shareholders, the Company’s 2004 Long-Term Incentive Compensation Program (the “2004 Incentive Plan”) allows for the issuance of Non-Statutory Stock Options to nonemployee directors. The Board believes that providing for the grant of Non-Statutory Stock Options to nonemployee directors is in the best interests of the Company. In the spirit of the Blue Ribbon Report, such a provision more closely aligns the interests of individual directors with the long-term interests of the Company’s Shareholders, and enables the Company to continue to attract qualified individuals to serve on the Board. In particular, when directors receive equity-based compensation such as stock options, their overall compensation is enhanced when the market price of the Company’s common stock increases and is adversely affected when the market price of the Company’s common stock decreases.

     The 2004 Incentive Plan provides that each eligible nonemployee director is to receive an option to purchase 2,320 shares of common stock on or about January 1st of his or her first year as a director, and an option to purchase 4,000 shares on or about the date of the January Board meeting each year thereafter. Each option granted to a nonemployee director is granted at an option price per share equal to the market value per share of the Company’s common stock on the date of grant, and is fully exercisable on its date of grant, provided that shares of common stock acquired pursuant to the exercise of such options may not be sold or otherwise transferred by a director within six months of the grant. Each option is exercisable until the earlier of (i) ten years from the date of grant, or (ii) termination of the optionee’s service on the Board for cause (as defined in the 2004 Incentive Plan). Notwithstanding the foregoing, to the extent that the Committee appointed by the Board to administer the 2004 Incentive Plan determines that grants may be exempt from Section 16(b) of the Securities Exchange Act of 1934, as amended, the Non-Statutory Stock Options granted to eligible nonemployee directors shall relate to a number of shares of common stock to be determined based upon the financial performance of the Company. Such financial performance shall be determined based upon factors including (but not limited to) the Company’s growth in earnings per share, asset quality, return on equity, and CAMELS rating (a measurement of capital, assets, management, earnings, liquidity, and sensitivity utilized by the Office of the Comptroller of the Currency, the Bank’s primary regulator). Pursuant to the 2004 Incentive Plan, each eligible nonemployee director received an option to purchase 3,604 shares effective January 19, 2005.

     In addition, in keeping with the spirit of the Blue Ribbon Report, effective January 1, 1996, the Board adopted a “Stock Balance Plan” for nonemployee directors of the Company who have completed at least six months of service as director. The plan establishes an account for each eligible director. Amounts credited to those accounts reflect the value of 400 shares of the Company’s common stock for each year of service between 1981 and 1995 at the December 31, 1995 market value, plus an annual amount equal to 400 additional shares of common stock beginning in 1996, plus an annual earnings credit equal to the one-year average total return on the Company’s common stock. The crediting of additional units beginning in 1996 is subject to an adjustment factor which reflects the Company’s asset quality, return on equity, and CAMELS rating. The account balance is payable to each director in the form of a lifetime annuity or, at the election of the director, monthly installment payments over a three, five, or ten year period following the later of age 55 or disassociation from the Board, is subject to a six-year vesting schedule, and is forfeitable in the event of termination from the Board for cause.

     The 2004 Incentive Plan allows the grant of “Offset Options” to directors. The effect of these Offset Options is to permit the Company to reduce the grantee’s Stock Balance Plan account balance by an amount equal to the growth in value of the Offset Options (i.e., the amount by which the aggregate fair market value of the common stock underlying the Offset Options exceeds the aggregate exercise price of the Offset Options) as of the date on which the director’s account is valued, provided that a director’s account may not be reduced below zero. As such, the Offset Options are not intended to materially change the level of compensation to participating directors under the Stock Balance Plan, but are intended

to reduce the cost of director compensation to the Company. In the event that the growth in value of a director’s Offset Options is less than the value of the director’s Stock Balance Plan account as of the date that the Offset Options are exercised, the shortfall will be paid to the director either in cash or, at the Company’s option in the case of an exercise prior to retirement, by the issuance of additional Offset Options. In the event that the growth in value of a director’s Offset Options exceeds the value of the director’s Stock Balance Plan account, no adjustment will be made.

CODE OF ETHICS

     The Company has a Code of Ethics for its directors, officers and employees. The Code of Ethics requires that individuals avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner, and otherwise act with integrity and in the best interests of the Company. In addition, the Code of Ethics requires individuals to report illegal or unethical behavior they observe.

     The Company also has adopted a Code of Ethics for Senior Executive Officers that applies to its chief executive officer, chief financial officer, chief accounting officer and other senior officers performing similar functions. This Code of Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws and regulations.

     The text of each Code is posted on the Company’s website at www.communitybankna.com and is available in print to any Shareholder who requests it. The Company intends to report and post on its website any amendment to or waiver from any provision in the Code of Ethics for Senior Executive Officers as required by SEC rules.

COMPENSATION OF EXECUTIVE OFFICERS

     The following table sets forth information concerning compensation paid to those persons who served as chief executive officer (or in an equivalent capacity) during 2005 and to the other most highly compensated executive officers whose annual salary and bonus earned during 2005 exceeded $100,000.

SUMMARY COMPENSATION TABLE

																		Long-Term
		Annual Compensation																Compensation Awards
														Other Annual								All Other
Name and										Bonus ($)				Compensation								Compensation
Principal Position		Year				Salary ($)				(1)				($) (2)				Stock Options (#)				($) (3)
Sanford A. Belden			2005				539,634				269,817				5,829				67,359				358,647
President and Chief			2004				522,648				261,324				4,860				43,158				399,847
Executive Officer			2003				503,758				287,847				5,303				47,754				493,198
James A. Wears			2005				235,655				70,697				6,984				23,532				154,674
President, New York Banking			2004				228,238				68,471				5,285				14,676				118,886
			2003				219,988				89,557				4,676				15,114				87,546
Michael A. Patton			2005				235,655				70,697				514				23,532				146,084
President, Financial Services			2004				228,238				68,471				3,491				14,676				76,419
			2003				219,988				89,557				3,512				15,114				99,679
Mark E. Tryniski (4)			2005				300,000				90,000				6,479				12,674				26,982
Executive Vice President/			2004				250,002				75,000				5,368				14,676				17,359
Chief Operating Officer			2003				129,808				53,432				2,125				0				277
Scott A. Kingsley (4)			2005				245,000				73,500				0				10,139				15,858
Executive Vice President,			2004				94,904				29,328				0				0				30
Chief Financial Officer

OPTION/SAR GRANTS IN LAST FISCAL YEAR

     The following table provides further information on grants of stock options pursuant to the 2004 Incentive Plan in fiscal year 2005 to the named executives as reflected in the Summary Compensation Table on page 13.

						% of Total
						Options
						Granted to				Exercise								Market				Potential Realizable Value at
						Employees				or Base								Value on				Assumed Annual Rates of Stock Price
		Options				in Fiscal				Price				Expiration				Grant Date				Appreciation for Option Term($)
Name		Granted (#)				Year				($/Sh)				Date				($/Sh)				5%				10%
Sanford A. Belden			33,121				5.71	%			24.84				1/19/15				24.84				517,408				1,311,213
Sanford A. Belden			34,238				5.91	%			23.04				12/21/15				23.04				496,099				1,257,213
James A. Wears			11,571				2.00	%			24.84				1/19/15				24.84				180,759				458,080
James A. Wears			11,961				2.06	%			23.04				12/21/15				23.04				173,312				439,206
Michael A. Patton			11,571				2.00	%			24.84				1/19/15				24.84				180,759				458,080
Michael A. Patton			11,961				2.06	%			23.04				12/21/15				23.04				173,312				439,206
Mark E. Tryniski			12,674				2.19	%			24.84				1/19/15				24.84				197,990				501,745
Scott A. Kingsley			10,139				1.75	%			24.84				1/19/15				24.84				158,389				401,389

     Effective January 19, 2005, the Board of Directors issued incentive stock options to Messrs. Belden, Wears, Patton, Tryniski and Kingsley at the then current market price of $24.84 per share. Such options become exercisable over the course of five years, with one-fifth of the options becoming exercisable on January 1, 2006, 2007, 2008, 2009, and 2010. Effective December 21, 2005, the Board of Directors issued non-statutory stock options to Messrs. Belden, Wears, and Patton at the then current market price of $23.04 per share. Such options were issued in connection with these executives’ anticipated retirement pursuant to the Company’s announced succession plan, in lieu of options that would normally have been issued in January 2006, and were exercisable as of the date of their issuance.

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

     The following table provides information for the named executive officers, with respect to (i) stock options exercised in fiscal year 2005, (ii) the number of stock options held at the end of fiscal year 2005, and (iii) the value of in-the-money stock options held at the end of fiscal year 2005.

										Number of Unexercised								Value of Unexercised
		Shares								Options								In-the-Money Options
		Acquired on				Value				at 12/31/05 (#)								at 12/31/05 ($) (1)
Name		Exercise (#)				Realized ($)				Exercisable				Unexercisable				Exercisable				Unexercisable
Sanford A. Belden			37,632				347,221				175,763				0				541,133				0
James A. Wears			22,736				211,017				92,526				0				434,225				0
Michael A. Patton			44,710				465,284				64,830				0				213,349				0
Mark E. Tryniski			0				0				8,934				33,416				21,570				32,355
Scott A. Kingsley			0				0				3,000				22,139				60				240

PENSION PLAN INFORMATION

     The Company maintains a noncontributory defined benefit pension plan which is funded by the Company and administered by a committee appointed by the Board of Directors. The plan covers all employees of the Company who have completed one full year of continuous service, other than employees covered by a collective bargaining agreement (unless such collective bargaining agreement expressly provides for plan coverage).

     The plan includes two types of benefit formulas: a “traditional” formula and a “cash balance” formula. The plan also includes certain minimum benefit and supplemental benefit provisions. An eligible participant earns benefits under either the traditional formula or the cash balance formula (subject to any applicable minimum or supplemental benefit provisions). Messrs. Wears and Patton are covered under the traditional formula and Messrs. Belden, Tryniski, and Kingsley are covered under the cash balance formula. Each is covered by one or more minimum or supplemental benefit provisions.

     Under the traditional formula, eligible participants generally accrue benefits based on the participant’s service and the participant’s average annual compensation for the highest consecutive five years of plan participation. Pension benefits earned under the traditional formula may be distributed as a lump sum or as an annuity. The following table sets forth the estimated annual benefits under the plan’s traditional formula adopted for post-1988 years of service, payable upon retirement at age 65 in the form of a single life annuity. The amounts are not subject to any deduction for Social Security. For purposes of calculating the benefit, an employee may not be credited with more than 35 years of service.

PENSION PLAN TABLE

YEARS OF SERVICE

Highest Five
Year Average
Compensation (1)		15				20				25				30				35
100,000			18,512				24,682				30,853				37,023				43,194
150,000			30,137				40,182				50,228				60,273				70,319
200,000			41,762				55,682				69,603				83,523				97,444
250,000			44,087				58,782				73,478				88,173				102,869
300,000			44,087				58,782				73,478				88,173				102,869
350,000			44,087				58,782				73,478				88,173				102,869
400,000			44,087				58,782				73,478				88,173				102,869

     The base salary and cash award amounts in the Summary Compensation Table on page 13 reflect the covered compensation under the plan for Messrs. Wears and Patton, each of whom was credited with 34 years of service under the plan as of his retirement effective December 31, 2005. The estimated annual benefits payable upon retirement at normal retirement age under the traditional formula (and applicable minimum and supplemental benefit provisions) for Messrs. Wears and Patton would have been $178,508 and $168,725, respectively. In connection with their retirement, Messrs. Wears and Patton received lump

sump benefit payments of $1,346,076 and $1,567,924, respectively, pursuant to the plan’s lump sum distribution option.

     Under the cash balance formula, benefits are expressed in the form of a hypothetical account balance. Each year a participant’s cash balance account is increased by (i) service credits based on the participant’s covered compensation and compensation in excess of the Social Security taxable wage base for that year, and (ii) interest credits based on the participant’s account balance as of the end of the prior year. Service credits accrue at a rate between 5 percent and 6.10 percent, based on the participant’s age and date of participation. Pension benefits earned under the cash balance formula may be distributed as a lump sum or as an annuity. The estimated annual benefits payable upon retirement at normal retirement age under the cash balance formula (and applicable minimum and supplemental benefit provisions) for Messrs. Tryniski and Kingsley are $80,018 and $91,959, respectively. As described below, Mr. Belden is scheduled to retire on July 31, 2006. The estimated annual benefit payable to Mr. Belden upon retirement as of that date under the cash balance formula (and applicable minimum and supplemental benefit provisions) is $175,000.

     In addition to benefits under the tax-qualified defined benefit pension plan, Messrs. Belden, Wears, Patton, Tryniski and Kingsley earned supplemental retirement benefits pursuant to individual nonqualified supplemental retirement plan agreements (described on pages 19-20 below).

Employment Agreements

     Sanford A. Belden. The Company has an employment agreement with Mr. Belden that (as amended effective December 1, 2005 in furtherance of the Company’s succession plan) provides for his employment as the Company’s President and Chief Executive Officer until July 31, 2006. The agreement provides that during the period from March 1, 2004 through December 31, 2004, the Company shall pay Mr. Belden a base salary at the annual rate in effect on February 29, 2004, which was $522,648. Mr. Belden’s base salary for calendar years after 2004 shall be increased at the same rate as the rate applied by the Company in its merit pool for salary increases to be paid for the applicable calendar year. The agreement may be terminated by the Board for cause at any time, and shall terminate upon Mr. Belden’s death or disability. If Mr. Belden’s employment is terminated by the Company prior to July 31, 2006 for reasons other than cause, death, or disability, Mr. Belden will be entitled to severance pay equal to the greater of (i) the sum of Mr. Belden’s annual base salary at the time of the termination and the most recent payment to Mr. Belden under the Company’s Management Incentive Plan, or (ii) amounts of base salary and expected Management Incentive Plan payments that otherwise would have been payable to Mr. Belden through the unexpired term of his employment (provided that in the event that Mr. Belden’s involuntary termination without cause occurs under circumstances entitling him to the change in control benefits described in the following paragraph, the foregoing severance pay shall be reduced by the consulting fee payments to be made to Mr. Belden as described below). In addition, Mr. Belden will be permitted to dispose of any restricted stock previously granted to him, all of his stock options will become fully exercisable, and the Company will cover Mr. Belden and his eligible dependents under all benefit plans and programs available to its retired employees. Upon Mr. Belden’s retirement on July 31, 2006, the Company will enter into a separate consulting agreement with him, pursuant to which the Company will retain him as a consultant for a period of 36 months at a compensation rate of $4,000 per month.

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

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

     James A. Wears. The Company entered into a separation agreement with Mr. Wears effective as of his retirement on December 31, 2005. Mr. Wears’s prior employment agreement with the Company had provided for his employment until December 31, 2007. In consideration of his voluntary early retirement in furtherance of the Company’s succession plan, the Company agreed to pay Mr. Wears $611,265 in three installments in July 2006, January 2007 and January 2008, with interest at the rate of 4% on the unpaid amount. The Company also agreed to (a) amend the basic formula for Mr. Wears’s supplemental retirement benefit to provide that Mr. Wears will be deemed to have retired on December 31, 2007 for purposes of determining supplemental retirement benefits; (b) grant Mr. Wears options that would have been granted to him in 2006 under the 2004 Incentive Plan as if he had been employed through February 2006; (c) treat Mr. Wears as having retired in good standing (and, as such, to treat all of his stock options as fully vested); and (d) transfer to Mr. Wears ownership of the Company-owned vehicle used by him.

     Michael A. Patton. The Company entered into a separation agreement with Mr. Patton effective as of his retirement on December 31, 2005. Mr. Patton’s prior employment agreement with the Company had provided for his employment until December 31, 2007. In consideration of his voluntary early retirement in furtherance of the Company’s succession plan, the Company agreed to pay Mr. Patton a lump sum payment of $511,265. The Company also agreed to (a) amend the basic formula for Mr. Patton’s supplemental retirement benefit to provide that Mr. Patton will be deemed to have retired on December 31, 2007 for purposes of determining supplemental retirement benefits; (b) grant Mr. Patton options that would have been granted to him in 2006 under the 2004 Incentive Plan as if he had been employed through February 2006; (c) treat Mr. Patton as having retired in good standing (and, as such, to treat all of his stock options as fully vested); and (d) transfer to Mr. Patton ownership of the Company-owned vehicle used by him.

     Mark E. Tryniski. The Company has an employment agreement with Mr. Tryniski providing for his continued employment until December 31, 2008. The agreement provides that during the period from December 1, 2005 until the date on which he assumes the duties of President and Chief Executive Officer, the Company will pay Mr. Tryniski a base salary of $325,000. Upon Mr. Tryniski’s assumption of the duties of President and Chief Executive Officer, the Company shall pay Mr. Tryniski a base salary at an annual rate of at least $400,000, with his base salary for calendar years after 2006 to be adjusted in accordance with the Company’s regular payroll practices for executive employees. The agreement may be terminated by the Company for cause at any time, and shall terminate upon Mr. Tryniski’s death or disability. The agreement provides for severance pay in the event of a termination for reasons other than cause, death, or disability, or if Mr. Tryniski is not appointed as President and Chief Executive Officer upon Mr. Belden’s retirement, equal to the greater of (i) 200% of the sum of Mr. Tryniski’s annual base salary at the time of termination and the most recent payment to him under the Company’s Management Incentive Plan, or (ii) amounts of base salary and expected Management Incentive Plan payments payable to Mr. Tryniski through the unexpired term of his employment. In addition, if the agreement is not renewed at the end of its term (other than by reason of Mr. Tryniski’s refusal to negotiate or rejection of a

bona fide offer from the Company), Mr. Tryniski is entitled to severance pay equal to 200% of the sum of his then current base salary plus the most recent payment to him under the Management Incentive Plan.

     If Mr. Tryniski’s employment is terminated for reasons other than cause, death, or disability within two years following a change of control or if Mr. Tryniski voluntarily resigns during this period based upon an involuntary and material adverse change in his title, duties, responsibilities, working conditions, total remuneration, or the geographic location of his assignment, the Company will retain him as a consultant for three years at an annual consulting fee equal to his then current base salary plus the award to Mr. Tryniski under the Management Incentive Plan for the year immediately preceding the change in control, will permit him to dispose of any restricted stock previously granted to him, and all of his stock options will become fully exercisable. As an alternative to paying change of control benefits to Mr. Tryniski over a three-year period, the Board of Directors may elect, in its sole discretion, to pay all benefits due to Mr. Tryniski in a single lump sum payment within 90 days following the change of control and Mr. Tryniski’s termination of employment. In such event, the amount of the lump sum payment will be increased to hold Mr. Tryniski harmless from all income and excise tax liability attributable to the lump sum payment.

     Scott A. Kingsley. The Company has an employment agreement with Mr. Kingsley providing for his continued employment until December 31, 2007. The agreement provides that during the period from December 31, 2004 to December 31, 2007, the Company shall pay Mr. Kingsley a base salary at an annual rate of at least $235,000, with his base salary for calendar years after 2004 to be adjusted in accordance with the Company’s regular payroll practices for executive employees. The agreement may be terminated by the Company for cause at any time, and shall terminate upon Mr. Kingsley’s death or disability. The agreement provides for severance pay, in the event of a termination for reasons other than cause, death, or disability, equal to the greater of (i) the sum of Mr. Kingsley’s annual base salary at the time of termination and the most recent payment to him under the Company’s Management Incentive Plan, or (ii) amounts of base salary and expected Management Incentive Plan payments payable to Mr. Kingsley through the unexpired term of his employment. In addition, if the agreement is not renewed at the end of its term (other than by reason of Mr. Kingsley’s refusal to negotiate or rejection of a bona fide offer from the Company), Mr. Kingsley is entitled to severance pay equal to 175% of the sum of his then current base salary plus the most recent payment to him under the Management Incentive Plan.

     If Mr. Kingsley’s employment is terminated for reasons other than cause, death, or disability within two years following a change of control, or if Mr. Kingsley voluntarily resigns during this period based upon an involuntary and material adverse change in his title, duties, responsibilities, working conditions, total remuneration, or the geographic location of his assignment, the Company will retain him as a consultant for three years at an annual consulting fee equal to his then current base salary plus the award to Mr. Kingsley under the Management Incentive Plan for the year immediately preceding the change in control, will permit him to dispose of any restricted stock previously granted to him, and all of his stock options will become fully exercisable. As an alternative to paying change of control benefits to Mr. Kingsley over a three-year period, the Board of Directors may elect, in its sole discretion, to pay all benefits due to Mr. Kingsley in a single lump sum payment within 90 days following the change of control and Mr. Kingsley’s termination of employment. In such event, the amount of the lump sum payment will be increased to hold Mr. Kingsley harmless from all income and excise tax liability attributable to the lump sum payment.

Supplemental Retirement Plan Agreements

     The Company has supplemental retirement plan agreements with Messrs. Belden, Wears, Patton, Tryniski, and Kingsley.

     Sanford A. Belden. Under Mr. Belden’s supplemental retirement plan agreement, the Company must provide Mr. Belden with an annual supplemental retirement benefit equal to the product of (i) 5% times Mr. Belden’s number of years of service, considering only the first ten years of service, plus 2% times Mr. Belden’s number of years of service in excess of ten years, times (ii) his final average salary and cash incentive payment. Unless Mr. Belden voluntarily terminates his employment prior to July 1, 2006, the amount of Mr. Belden’s annual supplemental retirement benefits shall not be less than what would be calculated if he remained employed pursuant to his employment agreement through December 31, 2007 and received the base salary, including increases, and Management Incentive Plan payments (assuming a minimum incentive payment equal to 50% of base salary under the Company’s Management Incentive Plan) contemplated by the employment agreement. The supplemental retirement benefit is reduced by the benefit payable under the Company’s pension plan, 50% of Mr. Belden’s Social Security benefit, and Company contributions on Mr. Belden’s behalf and earnings attributable thereto under the Company’s 401(k) Employee Stock Ownership Plan and Deferred Compensation Plan for Certain Executive Employees. The supplemental retirement benefit is payable upon the later of Mr. Belden’s cessation of employment with the Company or his receipt of the final payment due under his employment agreement, generally in the form of an actuarially reduced joint and 100% survivor benefit. Benefits payable in another form are subject to the same actuarial adjustments as benefits under the Company’s pension plan.

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

     James A. Wears and Michael A. Patton. Under the supplemental retirement plan agreements for Messrs. Wears and Patton, the Company shall pay the employee an annual supplemental retirement benefit equal to the excess (if any) of (i) the annual benefit that the employee would have earned pursuant to the Company’s pension plan if (a) 100% of the employee’s annual compensation that is disregarded for pension plan purposes solely because of the limit imposed by Internal Revenue Code Section 401(a)(17) is added to the amount of the employee’s annual compensation actually taken into account pursuant to the pension plan and (b) Internal Revenue Code Section 415 is disregarded, minus (ii) the annual benefit actually payable to the employee pursuant to the pension plan. The supplemental retirement benefit is payable upon the later of the employee’s cessation of employment with the Company or his receipt of the final payment due under his employment agreement. The benefit is payable in the form of an actuarially

reduced joint and 50% survivor benefit, provided that benefits payable in another form are subject to the same actuarial adjustments as benefits under the Company’s pension plan. Pursuant to the separation agreements described on page 17, the supplemental retirement plan agreements for Messrs. Wears and Patton were amended to provide that the employee will be deemed to have retired on December 31, 2007 for purposes of calculating his supplemental retirement benefit.

     Mark E. Tryniski and Scott A. Kingsley. Under the supplemental retirement plan agreements for Messrs. Tryniski and Kingsley, the Company shall pay the employee an annual supplemental retirement benefit equal to the excess (if any) of (i) the annual benefit that he would have earned pursuant to the Company’s pension plan if (a) 100% of his annual compensation that is disregarded for pension plan purposes solely because of the limit imposed by Internal Revenue Code Section 401(a)(17) is added to the amount of his annual compensation actually taken into account pursuant to the pension plan and (b) Internal Revenue Code Section 415 is disregarded, minus (ii) the annual benefit actually payable to him pursuant to the pension plan. The supplemental retirement benefit is payable upon the later of the employee’s cessation of employment with the Company, his receipt of the final payment due under his employment agreement, or his attainment of age 55. The benefit is payable in the form of an actuarially reduced joint and 50% survivor benefit, provided that benefits payable in another form are subject to the same actuarial adjustments as benefits under the Company’s pension plan.

REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION

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

Philosophy

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

     The Company pays competitively. The Company regularly compares its cash, equity and benefits based compensation practices with those of other companies of similar size, operating in similar geographic market areas, many of which are represented in the stock performance graph included on page 23, and establishes compensation parameters based on that review.

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

     The Company strives for fairness in the administration of pay. The Company strives to ensure that compensation levels accurately reflect the level of accountability that each individual has within the Company; employees are informed of the total compensation program; decisions made regarding individual performance which affect compensation matters are based upon an objective assessment of performance; and all employees have equal access to positions within the Company which provide for increased levels of total compensation.

     The process of assessing performance involves the following:

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

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

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

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

Compensation Programs

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

          Cash-Based Compensation

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

               Management Incentive Plan. The Company maintains an annual incentive plan in which 31% of its employees participate. The Company’s performance to targeted asset quality, growth in earnings per share, and CAMELS rating, which targets are approved by the Board, triggers the payment of cash awards for all employees in this group. Award levels, which amount to a percentage of salary, have been established for different organizational levels within the Company. For Mr. Belden, 100% of his award is determined by the Company’s performance relative to the financial targets described above. For Messrs. Wears, Patton, Tryniski, and Kingsley, 80% of their respective award opportunities reflect the Company’s performance relative to the financial targets, and 20% of their respective award opportunities reflect performance to other quantitative and qualitative goals specific to their areas of responsibility.

          Equity-Based Compensation

               Stock Option Program. The purpose of this program is to provide additional incentives to employees to work to maximize Shareholder value. The option program serves as an effective tool in recruiting key individuals and utilizes vesting periods to encourage these individuals to continue in the employ of the Company. The Board frequently awards options in years during which the Company has

achieved its financial targets. The number of stock options issued generally reflects a percentage of salary; and various percentages have been established for different organizational levels within the Company.

               Restricted Stock. The Company has, on occasion, issued limited amounts of restricted stock to individuals to support a variety of business objectives. Examples include: performance unit shares have been issued in start-up and turnaround assignments, with vesting schedules tied to specific performance criteria; and restricted shares have been issued to employees for extraordinary service in consummating acquisitions.

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

CEO Compensation

     In December 2005, the full Board formally reviewed Mr. Belden’s performance for fiscal year 2005, his twelfth full year as the Company’s President and CEO. Having determined that the Company’s level of performance relative to the majority of its previously approved annual and long-term financial targets had been surpassed, the Board, operating under the terms of the Management Incentive Plan disclosed in this Report, authorized the payment of Mr. Belden’s cash award for 2005, which amounted to $269,817. Mr. Belden’s $539,634 base salary level for 2005 is well supported by competitive wage survey data, and the increase over his 2004 base salary level is well supported by the Company’s strategic accomplishments and financial performance during the 2004 evaluation period.

     The foregoing report has been provided by Lee T. Hirschey (Chair), Brian R. Ace, David C. Patterson, and Peter A. Sabia, members of the Compensation Committee. The Board has determined that each of the Compensation Committee’s members is “independent” as defined by the NYSE Rules. The Compensation Committee has adopted a written charter setting forth its composition and responsibilities, a copy of which is available at the Company’s website at www.communitybankna.com and in print to any Shareholder who requests it.

          Stock Performance Graph

     The following graph compares cumulative total shareholder returns on the Company’s common stock over the last five fiscal years to the S&P SmallCap Commercial Banks Index, the Nasdaq Bank Index, the S&P 600 SmallCap Index (of which the Company became a member in 2004), and the Russell 2000 Index (of which the Company became a member in 2003). Total return values were calculated as of December 31 of each indicated year assuming a $100 investment on December 31, 2000 and reinvestment of dividends.

		2000				2001				2002				2003				2004				2005
Community Bank System, Inc.			100.00				110.09				136.59				220.11				260.84				214.97
S&P SmallCap Commercial Banks Index			100.00				114.50				122.60				164.29				199.33				181.53
Nasdaq Bank Index			100.00				112.68				120.50				160.29				182.16				178.65
S&P 600 SmallCap Index			100.00				106.54				90.96				126.23				154.83				166.75
Russell 2000 Index			100.00				102.63				81.63				120.22				142.36				148.94

AUDIT COMMITTEE REPORT

     In accordance with its written charter adopted by the Board of Directors, a copy of which is available at the Company’s website at www.communitybankna.com and in print to any Shareholder who requests it, the Bank’s Audit/Compliance/Risk Management Committee (which also serves as the Company’s Audit Committee) assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, and financial reporting practices of the Company and the Bank. The Committee reviews internal and external audits of the Company and the Bank and the adequacy of the Company’s and the Bank’s accounting, financial, and compliance controls, and investigates and makes recommendations to the Board regarding the appointment of independent auditors.

     The Audit/Compliance/Risk Management Committee is comprised of four directors, each of whom the Board has determined to be “independent” as defined by the Sarbanes-Oxley Act and the NYSE Rules. Committee members may not serve simultaneously on the audit committees of more than two other public companies without approval of the full Board. To date, no such approval has been granted. Each of the Audit/Compliance/Risk Management Committee members are financially literate as that qualification has been interpreted by the Board and the Board has determined that Charles E. Parente, who serves on the Audit/Compliance/Risk Management Committee, qualifies as an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K promulgated by the Securities and Exchange Commission.

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

     The Committee discussed and reviewed with the independent auditors all communications required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees,” and, with and without management present, discussed and reviewed the results of the independent auditors’ examination of the financial statements. The Committee also reviewed with management and the independent auditors the audited financial statements of the Company as of and for the fiscal year ended December 31, 2005.

     Based on the above-mentioned reviews and discussions with management and the independent auditors, the Committee recommended to the Board of Directors that the Company’s audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005, for filing with the Securities and Exchange Commission.

     The foregoing report has been provided by William M. Dempsey (Chair), John M. Burgess, Lee T. Hirschey, and Charles E. Parente, members of the Audit/Compliance/Risk Management Committee.

AUDIT FEES

     The following table sets forth the aggregate fees billed to the Company by PricewaterhouseCoopers LLP for professional services rendered for the fiscal years ended December 31, 2005 and 2004.

		2005				2004
Audit Fees		$	343,500			$	325,000
Audit Related Fees (1)			12,000				49,417
Tax Fees (2)			145,275				274,525
All Other Fees (3)			7,334				0

     Pursuant to the Audit Committee Charter, the Company is required to obtain pre-approval by the Audit/Compliance/Risk Management Committee for all audit and permissible non-audit services obtained from its independent auditors to the extent required by applicable law. In accordance with this pre-approval policy, the Audit/Compliance/Risk Management Committee pre-approved 100% of the Audit Fees, 100% of the Audit Related Fees, 100% of the Tax Consulting Fees, and 100% of the “All Other” Fees for fiscal 2005 and fiscal 2004.

TRANSACTIONS WITH MANAGEMENT

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

     Outside of these normal customer relationships, none of the directors or executive officers of the Company or the Bank and no 5% Shareholders of the Company (or members of the immediate families of any of the above or any corporations, organizations, or trusts with which such persons are associated) maintains any significant business or personal relationship with the Company or the Bank, other than as

arises by virtue of his ownership interest in the Company or his position with the Company or the Bank. The law firm of Franklin & Gabriel, owned by Director Gabriel, provided legal services to the Bank’s operations in its Finger Lakes Markets during 2005; the law firm of DiCerbo and Palumbo, of which Director DiCerbo is a partner, provided legal services to the Bank’s operations in its Southern Region Markets during 2005; the law firm of Cantwell & Cantwell, owned by Director Cantwell, provided legal services to the Bank’s operations in its Northern Region Markets during 2005; and Director Sally A. Steele, Esq. provided legal services to the Bank’s operations in its Pennsylvania Markets during 2005. For services rendered during 2005 and for related out-of-pocket disbursements, DiCerbo and Palumbo received $259,391 from the Bank, Franklin and Gabriel received $62,133 from the Bank, and Cantwell & Cantwell received $49,832 from the Bank. The amount received by Director Steele for legal services rendered during 2005 and for related out-of-pocket disbursements did not exceed 5% of her firm’s gross revenues.

     Pursuant to the terms of its written charter, the Audit/Compliance/Risk Management Committee is responsible for reviewing and approving all related-party transactions involving the Company or the Bank. Consistent with this responsibility, the Committee has reviewed and approved the foregoing relationships as being consistent with the best interests of the Company and the Bank.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, executive officers and holders of more than 10% of the Company’s common stock (collectively, “Reporting Persons”) to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of the common stock. Such persons are required by regulations of the Securities and Exchange Commission to furnish the Company with copies of all such filings. Based solely on its review of the copies of such filings received by it and written representations of Reporting Persons with respect to the fiscal year ended December 31, 2005, the Company believes that all Reporting Persons complied with all Section 16(a) filing requirements in the fiscal year ended December 31, 2005 except as follows: Timothy Baker, the Company’s Director of Special Projects, filed one late report on Form 4 reflecting a single purchase transaction; Director DiCerbo filed three late reports on Form 4, each reflecting a single purchase transaction; and each of the following individuals filed one late report on Form 4 with respect to a single grant of stock options by the Company: Directors Ace, Cantwell, Parente and Steele, and Messrs. Belden, Patton and Wears.

SHAREHOLDER PROPOSALS

     If Shareholder proposals are to be considered by the Company for inclusion in a proxy statement for a future meeting of the Company’s Shareholders, such proposals must be submitted on a timely basis and must meet the requirements established by the Securities and Exchange Commission for Shareholder proposals. Shareholder proposals for the Company’s 2007 Annual Meeting of Shareholders will not be deemed to be timely submitted unless they are received by the Company at its principal executive offices by December 14, 2006. Such Shareholder proposals, together with any supporting statements, should be directed to the Secretary of the Company. Shareholders submitting proposals are urged to submit their proposals by certified mail, return receipt requested.

INDEPENDENT AUDITORS

     PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, were retained by the Company at the direction of the Board of Directors. The independent auditors have audited the financial statements of the Company for the fiscal year ended December 31, 2005 and performed such other nonaudit services as the Board requested.

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

OTHER MATTERS

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

Date: April 13, 2006

		By Order of the Board of Directors
		Donna J. Drengel Secretary

ANNUAL MEETING OF SHAREHOLDERS OF

COMMUNITY BANK SYSTEM, INC.

May 16, 2006

Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.

ê Please detach along perforated line and mail in the envelope provided. ê

		THE BOARD OF DIRECTORS RECOMMEND A VOTE “FOR” THE ELECTION OF ALL NOMINEES. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE	x

1.

ELECTION OF DIRECTORS:

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

o

NOMINEES:

FOR ALL NOMINEES

¡

John M. Burgess

¡

David C. Patterson

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

o

WITHHOLD AUTHORITY

¡

Sally A. Steele

FOR ALL NOMINEES

¡

Mark E. Tryniski

IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED “FOR” THE ELECTION OF ALL NOMINEES.

o

FOR ALL EXCEPT (See instructions below)

INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and fill in the circle next to each nominee you wish to withhold, as shown here: =

Please check here if you plan to attend the meeting. o

To change the address on your account, please check the box at right and indicate your new address in the address space above. Please note that changes to the registered name(s) on the account may not be submitted via this method.

o

Signature of Shareholder

Date:

Signature of Shareholder

Date:

		Note:		Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

		The Directors and Officers of COMMUNITY BANK SYSTEM, INC. extend a cordial invitation for you to join them for refreshments in the Harbour Ballroom WYNDHAM SYRACUSE HOTEL East Syracuse, New York at 12:00 Noon immediately prior to the ANNUAL MEETING OF SHAREHOLDERS Tuesday, May 16, 2006
		James A. Gabriel		Sanford A. Belden
		Chairman		President & CEO
Wyndham Syracuse Hotel
6301 Route 298
East Syracuse, New York 13057
Phone 315-432-0200 • Fax: 315-433-1210

0         n

 

 

 

ANNUAL MEETING OF SHAREHOLDERS OF

COMMUNITY BANK SYSTEM, INC.

May 16, 2006

		PROXY VOTING INSTRUCTIONS

You may enter your voting instructions at 1-800-PROXIES or www.voteproxy.com up until 11:59 PM Eastern Time the day before the cut-off or meeting date.

â  Please detach along perforated line and mail in the envelope provided IF you are not voting via telephone or the Internet.   â

		THE BOARD OF DIRECTORS RECOMMEND A VOTE “FOR” THE ELECTION OF ALL NOMINEES. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE	x

1.

ELECTION OF DIRECTORS:

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

o

NOMINEES:

FOR ALL NOMINEES

¡

John M. Burgess

¡

David C. Patterson

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

o

WITHHOLD AUTHORITY

¡

Sally A. Steele

FOR ALL NOMINEES

¡

Mark E. Tryniski

IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED “ FOR ” THE ELECTION OF ALL NOMINEES.

o

FOR ALL EXCEPT (See instructions below)

INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and fill in the circle next to each nominee you wish to withhold, as shown here: =

Please check here if you plan to attend the meeting. o

To change the address on your account, please check the box at right and indicate your new address in the address space above. Please note that changes to the registered name(s) on the account may not be submitted via this method.

o

Signature of Shareholder

Date:

Signature of Shareholder

Date:

		Note:		Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.