EXHIBIT 13



              EXCERPT FROM ANNUAL REPORT TO SHAREHOLDERS
               FOR FISCAL YEAR ENDED DECEMBER 31, 2003



                                  22

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


BOARD OF DIRECTORS AND STOCKHOLDERS OF FIRST KEYSTONE CORPORATION:

     We have audited the accompanying consolidated balance sheets of
First Keystone Corporation and Subsidiary as of December 31, 2003
and 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2003.  These consolidated financial
statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

     We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements.  An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial
statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of First Keystone Corporation and Subsidiary as
of December 31, 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.



                               /s/ J. H. Williams & Co., LLP
                               J. H. Williams & Co., LLP

Kingston, Pennsylvania
January 21, 2004

                                   2003 ANNUAL REPORT * 7

<PAGE>


<TABLE>

FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 and 2002

<CAPTION>
--------------------------------------------------------------------------
  2003                                             2002
--------------------------------------------------------------------------

                                         <c>              <c>
ASSETS

Cash and due from banks                          $  5,912,709     $  7,396,004
Interest-bearing deposits in
  other banks                                          28,123           60,060
Investment securities available-
  for-sale                                        226,042,797      209,822,667
Investment securities held-to-
  maturity (estimated fair value
  2003 - $5,229,237;
  2002 - $5,925,209)                                5,229,314        5,932,331
Loans, net of unearned income                     229,073,303      201,517,492
Allowance for loan losses                          (3,524,315)      (3,174,616)
                                                                  ____________        ____________
  Net loans                                      $225,548,988     $198,342,876
                                                                  ____________        ____________
Premises and equipment, net                         4,157,840        3,429,507
Accrued interest receivable                         2,871,354        3,068,952
Cash surrender value of bank
  owned life insurance                             10,586,964       10,102,069
Other assets                                        1,462,265        1,371,154
                                                                  ____________        ____________
    TOTAL ASSETS                                 $481,840,354     $439,525,620
                                                                  ============        ============

LIABILITIES

Deposits:
  Non-interest bearing                           $ 30,052,477     $ 30,056,766
  Interest bearing                                312,967,673      300,688,512
                                                                  ____________        ____________
    Total Deposits                                343,020,150      330,745,278
Short-term borrowings                              11,744,392        9,067,145
Long-term borrowings                               62,945,000       45,750,000
Accrued interest and
  other expenses                                    1,664,471        1,648,499
Pre-settlement advance on
  acquisition of branch                             8,714,900           -
Other liabilities                                   2,400,100        3,218,657
                                                                  ____________        ____________
    TOTAL LIABILITIES                            $430,489,013     $390,429,579
                                                                  ____________        ____________

STOCKHOLDERS' EQUITY

Preferred stock, par value
  $10.00 per share; authorized
  and unissued 500,000 shares                    $      -         $     -
Common stock, par value $2.00
  per share; authorized 10,000,000
  shares; issued 3,077,207 shares
  in 2003 and 3,075,180 shares
  in 2002                                           6,154,414        6,150,360
Surplus                                            12,535,284       12,583,626
Retained earnings                                  31,828,342       27,394,962
Accumulated other comprehensive
  income                                            5,488,540        6,543,981
Treasury stock, at cost,
  152,600 shares in 2003 and
  119,181 shares in 2002                           (4,655,239)      (3,576,888)
                                                                  ____________        ____________
    TOTAL STOCKHOLDERS' EQUITY                   $ 51,351,341     $ 49,096,041
                                                                  ____________        ____________
    TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY                       $481,840,354     $439,525,620
                                                                  ============        ============


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

</TABLE>


     8 * FIRST KEYSTONE CORPORATION

     <PAGE>


<TABLE>

FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

<CAPTION>

--------------------------------------------------------------------------
                                                  2003             2002
--------------------------------------------------------------------------

                                        <c>               <c>
INTEREST INCOME

Interest and fees on loans                      $14,351,675        $14,963,423
Interest and dividends on
  investment securities:
  Taxable                                         7,513,042          7,891,547
  Tax-exempt                                      2,882,499          2,607,574
  Dividends                                         284,211            320,976
Deposits in banks                                    31,858             78,211
                                                                   ___________         ___________
    Total interest income                       $25,063,285        $25,861,731

INTEREST EXPENSE
Deposits                                        $ 7,469,213        $ 8,116,618
Short-term borrowings                               142,997            146,613
Long-term borrowings                              2,588,345          3,078,389
                                                                   ___________         ___________
    Total interest expense                      $10,200,555        $11,341,620
                                                                   ___________         ___________
    Net interest income                         $14,862,730        $14,520,111
Provision for loan losses                           500,000            550,000
                                                                   ___________         ___________
    Net interest income
      after provision for
      loan losses                               $14,362,730        $13,970,111
                                                                   ___________         ___________
NON-INTEREST INCOME
  Trust Department                              $   485,954        $   509,842
  Service charges and fees                        1,723,700          1,372,935
  Bank owned life insurance
    income                                          484,895            102,069
  Gain on sale of loans                             234,328            228,194
  Investment securities gains
    (losses) - net                                  298,975             28,647
  Other                                              47,133             43,092
                                                                   ___________         ___________
    Total non-interest income                   $ 3,274,985        $ 2,284,779

NON-INTEREST EXPENSE
  Salaries and employee benefits                $ 4,445,790        $ 4,222,354
  Occupancy, net                                    567,208            485,578
  Furniture and equipment                           642,715            616,004
  State Shares Tax                                  406,927            366,523
  Other                                           2,307,930          2,120,679
                                                                   ___________         ___________
    Total non-interest expense                  $ 8,370,570        $ 7,811,138

Income before income taxes                      $ 9,267,145        $ 8,443,752
Income tax expense                                1,950,153          1,856,603
                                                                   ___________         ___________
    NET INCOME                                  $ 7,316,992        $ 6,587,149
                                                                   ===========         ===========
PER SHARE DATA
  Net income per share:*
    Basic                                        $      2.48       $     2.22
    Diluted                                      $      2.48       $     2.21
  Cash dividends per share*                      $       .98       $      .85


<CAPTION>

--------------------------------------------------------
  2001
--------------------------------------------------------

                                         <c>
INTEREST INCOME

Interest and fees on loans                       $15,830,542
Interest and dividends on
  investment securities:
  Taxable                                          7,871,300
 Tax-exempt                                        2,492,147
 Dividends                                           414,099
Deposits in banks                                    228,392
                                                 ___________
    Total interest income                        $26,836,480
                                                 ___________
INTEREST EXPENSE
Deposits                                         $11,690,814
Short-term borrowings                                346,727
Long-term borrowings                               2,427,519
                                                 ___________
    Total interest expense                       $14,465,060
                                                 ___________
    Net interest income                          $12,371,420
Provision for loan losses                            610,000
                                                 ___________
    Net interest income
      after provision for
      loan losses                                $11,761,420
                                                 ___________
NON-INTEREST INCOME
  Trust Department                               $   554,606
  Service charges and fees                         1,232,368
  Bank owned life insurance
    income                                            -
  Gain on sale of loans                              184,013
  Investment securities
    gains (losses) - net                             278,474
  Other                                               96,344
                                                 ___________
    Total non-interest income                    $ 2,345,805

NON-INTEREST EXPENSE
  Salaries and employee benefits                 $ 3,895,588
  Occupancy, net                                     447,294
  Furniture and equipment                            567,644
  State Shares Tax                                   333,710
  Other                                            1,936,143
                                                 ___________
    Total non-interest expense                   $ 7,180,379

Income before income taxes                       $ 6,926,846
Income tax expense                                 1,493,445
                                                 ___________
    NET INCOME                                   $ 5,433,401
                                                 ===========

PER SHARE DATA
  Net income per share:*
    Basic                                        $      1.83
    Diluted                                      $      1.83
  Cash dividends per share*                      $       .77


*Adjusted for 5% stock dividend declared June 25, 2002, to shareholders of
record July 16, 2002, payable August 6, 2002.

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

</TABLE>


                                       2003 ANNUAL REPORT * 9

     <PAGE>

<TABLE>

FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

<CAPTION>
__________________________________________________________________________
  Common
   Stock                                    Surplus
__________________________________________________________________________

                                    <c>               <c>
Balance At December 31, 2000                $5,867,454        $ 9,761,066

Comprehensive Income:
 Net income
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects
 Total comprehensive income
Cash dividends - $.77 per share             __________        ___________

Balance At December 31, 2001                $5,867,454        $ 9,761,066

Comprehensive Income:
 Net income
  Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects
 Total comprehensive income
5% stock dividend                              282,906          2,829,060
Dividends paid in lieu
 of fractional shares
Purchase of 20,181 shares
 of treasury stock
Issuance of 1,000 shares of
 treasury stock upon exercise
 of employee stock options                                         (6,500)
Cash dividends - $.85 per
 share                                      __________        ___________

Balance At December 31, 2002                $6,150,360        $12,583,626

Comprehensive Income:
 Net income
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects
 Total comprehensive income
Purchase of 41,987 shares
 of treasury stock
Issuance of 2,027 shares of
 common stock under
 dividend reinvestment                           4,054             48,182
Issuance of 8,568 shares of
 treasury stock upon exercise
 of employee stock options                                       (144,655)
Recognition of stock option
 expense                                                           48,131
Cash dividends - $.98
 per share
                                            __________        ___________
Balance At December 31, 2003                $6,154,414        $12,535,284
                                            ==========        ===========

<CAPTION>
_________________________________________________________________________
Comprehensive                               Retained
  Income                                   Earnings
_________________________________________________________________________

                                    <c>               <c>
Balance At December 31, 2000                                  $23,311,355

Comprehensive Income:
 Net income                                 $ 5,433,401         5,433,401
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                    (99,842)
                                            ___________
 Total comprehensive income                 $ 5,333,559
                                            ===========
Cash dividends - $.77 per
 share                                                         (2,295,319)
                                                              ___________
Balance At December 31, 2001                                  $26,449,437

Comprehensive Income:
 Net income                                 $ 6,587,149         6,587,149
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                  5,829,380
                                            ___________
 Total comprehensive income                 $12,416,529
                                            ===========
5% stock dividend                                              (3,111,966)
Dividends paid in lieu
 of fractional shares                                              (4,725)
Purchase of 20,181 shares
 of treasury stock
Issuance of 1,000 shares of
 treasury stock upon exercise
 of employee stock options
Cash dividends - $.85 per
 share                                                         (2,524,933)
                                                              ___________
Balance At December 31, 2002                                  $27,394,962

Comprehensive Income:
 Net income                                 $ 7,316,992         7,316,992
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                 (1,055,441)
                                            ___________
 Total comprehensive income                 $ 6,261,551
                                            ===========
Purchase of 41,987 shares
 of treasury stock
Issuance of 2,027 shares of
 common stock under
 dividend reinvestment
Issuance of 8,568 shares of
 treasury stock upon exercise
 of employee stock options
Recognition of stock option
 expense
Cash dividends - $.98 per
 share                                                         (2,883,612)
                                                              ___________
Balance At December 31, 2003                                  $31,828,342
                                                              ===========


<CAPTION>
_________________________________________________________________________
Accumulated
   Other
Comprehensive                               Treasury
  Income                                     Stock
_________________________________________________________________________

                                     <c>              <c>
Balance At December 31, 2000                 $  814,443       $(3,096,681)

Comprehensive Income:
 Net income
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                    (99,842)
 Total comprehensive income
Cash dividends - $.77 per share
                                             __________       ___________
Balance At December 31, 2001                 $  714,601       $(3,096,681)

Comprehensive Income:
 Net income
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                  5,829,380
 Total comprehensive income
5% stock dividend
Dividends paid in lieu
 of fractional shares
Purchase of 20,181 shares
 of treasury stock                                               (503,707)
Issuance of 1,000 shares of
 treasury stock upon exercise
 of employee stock options                                         23,500
Cash dividends - $.85 per
 share
                                             __________       ___________
Balance At December 31, 2002                 $6,543,981       $(3,576,888)

Comprehensive Income:
 Net income
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                 (1,055,441)
 Total comprehensive income
Purchase of 41,987 shares
 of treasury stock                                             (1,373,818)
Issuance of 2,027 shares of
 common stock under
 dividend reinvestment
Issuance of 8,568 shares of
 treasury stock upon exercise
 of employee stock options                                        295,467
Recognition of stock option
 expense
Cash dividends - $.98 per
 share
                                             __________       ___________
Balance At December 31, 2003                 $5,488,540       $(4,655,239)
                                             ==========       ===========

<CAPTION>
_________________________________________________________________________
   Total
_________________________________________________________________________

                                    <c>
Balance At December 31, 2000                $36,657,637

Comprehensive Income:
 Net income                                   5,433,401
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                    (99,842)
 Total comprehensive income
Cash dividends - $.77 per share              (2,295,319)
                                            ___________
Balance At December 31, 2001                $39,695,877

Comprehensive Income:
 Net income                                   6,587,149
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                  5,829,380
 Total comprehensive income
5% stock dividend                                 -
Dividends paid in lieu
 of fractional shares                            (4,725)
Purchase of 20,181 shares
 of treasury stock                             (503,707)
Issuance of 1,000 shares of
 treasury stock upon exercise
 of employee stock options                       17,000
Cash dividends - $.85 per
 share                                       (2,524,933)
                                            ___________
Balance At December 31, 2002                $49,096,041

Comprehensive Income:
 Net income                                   7,316,992
 Change in net unrealized
  gain (loss) on investment
  securities available-for-
  sale, net of reclassification
  adjustment and tax effects                 (1,055,441)
 Total comprehensive income
Purchase of 41,987 shares
  of treasury stock                          (1,373,818)
Issuance of 2,027 shares of
  common stock under
  dividend reinvestment                          52,236
Issuance of 8,568 shares of
  treasury stock upon exercise
  of employee stock options                     150,812
Recognition of stock option
 expense                                         48,131
Cash dividends - $.98 per
 share                                       (2,883,612)
                                            ___________
Balance At December 31, 2003                $51,351,341
                                            ===========


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

</TABLE>


    10 * FIRST KEYSTONE CORPORATION

<PAGE>


<TABLE>

FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

<CAPTION>
__________________________________________________________________________

                                                   2003              2002
__________________________________________________________________________

                                        <c>               <c>
OPERATING ACTIVITIES
Net income                                      $  7,316,992      $  6,587,149
Adjustments to reconcile net
  income to net cash provided
  by operating activities:
    Provision for loan losses                        500,000           550,000
    Depreciation and amortization                    491,252           446,313
    Stock option expense                              48,131            -
    Premium amortization on
      investment securities                        1,128,135           556,617
    Discount accretion on
      investment securities                         (450,477)         (567,358)
    Deferred income tax benefit                     (116,156)          (79,854)
    Gain on sale of mortgage loans                  (234,328)         (228,194)
    Proceeds from sale of mortgage
      loans originated for resale                 14,799,725         8,322,360
    Originations of mortgage
      loans held for resale                      (17,377,134)      (10,522,610)
    Gain on sales of investment
      securities                                    (298,975)          (28,647)
    Loss on sale of foreclosed
      real estate                                     14,576             5,000
    (Increase) decrease in accrued
      interest receivable                            197,598           (75,048)
    Increase in cash surrender
      value of bank owned life
      insurance                                     (484,895)         (102,069)
    Increase in other assets - net                  (156,752)         (304,251)
    Increase (decrease) in accrued
      interest and other expenses                     15,972          (434,325)
    Increase (decrease) in other
      liabilities - net                             (214,127)          127,932
                                                                  ____________        ____________
    NET CASH PROVIDED BY
      OPERATING ACTIVITIES                      $  5,179,537      $  4,253,015
                                                                  ____________        ____________
INVESTING ACTIVITIES
Proceeds from sales of investment
  securities available-for-sale                 $ 38,223,301      $ 46,732,078
Proceeds from maturities and
  redemptions of investment
  securities available-for-sale                   47,827,995        27,014,603
Purchases of investment securities
  available-for-sale                            (104,588,270)      (96,557,845)
Proceeds from maturities and
  redemption of investment
  securities held-to-maturity                      1,097,462         1,035,535
Purchases of investment
  securities held-to-maturity                         -               (982,690)
Net increase in loans                            (25,022,633)       (1,192,549)
Purchases of premises and equipment               (1,153,944)         (545,291)
Proceeds from sale of foreclosed
  real estate                                        113,683           100,000
Purchase of bank owned life
  insurance policies                                  -            (10,000,000)
Pre-settlement advance on
  acquisition of branch                            8,714,900            -
                                                                  ____________        ____________
    NET CASH (USED IN)
      INVESTING ACTIVITIES                      $(34,787,506)     $(34,396,159)
                                                                  ____________        ____________
FINANCING ACTIVITIES
Net increase in deposits                        $ 12,274,872      $ 36,064,455
Net increase (decrease) in
  short-term borrowings                            2,677,247        (2,499,219)
Proceeds from long-term borrowings                18,695,000         8,000,000
Repayment of long-term borrowings                 (1,500,000)       (7,500,000)
Dividends paid in lieu of
  fractional shares                                   -                 (4,725)
Proceeds from issuance of
  common stock                                        52,236            -
Proceeds from sale of treasury stock                 150,812            17,000
Acquisition of treasury stock                     (1,373,818)         (503,707)
Cash dividends paid                               (2,883,612)       (2,524,933)
                                                                  ____________        ____________
    NET CASH PROVIDED BY
      FINANCING ACTIVITIES                      $ 28,092,737      $ 31,048,871

INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                          $ (1,515,232)     $    905,727
CASH AND CASH EQUIVALENTS
  AT BEGINNING OF YEAR                             7,456,064         6,550,337
                                                                  ____________        ____________
    CASH AND CASH EQUIVALENTS
      AT END OF YEAR                            $  5,940,832      $  7,456,064
                                                                  ============        ============


<CAPTION>

_________________________________________________________________________
                                                   2001
_________________________________________________________________________

                                        <c>
OPERATING ACTIVITIES
Net income                                      $  5,433,401
Adjustments to reconcile net
  income to net cash provided
  by operating activities:
    Provision for loan losses                        610,000
    Depreciation and amortization                    384,925
    Stock option expense                              -
    Premium amortization on
      investment securities                          325,036
    Discount accretion on
      investment securities                         (950,450)
    Deferred income tax benefit                     (105,349)
    Gain on sale of mortgage loans                  (184,013)
    Proceeds from sale of mortgage
      loans originated for resale                  9,373,829
    Originations of mortgage
      loans held for resale                       (6,034,088)
    Gain on sales of investment
      securities                                    (278,474)
    Loss on sale of foreclosed
      real estate                                     54,808
    (Increase) decrease in accrued
      interest receivable                           (502,812)
    Increase in cash surrender
      value of bank owned life
      insurance                                       -
    Increase in other assets - net                  (422,755)
    Increase (decrease) in accrued
      interest and other expenses                   (148,448)
    Increase (decrease) in other
      liabilities - net                              111,637
                                                                  ____________
    NET CASH PROVIDED BY
      OPERATING ACTIVITIES                      $  7,667,247
                                                                  ____________
INVESTING ACTIVITIES
Proceeds from sales of investment
  securities available-for-sale                 $ 34,689,482
Proceeds from maturities and
  redemptions of investment
  securities available-for-sale                   45,400,938
Purchases of investment securities
  available-for-sale                            (108,563,617)
Proceeds from maturities and
  redemption of investment
  securities held-to-maturity                      1,580,584
Purchases of investment
  securities held-to-maturity                         -
Net increase in loans                            (11,688,658)
Purchases of premises and equipment                  (89,699)
Proceeds from sale of foreclosed
  real estate                                        473,901
Purchase of bank owned life
  insurance policies                                  -
Pre-settlement advance on
  acquisition of branch                               -
                                                                  ____________
    NET CASH (USED IN)
      INVESTING ACTIVITIES                      $(38,197,069)
                                                                  ____________
FINANCING ACTIVITIES
Net increase in deposits                        $ 23,207,813
Net increase (decrease) in
  short-term borrowings                            3,006,709
Proceeds from long-term borrowings                11,000,000
Repayment of long-term borrowings                 (7,000,000)
Dividends paid in lieu of
  fractional shares                                   -
Proceeds from issuance of
  common stock                                        -
Proceeds from sale of treasury stock                  -
Acquisition of treasury stock                         -
Cash dividends paid                               (2,295,319)
                                                                  ____________
    NET CASH PROVIDED BY
      FINANCING ACTIVITIES                      $ 27,919,203
                                                                  ____________
INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                          $ (2,610,619)
CASH AND CASH EQUIVALENTS
  AT BEGINNING OF YEAR                             9,160,956
                                                                  ____________
    CASH AND CASH EQUIVALENTS
      AT END OF YEAR                            $  6,550,337
                                                                  ============


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

</TABLE>


                                   2003 ANNUAL REPORT * 11

<PAGE>

FIRST KEYSTONE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements for Years Ended December
31, 2003, 2002 and 2001

NOTE 1  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     The accounting policies of First Keystone Corporation and
Subsidiary (the "Corporation") are in accordance with accounting
principles generally accepted in the United States of America and
conform to common practices within the banking industry. The more
significant policies follow:

PRINCIPLES OF CONSOLIDATION
     The consolidated financial statements include the accounts of
First Keystone Corporation and its wholly-owned Subsidiary, The
First National Bank of Berwick (the "Bank"). All significant
        inter-company balances and transactions have been eliminated
in consolidation.

NATURE OF OPERATIONS
     The Corporation, headquartered in Berwick, Pennsylvania,
provides a full range of banking, trust and related services
through its wholly owned Bank subsidiary and is subject to
competition from other financial institutions in connection with
these services. The Bank serves a customer base which includes
individuals, businesses, public and institutional customers
primarily located in the Northeast Region of Pennsylvania. The Bank
has ten full service offices and 14 ATMs located in Columbia,
Luzerne and Montour Counties. The Corporation and its subsidiary
must also adhere to certain federal banking laws and regulations
and are subject to periodic examinations made by various federal
agencies.

SEGMENT REPORTING
     The Corporation's banking subsidiary acts as an independent
community financial services provider, and offers traditional
banking and related financial services to individual, business and
government customers. Through its branch and automated teller
machine network, the Bank offers a full array of commercial and
retail financial services, including the taking of time, savings
and demand deposits; the making of commercial, consumer and
mortgage loans; and the providing of other financial services. The
Bank also performs personal, corporate, pension and fiduciary
services through its Trust Department.
     Management does not separately allocate expenses, including
the cost of funding loan demand, between the commercial, retail,
trust and mortgage banking operations of the Corporation.
Currently, management measures the performance and allocates the
resources of First Keystone Corporation as a single segment.

USE OF ESTIMATES
     The preparation of these consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of these consolidated financial statements and the
reported amounts of income and expenses during the reporting
periods. Actual results could differ from those estimates.

INVESTMENT SECURITIES
     The Corporation classifies its investment securities as either
"Held-to-Maturity" or "Available-for-Sale" at the time of purchase.
Debt securities are classified as Held-to-Maturity when the
Corporation has the ability and positive intent to hold the
securities to maturity. Investment securities Held-to-Maturity are
carried at cost adjusted for amortization of premium and accretion
of discount to maturity.
     Debt securities not classified as Held-to-Maturity and equity
securities are included in the Available-for-Sale category and are
carried at fair value. The amount of any unrealized gain or loss,
net of the effect of deferred income taxes, is reported as other
comprehensive income (loss) in the Consolidated Statement of
Stockholders' Equity. Management's decision to sell Available-
        for-Sale securities is based on changes in economic conditions
controlling the sources and applications of funds, terms,
availability of and yield of alternative investments, interest rate
risk and the need for liquidity.
     The cost of debt securities classified as Held-to-Maturity or
Available-for-Sale is adjusted for amortization of premiums and
accretion of discounts to expected maturity. Such amortization and
accretion, as well as interest and dividends is included in
interest income from investments. Realized gains and losses are
included in net investment securities gains. The cost of investment
securities sold, redeemed or matured is based on the specific
identification method.


12 * FIRST KEYSTONE CORPORATION

<PAGE>

LOANS
     Loans are stated at their outstanding unpaid principal
balances, net of deferred fees or costs, unearned income and the
allowance for loan losses. Interest on installment loans is
recognized as income over the term of each loan, generally, by the
"actuarial method". Interest on all other loans is primarily
recognized based upon the principal amount outstanding on an actual
day basis. Loan origination fees and certain direct loan
origination costs have been deferred with the net amount amortized
using the interest method over the contractual life of the related
loans as an interest yield adjustment.
     Mortgage loans held for resale are carried at the lower of
cost or market on an aggregate basis. These loans are sold without
recourse to the Corporation.

Past-Due Loans - Generally, a loan is considered to be past-due
when scheduled loan payments are in arrears 15 days or more.
Delinquent notices are generated automatically when a loan is 15
days past-due, depending on the type of loan. Collection efforts
continue on loans past-due beyond 60 days that have not been
satisfied, when it is believed that some chance exists for
improvement in the status of the loan. Past-due loans are
continually evaluated with the determination for charge-off being
made when no reasonable chance remains that the status of the loan
can be improved.

Non-Accrual Loans - Generally, a loan is classified as non-accrual
and the accrual of interest on such a loan is discontinued when the
contractual payment of principal or interest has become 90 days
past due or management has serious doubts about further
collectibility of principal or interest, even though the loan
currently is performing. A loan may remain on accrual status if it
is in the process of collection and is either guaranteed or well
secured. When a loan is placed on non-accrual status, unpaid
interest credited to income in the current year is reversed and
unpaid interest accrued in prior years is charged against the
allowance for loan losses. Certain non-accrual loans may continue
to perform, that is, payments are still being received. Generally,
the payments are applied to principal. These loans remain under
constant scrutiny and if performance continues, interest income may
be recorded on a cash basis based on management's judgement as to
collectibility of principal.

Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged against
income. Loans deemed to be uncollectible are charged against the
allowance for loan losses and subsequent recoveries, if any, are
credited to the allowance.
     A principal factor in estimating the allowance for loan losses
is the measurement of impaired loans. A loan is considered impaired
when, based on current information and events, it is probable that
the Corporation will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Under current
accounting standards, the allowance for loan losses related to
impaired loans is based on discounted cash flows using the
effective interest rate of the loan or the fair value of the
collateral for certain collateral dependent loans.
     The allowance for loan losses is maintained at a level
estimated by management to be adequate to absorb potential loan
losses. Management's periodic evaluation of the adequacy of the
allowance for loan losses is based on the Corporation's past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of
any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible
to significant change.

DERIVATIVES
     The Bank has outstanding loan commitments that relate to the
origination of mortgage loans that will be held for resale.
Pursuant to Statement of Financial Accounting Standards (SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" and the guidance
contained within the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan
commitments as derivative instruments.  The effective date of the
implementation guidance is the first day of the first fiscal
quarter beginning after April 10, 2002.  The outstanding loan
commitments in this category did not give rise to any losses for
the years ended December 31, 2003 and 2002, as the fair market
value of each outstanding loan commitment exceeded the Bank's cost
basis in each outstanding loan  commitment.

PREMISES AND EQUIPMENT
     Premises, improvements and equipment are stated at cost less
accumulated depreciation computed principally on the straight-line
method over the estimated useful lives of the assets. Long-lived
assets are reviewed for impairment whenever events or changes in
business circumstances indicate that the carrying value may not be
recovered.  Maintenance and minor repairs are charged to operations
as incurred. The cost and accumulated depreciation of the premises
and equipment retired or sold are eliminated from the property
accounts at the time of retirement or sale, and the resulting gain
or loss is reflected in current operations.


                                   2003 ANNUAL REPORT * 13

<PAGE>

MORTGAGE SERVICING RIGHTS
     The Corporation originates and sells real estate loans to
investors in the secondary mortgage market. After the sale, the
Corporation retains the right to service these loans. When
originated mortgage loans are sold and servicing is retained, a
servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other
fees in proportion to, and over the period of, estimated net
servicing income. The unamortized cost is included in other assets
in the accompanying consolidated balance sheet. The servicing
rights are periodically evaluated for impairment based on their
relative fair value.

FORECLOSED REAL ESTATE
     Real estate properties acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair
value on the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and
subsequent gains and losses on sales are included in other
           non-interest income and expense.

BANK OWNED LIFE INSURANCE
     The Corporation invests in Bank Owned Life Insurance (BOLI)
with split dollar life provisions.  Purchase of BOLI provides life
insurance coverage on certain employees with the Corporation being
owner and beneficiary of the policies.

INVESTMENTS IN REAL ESTATE VENTURES
     The Bank is a limited partner in  real estate ventures that
own and operate affordable residential low-income housing apartment
buildings for elderly residents. The investments are accounted for
under the effective yield method under the Emerging Issues Task
Force (EITF) 94-1 "Accounting for Tax Benefits Resulting from
Investments in Affordable Housing Projects". Under the effective
yield method, the Bank recognizes tax credits as they are allocated
and amortizes the initial cost of the investment to provide a
constant effective yield over the period that the tax credits are
allocated to the Bank.  Under this method, the tax credits
allocated, net of any amortization of the investment in the limited
partnerships, are recognized in the consolidated statements of
income as a component of income tax expense.  The amount of tax
credits allocated to the Bank were $90,877, $80,865 and $26,674 in
2003, 2002 and 2001, respectively, and the amortization of the
investments in the limited partnerships were $65,641, $55,263 and
$18,081 in 2003, 2002 and 2001, respectively.  The carrying value
of the investments as of December 31, 2003, and 2002, was $882,494
and $562,021, respectively, and is carried in Other Assets in the
accompanying consolidated balance sheets.

INCOME TAXES
     The provision for income taxes is based on the results of
operations, adjusted primarily for tax-exempt income. Certain items
of income and expense are reported in different periods for
financial reporting and tax return purposes. Deferred tax assets
and liabilities are determined based on the differences between the
consolidated financial statement and income tax bases of assets and
liabilities measured by using the enacted tax rates and laws
expected to be in effect when the timing differences are expected
to reverse. Deferred tax expense or benefit is based on the
difference between deferred tax asset or liability from period to
period.

STOCK BASED COMPENSATION
     The Corporation had accounted for stock options and shares
issued under the Stock Option Incentive Plan through
December 31, 2002 in accordance with Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees".
Under this method no compensation expense is recognized for stock
options when the exercise price equals the fair value of the
options at the grant date. Under provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation", the fair value of a stock option is
required to be recognized as compensation expense over the service
period (generally the vesting period). As permitted under SFAS No.
123, "Accounting for Stock Based Compensation", the fair value of a
stock option is required to be recognized as compensation expense
over the service period (generally the vesting period). As
permitted under SFAS No. 123 the Corporation had elected to
continue to account for its stock option plan in accordance with
APB No. 25.
     As of the first quarter 2003, the Corporation adopted
Statement of Financial Accounting Standards (SFAS) No. 148,
"ccounting for Stock Based Compensation - Transition and
Disclosures - an amendment of FASB Statement No. 123". The
Corporation elected to use the "prospective method" of accounting
for stock options as allowed by the Standard. Accordingly,
compensation expense was recognized in 2003 in the amount of
$48,131 being the vested portion attributable to stock options
granted in 2003 (See Note 18).


14 * FIRST KEYSTONE CORPORATION


<PAGE>

PER SHARE DATA
     Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share", requires dual presentation of basic and fully
diluted earnings per share. Basic earnings per share is calculated
by dividing net income by the weighted average number of shares of
common stock outstanding at the end of each period. Diluted
earnings per share is calculated by increasing the denominator for
the assumed conversion of all potentially dilutive securities. The
Corporation's dilutive securities are limited to stock options.
     Per share data has been adjusted retroactively for stock
splits and stock dividends.
     The reconciliation of the numerators and denominators of the
basis and diluted earnings per share follows:

<TABLE>
<CAPTION>

                                       Year Ended December 31, 2003
                                 ________________________________________
                                             Weighted Average
                                                 Number of
                              Net Income          Shares           Per Share
                              Numerators       Denominators          Amount
                              __________       ____________          ______

                        <c>                <c>                <c>
Net income                      $7,316,992
                                ==========
Basic earnings per
  share:
  Income available
    to common
    stockholders                $7,316,992         2,944,420          $2.48
Effect of dilutive
  securities:
  Stock options                                        7,981
                                                   _________
Diluted earnings
  per share:
  Income available
    to common
    stockholders                $7,316,992         2,952,401          $2.48


<CAPTION>

                                       Year Ended December 31, 2002
                                 ________________________________________
                                             Weighted Average
                                                 Number of
                              Net Income          Shares           Per Share
                              Numerators       Denominators          Amount
                              __________       ____________          ______

                        <c>                <c>                <c>
Net income                      $6,587,149
                                ==========
Basic earnings per
  share:
  Income available
    to common
    stockholders                $6,587,149         2,972,210          $2.22
Effect of dilutive
  securities:
  Stock options                                        2,541
                                                   _________
Diluted earnings
  per share:
  Income available
    to common
    stockholders                $6,587,149         2,974,751          $2.21


<CAPTION>

                                       Year Ended December 31, 2001
                                 ________________________________________
                                             Weighted Average
                                                 Number of
                              Net Income          Shares           Per Share
                              Numerators       Denominators          Amount
                              __________       ____________          ______

                        <c>                <c>                <c>
Net income                      $5,433,401
                                ==========
Basic earnings per
  share:
 Income available
  to common
  stockholders                  $5,433,401         2,975,180          $1.83
Effect of dilutive
  securities:
  Stock options                                            0
                                                   _________
Diluted earnings
  per share:
  Income available
    to common
    stockholders                $5,433,401         2,975,180          $1.83


</TABLE>


CASH FLOW INFORMATION
     For purposes of reporting consolidated cash flows, cash and
cash equivalents include cash on hand and due from other banks and
interest bearing deposits in other banks. The Corporation considers
cash classified as interest bearing deposits with other banks as a
cash equivalent since they are represented by cash accounts
essentially on a demand basis.


                                   2003 ANNUAL REPORT * 15

<PAGE>

     Interest paid on deposits and other borrowings was
$10,263,061, $11,456,466 and $14,904,607 in 2003, 2002 and 2001,
respectively. Cash payments for income taxes were $1,767,725,
$2,263,801 and $1,442,884 for 2003, 2002 and 2001, respectively.
The Corporation transferred loans to foreclosed assets held for
sale in the amounts of $128,258, $30,000 and $590,375 in 2003, 2002
and 2001, respectively.

TRUST ASSETS AND INCOME
     Property held by the Corporation in a fiduciary or agency
capacity for its customers is not included in the accompanying
consolidated financial statements since such items are not assets
of the Corporation. Trust Department income is generally
recognized on a cash basis and is not materially different than if
it were reported on an accrual basis.

RECENT ACCOUNTING PRONOUNCEMENTS
     In November 2002, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" This interpretation
expands the disclosures to be made by a guarantor about its
obligations under certain guarantees and requires the guarantor to
recognize a liability in its financial statements for the
obligation assumed under a guarantee. In general, FIN 45 applies to
contracts of indemnification agreements that contingently require
the guarantor to make payments to the guaranteed party based on
changes in an underlying that is related to an asset, liability, or
equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and recognition
requirements of this interpretation, while other guarantees are
subject to just the disclosure requirements of FIN 45 but not to
the recognition provisions. The disclosure requirements of FIN 45
were effective for the Corporation as of December 31, 2002 and
require disclosure of the nature of the guarantee, the maximum
potential amount of future payments the guarantor could be required
to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of FIN 45 are applied
prospectively to guarantees issued or modified after December 31,
2002. This standard did not have any impact on the Corporation's
consolidated financial condition or results of operation.
     In December 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123", is generally effective for financial statements
for fiscal years and interim periods beginning after December 31,
2002. The statement amends SFAS No. 123, "Accounting for Stock-
          Based Compensation", to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. The statement also amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Corporation has
elected to adopt SFAS 148 for the first quarter 2003 using the
"prospective method" of accounting for stock options as allowed for
in the Standard.
     In December 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 149, "Amendments to SFAS 133 on
Derivative Instruments and Hedging Activities" is generally
effective for contracts entered into after June 30, 2003. This
Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities under SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". The
changes in this Statement improve financial reporting by requiring
that contracts with comparable characteristics be accounted for
similarly. The changes will result in more consistent reporting of
contracts as either derivatives or hybrid instruments. This
standard does not have any impact on the Corporation's consolidated
financial position or results of operations.
     In January 2003, the FASB issued Interpretation No. 46 (FIN
46), which provides guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a VIE are to
be included in an entity's consolidated financial statements. A VIE
exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by
itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Those
characteristics include the direct or indirect ability to make
decisions about an entity's activities through voting rights or
similar rights, the obligation to absorb the expected losses of an
entity if they occur, or the right to receive the expected residual
returns of the entity if they occur. This standard did not have any
impact on the Corporation's consolidated financial position or
results of operations.
     In May 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 150 "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity" is
generally effective for financial instruments entered into or
modified after May 31, 2003 and for contracts in existence at the
start of the first interim period beginning after June 15, 2003.
This Statement establishes new standards for classification,
measurement and disclosure of certain types of financial
instruments having characteristics of both liabilities and equity,
including instruments that are mandatorily redeemable and that
embody obligations requiring or permitting settlement by
transferring assets or by issuing an entity's own shares. In
December 2003, the


16 * FIRST KEYSTONE CORPORATION

<PAGE>

FASB deferred for an indefinite period the application of the
guidance in SFAS 150 to noncontrolling interests that are
classified as equity in the financial statements of a subsidiary
but would be classified as a liability in the parent's financial
statement's under SFAS 150. The deferral is limited to mandatorily
redeemable noncontrolling interests associated with finite-lived
subsidiaries. This standard does not have any impact on the
Corporation's consolidated financial position or results of
operations.
     In December 2003, the Emerging Issues Task Force (EITF) issued
EITF 03-1 "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments" is generally effective for
fiscal years ending after December 15, 2003 and addresses how to
define an "other-than-temporary impairment" as well as its
application to investments classified as either "available-for-sale"
          and "held-to-maturity" under SFAS 115. The EITF requires
disclosure of securities in a continuous unrealized loss position
to be stratified based on length of time those securities were
carried in such a position (less than 12 months and 12 months
more). Additional information is required to be disclosed to
include the nature of the investment, the cause of the decline in
value and the evidence considered in reaching the conclusions that
the investment is not other-than-temporarily impaired. The
disclosure is required for fiscal years ending after December 15,
2003. Comparative information for earlier periods is not required.

ADVERTISING COSTS
     It is the Corporation's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for the
years ended December 31, 2003, 2002 and 2001, was approximately
$255,572, $218,977, and $141,258, respectively.

RECLASSIFICATIONS
     Certain amounts in the consolidated financial statements of
prior periods have been reclassified to conform with presentation
used in the 2003 consolidated financial statements. Such
reclassifications have no effect on the Corporation's consolidated
financial condition or net income.


NOTE 2  -  RESTRICTED CASH BALANCES
     The Bank is required to maintain certain average reserve
balances as established by the Federal Reserve Bank. The amount of
those reserve balances for the reserve computation period which
included December 31, 2003, was $764,000, which was satisfied
through the restriction of vault cash. In addition, the Bank
maintains a clearing balance at the Federal Reserve Bank to offset
specific charges for services. At December 31, 2003, the amount of
this balance was $700,000.


NOTE 3  -  INVESTMENT SECURITIES
     The amortized cost, related estimated fair value, and
unrealized gains and losses for investment securities classified as
"Available-For-Sale" or "Held-to-Maturity" were as follows at
December 31, 2003 and 2002:

<TABLE>
<CAPTION>

                                             Available-for-Sale Securities
                                             _____________________________
                                             Gross
 Amortized                                Unrealized
  Cost                                       Gains
 _________                                __________

                                   <c>                     <c>
December 31, 2003:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                          $ 94,357,473            $  719,191
  Other                                       5,997,600                49,463
Obligations of state and
  political subdivisions                     73,690,568             5,199,017
Corporate securities                         33,723,868             2,301,064
Marketable equity securities                  4,652,645             1,378,112
Restricted equity securities                  5,167,000                 -
                                           ____________            __________
Total                                      $217,589,154            $9,646,847
                                           ============            ==========

<CAPTION>

                                             Available-for-Sale Securities
                                            ______________________________
   Gross                                   Estimated
Unrealized                                  Fair
  Losses                                     Value
 _________                                 ________

                                   <c>                   <c>
December 31, 2003:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                          $  628,725            $ 94,447,939
  Other                                         7,843               6,039,220
Obligations of state and
  political subdivisions                      179,185              78,710,400
Corporate securities                            -                  36,024,932
Marketable equity securities                  377,451               5,653,306
Restricted equity securities                    -                   5,167,000
                                           __________            ____________
Total                                      $1,193,204            $226,042,797
                                           ==========            ============
</TABLE>


                                       2003 ANNUAL REPORT * 17

    <PAGE>


<TABLE>
<CAPTION>
                                              Held-to-Maturity Securities
                                             ____________________________
                                             Gross
 Amortized                                Unrealized
  Cost                                       Gains
 ________                                   ________

                                    <c>                     <c>
December 31, 2003:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                           $3,152,908              $ 2,641
Obligations of state and
  political subdivisions                     2,076,406               28,480
                                            __________              _______
Total                                       $5,229,314              $31,121
                                            ==========              =======

<CAPTION>

                                              Held-to-Maturity Securities
                                            ______________________________
   Gross                                   Estimated
Unrealized                                  Fair
  Losses                                     Value
 ________                                   ________


                                      <c>                  <c>
December 31, 2003:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                             $31,198              $3,124,351
Obligations of state and
  political subdivisions                         -                  2,104,886
                                              _______              __________
Total                                         $31,198              $5,229,237
                                              =======              ==========
</TABLE>


<TABLE>
<CAPTION>

                                             Available-for-Sale Securities
                                             _____________________________
                                             Gross
 Amortized                                Unrealized
  Cost                                       Gains
 _________                                __________

                                   <c>                    <c>
December 31, 2002:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                          $ 71,510,863           $ 1,677,919
  Other                                       4,520,687               102,780
Obligations of state and
  political subdivisions                     79,569,388             5,276,818
Corporate securities                         36,191,874             2,254,868
Marketable equity securities                  4,580,397               823,581
Restricted equity securities                  3,452,100                -
                                           ____________           ___________
Total                                      $199,825,309           $10,135,966
                                           ============           ===========


<CAPTION>

                                             Available-for-Sale Securities
                                            ______________________________
   Gross                                   Estimated
Unrealized                                  Fair
  Losses                                     Value
 _________                                 ________

                                     <c>                 <c>
December 31, 2002:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                            $  6,212            $ 73,182,570
  Other                                          -                  4,623,467
Obligations of state and
  political subdivisions                       37,445              84,808,761
Corporate securities                            1,093              38,445,649
Marketable equity securities                   93,858               5,310,120
Restricted equity securities                     -                  3,452,100
                                             ________            ____________
Total                                        $138,608            $209,822,667
                                             ========            ============

</TABLE>


<TABLE>
<CAPTION>
                                              Held-to-Maturity Securities
                                             ____________________________
                                             Gross
 Amortized                                Unrealized
  Cost                                       Gains
 ________                                   ________

                                    <c>                     <c>
December 31, 2002:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                           $4,272,615              $ 2,143
Obligations of state and
  political subdivisions                     1,659,716               29,120
                                            __________              _______
Total                                       $5,932,331              $31,263
                                            ==========              =======


<CAPTION>

                                              Held-to-Maturity Securities
                                            ______________________________
   Gross                                   Estimated
Unrealized                                  Fair
  Losses                                     Value
 ________                                   ________


                                      <c>                  <c>
December 31, 2002:
Obligations of U.S.
  Government Corporations
  and Agencies:
  Mortgage-backed                             $38,385              $4,236,373
Obligations of state and
  political subdivisions                         -                  1,688,836
                                              _______              __________
Total                                         $38,385              $5,925,209
                                              =======              ==========

</TABLE>


     Securities Available-for-Sale with an aggregate fair value of
$52,927,314 in 2003 and $59,575,229 in 2002; and securities
          Held-to-Maturity with an aggregate unamortized cost of $3,152,908 in
2003 and $5,942,622 in 2002, were pledged to secure public funds,
trust funds, securities sold under agreements to repurchase, FHLB
advances and other balances of $38,209,594 in 2003 and $37,693,072
in 2002 as required by law.
     The amortized cost, estimated fair value and weighted average
yield of debt securities, by contractual maturity, are shown below
at December 31, 2003. Expected maturities will differ from
contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.


18 * FIRST KEYSTONE CORPORATION

<PAGE>


<TABLE>
<CAPTION>
                                             December 31, 2003
                                     _________________________________
                                      U.S. Government       Obligations
                                         Agency &              of State
                                        Corporation         & Political
                                        Obligations          Subdivisions
                                          <F1>                 <F2>
                                      ______________       _______________

                                  <c>                 <c>
Available-For-Sale:
Within 1 Year:
 Amortized cost                          $     -              $    -
 Estimated fair value                          -                   -
 Weighted average yield                        -                   -
1 - 5 Years:
 Amortized cost                            11,116,597           2,057,554
 Estimated fair value                      11,100,992           2,203,605
 Weighted average yield                         3.51%               5.24%
5 - 10 Years:
 Amortized cost                            40,373,443           6,949,791
 Estimated fair value                      40,178,530           7,455,483
 Weighted average yield                         3.61%               6.21%
After 10 Years:
 Amortized cost                            48,865,033          64,683,223
 Estimated fair value                      49,207,637          69,051,312
 Weighted average yield                         4.58%               7.40%
                                         ____________         ___________
Total:
 Amortized cost                          $100,355,073         $73,690,568
 Estimated fair value                     100,487,159          78,710,400
 Weighted average yield                         4.07%               7.23%


<CAPTION>

                                             December 31, 2003
                                      _______________________________
                                        Marketable           Restricted
                                          Equity               Equity
                                        Securities           Securities
                                          <F3>                 <F3>
                                       ____________          ____________

                                    <c>                <c>
Available-For-Sale:
Within 1 Year:
 Amortized cost                            $   -               $   -
 Estimated fair value                          -                   -
 Weighted average yield                        -                   -
1 - 5 Years:
 Amortized cost                                -                   -
 Estimated fair value                          -                   -
 Weighted average yield                        -                   -
5 - 10 Years:
 Amortized cost                                -                   -
 Estimated fair value                          -                   -
 Weighted average yield                        -                   -
After 10 Years:
 Amortized cost                             4,652,645           5,167,000
 Estimated fair value                       5,653,306           5,167,000
 Weighted average yield                         4.50%               2.11%
                                           __________          __________
Total:
 Amortized cost                            $4,652,645          $5,167,000
 Estimated fair value                       5,653,306           5,167,000
 Weighted average yield                         4.50%               2.11%


<CAPTION>

                                             December 31, 2003
                                      _______________________________
                                         Corporate
                                        Securities
                                         _________

                                   <c>
Available-For-Sale:
Within 1 Year:
 Amortized cost                           $ 1,006,750
 Estimated fair value                       1,013,917
 Weighted average yield                         3.91%
1 - 5 Years:
 Amortized cost                            27,653,136
 Estimated fair value                      29,519,308
 Weighted average yield                         6.14%
5 - 10 Years:
 Amortized cost                             3,958,624
 Estimated fair value                       4,314,302
 Weighted average yield                         6.15%
After 10 Years:
 Amortized cost                             1,105,358
 Estimated fair value                       1,177,405
 Weighted average yield                         5.94%
                                          ___________
Total:
 Amortized cost                           $33,723,868
 Estimated fair value                      36,024,932
 Weighted average yield                         6.07%
_______________________
<FN>
<F1>
Mortgage-backed securities are allocated for maturity reporting at their
original maturity date.
<F2>
Average yields on tax-exempt obligations of state and political
subdivisions have been computed on a tax-equivalent basis using a 34% tax
rate.
<F3>
Marketable equity securities and restricted equity securities are not
considered to have defined maturities and are included in the after ten
year category.

</FN>
</TABLE>


                                   2003 ANNUAL REPORT * 19

<PAGE>

<TABLE>
<CAPTION>
                                             December 31, 2003
                                     _________________________________
                                      U.S. Government       Obligations
                                         Agency &              of State
                                        Corporation         & Political
                                        Obligations          Subdivisions
                                          <F1>                 <F2>
                                      ______________       _______________

                                    <c>                <c>
Held-To-Maturity
Within 1 Year:
 Amortized cost                            $    -              $    -
 Estimated fair value                           -                   -
 Weighted average yield                         -                   -
1 - 5 Years:
 Amortized cost                                 -                   -
 Estimated fair value                           -                   -
 Weighted average yield                         -                   -
5 - 10 Years:
 Amortized cost                                 -                 715,155
 Estimated fair value                           -                 717,940
 Weighted average yield                         -                   5.06%
After 10 Years:
 Amortized cost                             3,152,908           1,361,251
 Estimated fair value                       3,124,351           1,386,946
 Weighted average yield                         3.23%               6.71%
                                           __________          __________
Total:
 Amortized cost                            $3,152,908          $2,076,406
 Estimated fair value                       3,124,351           2,104,886
 Weighted average yield                         3.23%               6.15%


<CAPTION>

                                             December 31, 2003
                                      _______________________________
                                        Marketable           Restricted
                                          Equity               Equity
                                        Securities           Securities
                                          <F3>                 <F3>
                                       ____________          ____________

                                    <c>                 <c>
Held-To-Maturity
Within 1 Year:
 Amortized cost                            $  -                 $   -
 Estimated fair value                         -                     -
 Weighted average yield                       -                     -
1 - 5 Years:
 Amortized cost                               -                     -
 Estimated fair value                         -                     -
 Weighted average yield                       -                     -
5 - 10 Years:
 Amortized cost                               -                     -
 Estimated fair value                         -                     -
 Weighted average yield                       -                     -
After 10 Years:
 Amortized cost                               -                     -
 Estimated fair value                         -                     -
 Weighted average yield                       -                     -
Total:
 Amortized cost                            $  -                 $   -
 Estimated fair value                         -                     -
 Weighted average yield                       -                     -


<CAPTION>
                                             December 31, 2003
                                      _______________________________
                                         Corporate
                                        Securities
                                         _________

                                   <c>
Held-To-Maturity
Within 1 Year:
 Amortized cost                           $   -
 Estimated fair value                         -
 Weighted average yield                       -
1 - 5 Years:
 Amortized cost                               -
 Estimated fair value                         -
 Weighted average yield                       -
5 - 10 Years:
 Amortized cost                               -
 Estimated fair value                         -
 Weighted average yield                       -
After 10 Years:
 Amortized cost                               -
 Estimated fair value                         -
 Weighted average yield                       -
Total:
 Amortized cost                           $   -
 Estimated fair value                         -
 Weighted average yield                       -
_______________________
<FN>
<F1>
Mortgage-backed securities are allocated for maturity reporting at their
original maturity date.
<F2>
Average yields on tax-exempt obligations of state and political
subdivisions have been computed on a tax-equivalent basis using a  34% tax
rate.
<F3>
Marketable equity securities and restricted equity securities are not
considered to have defined maturities and are included in the after ten
year category.

</FN>
</TABLE>


     Restricted equity securities consist of stock in the Federal
Home Loan Bank of Pittsburgh (FHLB), Federal Reserve Bank (FRB) and
Atlantic Central Bankers Bank (ACBB) and do not have a readily
determinable fair value for purposes of SFAS No. 115, because their
ownership is restricted and they can be sold back only to the FHLB,
FRB, ACBB or to another member institution. Therefore, these
securities are classified as restricted equity investment
securities, carried at cost, and evaluated for impairment.
     There were no aggregate investments with a single issuer
(excluding the U.S. Government and its agencies) which exceeded ten
percent of consolidated shareholders' equity at December 31, 2003.
The quality rating of all obligations of state and political
subdivisions are "A" or higher, as rated by Moody's or Standard and
Poors. The only exceptions are local issues which are not rated,
but are secured by the full faith and credit obligations of the
communities that issued these securities. All of the state and
political subdivision investments are actively traded in a liquid
market.
     Proceeds from sale of investments in Available-for-Sale debt
and equity securities during 2003, 2002, and 2001 were $38,223,301,
$46,732,078, and $34,689,482, respectively. Gross gains realized on
these sales were $734,587, $574,090, and $570,162, respectively.
Gross losses on these sales were $435,612, $545,443, and $291,688,
respectively.
     There were no proceeds from the sale of investments in Held-To-
           Maturity debt and equity securities during 2003, 2002 and 2001.
     In accordance with disclosures required by EITF No. 03-1, the
summary below shows the gross unrealized losses and fair value of
the Bank's investments, aggregated by investment category, that
individual securities have been in a continuous unrealized loss
position for less than 12 months or more than 12 months as of
December 31, 2003:


20 * FIRST KEYSTONE CORPORATION

<PAGE>


<TABLE>
<CAPTION>
                                                  Less Than 12 Months
                                                  ___________________
                                                Fair            Unrealized
                                               Value              Loss
                                               _____              ____

                                      <c>                  <c>
Direct obligations of the
   U.S. Government                            $ 1,002,260          $  7,843
Federal Agency Mortgage
   Backed Securities                           56,958,222           634,739
Municipal Bonds                                 3,338,162           179,185
Equity Securities                               1,768,614           106,848
                                              ___________          ________
                                              $63,067,258          $928,615
                                              ===========          ========

<CAPTION>
                                                   12 Months or More
                                                   _________________
                                                Fair            Unrealized
                                               Value              Loss
                                               _____              ____

                                       <c>                 <c>
Direct obligations of the
   U.S. Government                             $    -              $   -
Federal Agency Mortgage
   Backed Securities                            1,655,470            25,183
Municipal Bonds                                     -                  -
Equity Securities                               1,229,396           270,604
                                               __________          ________
                                               $2,884,866          $295,787
                                               ==========          ========

<CAPTION>
                                                         Total
                                                 _____________________
                                                Fair            Unrealized
                                               Value              Loss
                                               _____              ____

                                      <c>                 <c>
Direct obligations of the
   U.S. Government                            $ 1,002,260         $    7,843
Federal Agency Mortgage
   Backed Securities                           58,613,692            659,922
Municipal Bonds                                 3,338,162            179,185
Equity Securities                               2,998,010            377,452
                                              ___________         __________
                                              $65,952,124         $1,224,402
                                              ===========         ==========

</TABLE>


     The Corporation invests in various forms of agency debt
including mortgage backed securities and callable debt. The
mortgage backed securities are issued by FHLMC (Federal Home Loan
Mortgage Corporation) of FNMA (Federal National Mortgage
Association). The municipal securities consist of general
obligations and revenue bonds. The equity securities consist of
FHLMC preferred stocks.  The fair market value of the above
securities is influenced by market interest rates, prepayment
speeds on mortgage securities, bid to offer spreads in the market
place and credit premiums for various types of agency debt. These
factors change continuously and therefore the market value of these
securities may be higher or lower that the Corporation's carrying
value at any measurement date. Management does not believe any
individual unrealized loss as of December 31, 2003 represents an
other-than-temporary impairment. The Corporation has the ability to
hold the securities contained in the above table for a time
necessary to recover the cost.


NOTE 4  -  LOANS
     Major classifications of loans at December 31, 2003 and 2002
consisted of:

<TABLE>
<CAPTION>
                                                  2003            2002
                                                  ____            ____

                                        <c>               <c>
Commercial, Financial, and
  Agricultural                                  $ 33,889,532      $ 23,638,919
Tax-exempt                                         3,930,464         4,393,344
Real estate mortgage -
  Held for sale                                    7,855,461         4,897,339
Real estate mortgage - Other                     161,999,169       145,599,828

<PAGE>
Consumer                                         25,625,926         28,639,586
                                                ____________      ____________
Gross loans                                     $233,300,552      $207,169,016
Add (deduct): Unearned discount                   (4,436,089)       (5,777,975)
              Net deferred loan
               fees and costs                        208,840           126,451
                                                ____________      ____________
Loans, net of unearned income                   $229,073,303      $201,517,492
                                                ============      ============

</TABLE>

     Changes in the allowance for loan losses for the years ended
December 31, 2003, 2002 and 2001, were as follows:

<TABLE>
<CAPTION>

                                      2003           2002            2001
                                      ____           ____            ____

                             <c>            <c>             <c>
Balance, January 1                   $3,174,616     $2,922,405     $2,702,313
Provision charged
  to operations                         500,000        550,000        610,000
Loans charged off                      (198,021)      (402,112)      (458,242)
Recoveries                               47,720        104,323         68,334
                                     __________     __________     __________
Balance, December 31                 $3,524,315     $3,174,616     $2,922,405
                                     ==========     ==========     ==========

</TABLE>

     Non-accrual loans at December 31, 2003, 2002 and 2001 were
$735,235, $457,565 and $1,101,736, respectively. The gross interest
that would have been recorded if these loans had been current in
accordance with their original terms and the amounts actually
recorded in income were as follows:


                                   2003 ANNUAL REPORT * 21

<PAGE>

<TABLE>
<CAPTION>
                                           2003          2002         2001
                                           ____          ____         ____

                                     <c>          <c>          <c>
Gross interest due under terms              $60,778      $38,956      $93,258
Amount included in income                   (37,669)     (19,179)     (72,382)
                                            _______      _______      _______
Interest income not recognized              $23,109      $19,777      $20,876
                                            =======      =======      =======

</TABLE>

     At December 31, 2003, 2002 and 2001 the recorded investment in
loans that are considered to be impaired as defined by SFAS No. 114
was $113,913, $35,565, and $85,471, respectively. No additional
charge to operations was required to provide for the impaired loans
since the total allowance for loan losses is estimated by
management to be adequate to provide for the loan loss allowance
required by SFAS No. 114 along with any other potential losses. The
average recorded investment in impaired loans during the year ended
December 31, 2003, 2002 and 2001 was approximately $59,507,
$109,201, and $124,000, respectively.
     Loans past-due 90 days or more and still accruing interest
were $33,169 at December 31, 2003 and zero at December 31, 2002, as
presented in accordance with AICPA Statement of Position 01-6,
"Accounting by Certain Entities (Including Entities With Trade
Receivables) That Lend to or Finance the Activities of Others",
effective for fiscal years beginning after December 15, 2001.
     At December 31, 2003, there were no significant commitments to
lend additional funds with respect to non-accrual and restructured
loans.


NOTE 5  -  MORTGAGE SERVICING RIGHTS
     The mortgage loans sold serviced for others are not included
in the accompanying consolidated balance sheets. The unpaid
principal balances of mortgage loans serviced for others were
$26,809,194 and $23,141,951 at December 31, 2003 and 2002,
respectively. The balances of amortized capitalized mortgage
servicing rights, net of valuation allowances, included in other
assets at December 31, 2003 and 2002, were $201,816 and $218,897,
respectively. A valuation allowance is provided when the carrying
amount exceeds fair value determined by using a discount rate of 6%
and average lives of generally 3 to 6 years depending on loan
rates.
     The following summarizes mortgage servicing rights capitalized
and amortized along with the aggregate activity in the related
valuation allowances:

<TABLE>
<CAPTION>

                                      2003           2002           2001
                                      ____           ____           ____

                              <c>             <c>           <c>
Balance, January 1                    $218,897       $187,435       $124,340
Servicing asset additions              130,232         74,704         88,996
Amortization                           (94,420)       (43,242)       (25,901)
                                      ________       ________       ________
Balance, December 31                  $254,709       $218,897       $187,435
                                      ________       ________       ________
Valuation Allowances:
Balance, January 1                    $   -          $   -          $   -
   Additions                            52,893           -              -
   Reductions                             -              -              -
   Writedowns                             -              -              -
                                      ________       ________       ________
Balance, December 31                  $ 52,893       $   -          $   -
                                      ________       ________       ________
Net Mortgage Servicing
  Rights                              $201,816       $218,897       $187,435
                                      ========       ========       ========

</TABLE>

     Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were
approximately $10,905 and $20,250 at December 31, 2003 and 2002,
respectively.


22 * FIRST KEYSTONE CORPORATION

<PAGE>

NOTE 6  -  PREMISES AND EQUIPMENT
     A summary of premises and equipment at December 31, 2003 and
2002 follows:

<TABLE>
<CAPTION>
         2003                                 2002
         ____                                 ____

    <c>                           <c>
Land                                          $  991,772       $  876,526
Buildings                                      2,722,099        2,722,099
Leasehold improvements                           291,494          289,759
Equipment                                      4,741,330        4,356,353
Construction and equipment
  in progress                                    644,716            9,900
 __________                                   __________
  9,391,411                                    8,254,637
Less: Accumulated depreciation                 5,233,571        4,825,130
 __________                                   __________
Total                                         $4,157,840       $3,429,507
 ==========                                   ==========

</TABLE>

     Depreciation amounted to $425,611 for 2003, $391,050 for 2002,
and $384,925 for 2001.
     Construction in progress at December 31, 2003 consisted of
costs incurred in the construction of a new branch facility in
Scott Township that will replace the existing leased facility in
that locale. This new branch facility is expected to be open in the
first half of 2004.
     In January 2004, certain premises and equipment of the branch
of another financial institution located in Danville, Pennsylvania,
were acquired (See Note 12). Estimated costs to be incurred in 2004
to complete these two projects will approximated $1,525,000.


NOTE 7  -  DEPOSITS
     Major classifications of deposits at December 31, 2003 and
2002 consisted of:

<TABLE>
<CAPTION>

                                                 2003           2002
                                                 ____           ____

                                   <c>                  <c>
Demand - non-interest bearing              $ 30,052,477         $ 30,056,766
Demand - interest bearing                    61,493,597           49,158,732
Savings                                      69,386,005           71,629,153
Time, $100,000 and over                      36,355,637           42,675,023
Other time                                  145,732,434          137,225,604
                                           ____________         ____________
Total deposits                             $343,020,150         $330,745,278
                                           ============         ============

</TABLE>

     The following is a schedule reflecting classification and
remaining maturities of time deposits of $100,000 and over at
December 31, 2003:

<TABLE>
<CAPTION>

       
       <c>
                2004                         $22,485,967
                2005                           4,526,913
                2006                           1,604,978
                2007                           5,470,486
                2008                           2,267,293
                                             ___________
                                             $36,355,637
                                             ===========
</TABLE>

     Interest expense related to time deposits of $100,000 or more
was $1,226,635 in 2003, $1,374,694 in 2002, and $2,361,108 in 2001.
     In January 2004, approximately $10,350,000 of deposit accounts
were assumed from the branch of another financial institution (See
Note 12).


NOTE 8  -  SHORT-TERM BORROWINGS
     Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30-day borrowings. U.S. Treasury tax and
loan notes for collections made by the Bank are payable on demand.
Short-term borrowings consisted of the following at December 31,
2003, and 2002:


                                   2003 ANNUAL REPORT * 23

<PAGE>


<TABLE>
<CAPTION>


                                                     2003
                                    _________________________________________
                                                           Maximum
                                 Ending      Average       Month End   Average
                                 Balance      Balance      Balance     Rate
                                 ______        ______        ______     ____

                       <c>           <c>            <c>           <c>
Federal funds
  purchased and
  securities sold
  under agreements
  to repurchase                $ 6,457,834   $ 6,016,022    $ 6,760,603   1.50%
Federal Home Loan
 Bank                            4,575,000     3,953,598     18,000,000   1.23%
U.S. Treasury tax
  and loan notes                   711,558       467,883      2,000,000    .83%
                               ___________   ___________    ___________
Total                          $11,744,392   $10,437,503    $26,760,603   1.19%
                               ===========   ===========    ===========

</TABLE>

<TABLE>
<CAPTION>
                                                     2002
                                     ______________________________________
                                                           Maximum
                                 Ending      Average       Month End   Average
                                 Balance      Balance      Balance     Rate
                                 _______      _______      _______     ____

                         <c>          <c>           <c>           <c>
Federal funds
  purchased and
  securities sold
  under agreements
  to repurchase                  $5,567,145   $6,357,032    $ 7,779,266   1.91%
Federal Home Loan
  Bank                            1,500,000      819,477      4,150,000   1.96%
U.S. Treasury tax
 and loan notes                   2,000,000      559,068      2,004,036   1.62%
                                 __________   __________    ___________
Total                            $9,067,145   $7,735,577    $13,933,302   1.90%
                                 ==========   ==========    ===========

</TABLE>


NOTE 9  -  LONG-TERM BORROWINGS
     Long-term borrowings are comprised of advances from the
Federal Home Loan Bank (FHLB). Under terms of a blanket agreement,
collateral for the loans are secured by certain qualifying assets
of the Corporation's banking subsidiary.  The principal assets are
real estate mortgages with a carrying value of $206,564,000 and
certain investment securities with a carrying value of $88,985,000
at December 31, 2003.
     A schedule of long-term borrowings by maturity as of December
31, 2003 and 2002 follows:

<TABLE>
<CAPTION>

                                           2003            2002
                                           ____            ____

                              <c>              <c>
Due 2003, 6.79%                           $    -            $1,500,000
Due 2004, 1.25% to 1.36%                    3,535,000           -
Due 2005, 1.83% to 6.49%                    9,375,000        5,000,000
Due 2006, 2.46% to 3.12%                    6,500,000        3,000,000
Due 2007, 3.09% to 3.21%                    3,255,000           -
Due 2008, 3.54% to 5.48%                    7,030,000        3,000,000
Due 2010, 5.45% to 6.76%                   15,500,000       15,500,000
Due 2011, 4.23% to 5.03%                    9,000,000        9,000,000
Due 2012, 4.77%                             5,000,000        5,000,000
Due 2014, 5.41%                             3,750,000        3,750,000
                                                           ___________         ___________
                                                           $62,945,000         $45,750,000
                                                           ===========         ===========

</TABLE>


NOTE 10  -  INCOME TAXES
     The current and deferred components of the income tax
provision (benefit) consisted of the following:

<TABLE>

<PAGE>
<CAPTION>
    2003                             2002            2001
    ____                             ____            ____

                            <c>            <c>             <c>
Federal
  Current                           $2,066,309     $1,936,447      $1,592,729
  Deferred (benefit)                  (114,684)       (79,854)       (105,349)
                                    __________     __________      __________
                                    $1,951,625     $1,856,593      $1,487,380
                                    __________     __________      __________
State
  Current                           $   -          $       10      $    6,065
  Deferred (benefit)                    (1,472)         -              -
                                    __________     __________      __________
                                    $   (1,472)    $       10      $    6,065
                                    __________     __________      __________
Total provision for
  income taxes                      $1,950,153     $1,856,603      $1,493,445
                                    ==========     ==========      ==========

</TABLE>

24 * FIRST KEYSTONE CORPORATION

<PAGE>

     The following is a reconciliation between the actual provision
for federal income taxes and the amount of federal income taxes
which would have been provided at the statutory rate of 34%:

<TABLE>
<CAPTION>

                                                          2003
                                                   ________________
                                                Amount          Rate
                                                ______          ____

                                       <c>              <c>
Provision at statutory rate                        $3,150,829       34.0%
Tax-exempt income                                  (1,049,977)      (11.3)
Non-deductible expenses                               112,954         1.2
Tax credit from limited
  partnership
  Less amortization - net                             (48,976)        (.5)
Bank owned life insurance
  income - net                                       (164,864)       (1.8)
Other, net                                            (48,341)        (.5)
      __________                                         ____
Applicable federal income
  tax and rate                                     $1,951,625        21.1%
      ==========                                         ====


<CAPTION>

                                                        2002
                                                   ________________
                                                Amount          Rate
                                                ______          ____

                                       <c>              <c>
Provision at statutory rate                        $2,870,876        34.0%
Tax-exempt income                                    (994,782)      (11.8)
Non-deductible expenses                               112,500         1.3
Tax credit from limited
  partnership
  Less amortization - net                             (44,391)        (.5)
Bank owned life insurance
  income - net                                        (32,734)        (.4)
Other, net                                            (54,876)        (.6)
      __________                                         ____
Applicable federal income
  tax and rate                                     $1,856,593        22.0%
      ==========                                         ====


<CAPTION>

                                                        2001
                                                   ________________
                                                Amount          Rate
                                                ______          ____

                                       <c>              <c>
Provision at statutory rate                        $2,355,128        34.0%
Tax-exempt income                                    (952,900)      (13.8)
Non-deductible expenses                               141,425         2.1
Tax credit from limited
  partnership
  Less amortization - net                             (14,741)        (.2)
Bank owned life insurance
  income - net                                          1,952          -
Other, net                                            (43,484)        (.6)
      __________                                         ____
Applicable federal income
  tax and rate                                     $1,487,380        21.5%
      ==========                                         ====

</TABLE>

     Total federal income tax attributable to realized security
gains and losses was $101,652 in 2003, $9,740 in 2002 and $94,681
in 2001.
     The deferred tax assets and liabilities resulting from
temporary timing differences have been netted to reflect a net
deferred tax asset (liability) included in other assets or other
liabilities in these consolidated financial statements. The
components of the net deferred tax asset (liability) at December
31, 2003, 2002 and 2001, are as follows:

<TABLE>
<CAPTION>

                                               2003                 2002
                                               ____                 ____

                                      <c>                <c>
Deferred Tax Assets:
  Allowance for loan losses                   $ 1,051,363        $   932,466
  Deferred compensation                           203,310            177,098
  Contributions                                    -                   3,197
  Non-accrual interest                              6,360              5,229
  Mortgage servicing rights                         7,653             -
  State tax net operating loss                      1,472             -
  Limited partnership                              20,509              9,095
                                              ___________        ___________
    Total                                     $ 1,290,667        $ 1,127,085
Deferred Tax Liabilities:
  Loan fees and costs                         $  (222,059)       $  (210,290)
  Depreciation                                   (272,744)          (249,937)
  Accretion                                      (121,042)           (98,809)
  Mortgage servicing rights                        -                  (9,382)
  Limited partnership                              -                  -
  Unrealized investment
    securities gains                           (2,965,103)        (3,453,378)
                                              ___________        ___________
    Total                                     $(3,580,948)       $(4,021,796)
                                              ___________        ___________
  Net Deferred Tax Asset
    (Liability)                               $(2,290,281)       $(2,894,711)
                                              ===========        ===========


<CAPTION>
                                               2001
                                               ____

                                        <c>
Deferred Tax Assets:
  Allowance for loan losses                     $ 846,714
  Deferred compensation                           141,022
  Contributions                                     6,133
  Non-accrual interest                              3,209
  Mortgage servicing rights                         -
  State tax net operating loss                      -
  Limited partnership                               -
                                                _________
    Total                                       $ 997,078
                                                _________
Deferred Tax Liabilities:
  Loan fees and costs                           $(209,338)
  Depreciation                                   (237,699)
  Accretion                                       (62,260)
  Mortgage servicing rights                        (6,788)
  Limited partnership                              (2,181)
  Unrealized investment
    securities gains                             (432,698)
                                                _________
    Total                                       $(950,964)
                                                _________
  Net Deferred Tax Asset
    (Liability)                                 $  46,114
                                                =========

</TABLE>

     It is anticipated that all deferred tax assets are to be
realized and accordingly, no valuation allowance has been provided.
     The Corporation and its subsidiary file a consolidated federal
income tax return. The parent company is also required to file a
separate state income tax return and has available a state
operating loss carry forward in the amount of $14,738 that expires
in 2023.


NOTE 11  -  EMPLOYEE BENEFIT PLANS AND DEFERRED
            COMPENSATION AGREEMENTS
     The Corporation maintains a 401K Plan which has a combined tax
qualified savings feature and profit sharing feature for the
benefit of its employees. Under the savings feature, the
Corporation matches 100% of the employee contribution up to 3% of
compensation which amounted to $92,937, $91,532, and $87,136, in
2003, 2002 and 2001, respectively. Under the profit sharing
feature, contributions, at the discretion of the Board of Directors
are funded currently and amounted to $357,301, $350,894 and
$212,421 in 2003, 2002 and 2001, respectively.


                                   2003 ANNUAL REPORT * 25

<PAGE>

     The Bank also has non-qualified deferred compensation
agreements with three of its officers. These agreements are
essentially unsecured promises by the Bank to make monthly payments
to the officers over a twenty year period. Payments begin based
upon specific criteria - generally, when the officer retires. To
account for the cost of payments yet to be made in the future, the
Bank recognizes an accrued liability in years prior to when
payments begin based on the present value of those future payments.
The Bank's accrued liability for these deferred compensation
agreements as of December 31, 2003 and 2002, was $597,970 and
$520,876, respectively.  The related expense for these plans
amounted to $82,094, $110,334 and $105,533 in 2003, 2002 and 2001,
respectively.


NOTE 12  -  LEASE COMMITMENTS CONTINGENCIES AND COMMITMENTS
     The Corporation's banking subsidiary currently leases five
branch banking facilities, as well as the operations center
adjoining the main bank office, under operating leases. Rent
expense for the existing facilities for the years ended December
31, 2003, 2002 and 2001 was $195,557, $151,207 and $141,110,
respectively.
     Minimum rental payments required under these operating leases
are: 2004 - $156,558, 2005 - $110,113, 2006 - $90,619, 2007 -
$92,006, 2008 - $93,441 and thereafter $737,038.
     In the normal course of business, there are various pending
legal actions and proceedings that are not reflected in the
consolidated financial statements. Management does not believe the
outcome of these actions and proceedings will have a material
effect on the consolidated financial position of the Corporation.
     During the third quarter of 2003, the Bank entered into an
agreement to acquire certain fixed and operating assets and to
assume deposit accounts of the branch of another financial
institution located in Danville, Pennsylvania. In December 2003,
the Bank received a pre-settlement advance on the acquisition of
these branch assets and assumption of deposits in the amount of
$8,714,900. In January 2004, the transaction was consummated and
the Bank was required to expend approximately $408,000 to complete
the acquisition.


NOTE 13  -  RELATED PARTY TRANSACTIONS
     Certain directors and executive officers of First Keystone
Corporation and its Subsidiary and companies in which they are
principal owners (i.e., at least 10%) were indebted to the
Corporation at December 31, 2003, 2002 and 2001. These loans were
made on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties. The loans do not
involve more than the normal risk of collectibility nor present
other unfavorable features.
     A summary of the activity on the related party loans,
comprised of 6 directors and 4 executive officers and their related
companies consists of the following:

<TABLE>
<CAPTION>

  2003                            2002            2001
  ____                            ____            ____

                         <c>              <c>              <c>
Balance at January 1              $2,651,391       $3,005,435      $1,455,475
Additions                            505,749        1,482,405       3,050,795
Deductions                        (1,560,140)      (1,836,449)     (1,500,835)
                                  __________       __________      __________
Balance at December 31            $1,597,000       $2,651,391      $3,005,435
                                  ==========       ==========      ==========

</TABLE>

     The above loans represent funds drawn and outstanding at the
date of the accompanying consolidated financial statement.
Commitments by the Bank to related parties on lines of credit and
letters of credit for 2003, 2002 and 2001,  presented an additional
off-balance sheet risk to the extent of undisbursed funds in the
amounts of $2,517,230, $2,308,737 and $4,334,140, respectively, on
the above loans.


NOTE 14  -  REGULATORY MATTERS
     Dividends are paid by the Corporation to shareholders which
are mainly provided by dividends from the Bank. However, national
banking laws place certain restrictions on the amount of cash
dividends allowed to be paid by the Bank to the Corporation.
Generally, the limitation provides that dividend payments may not
exceed the Bank's current year's retained income plus retained net
income for the preceding two years. Accordingly, in 2004, without
prior regulatory approval, the Bank may declare dividends to the
Corporation in the amount of $3,566,475 plus additional amounts
equal to the net income earned in 2004 for the period January 1,
2004, through the date of declaration, less any dividends which may
have already been paid in 2004. Regulations also limit the amount
of loans and advances from the Bank to the Corporation to 10% of
consolidated net assets.


26 * FIRST KEYSTONE CORPORATION

<PAGE>

     The Corporation is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory
- and possibly additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the
Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that
involve quantitative measures of the Corporation's assets,
liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Corporation's capital
amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings and
other factors. Management believes, as of December 31, 2003 and
2002, that the Corporation and the Bank met all capital adequacy
requirements to which they are subject.
     Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios (set fourth in the table below) of Total and Tier I Capital
(as defined in the regulations) to Risk-Weighted Assets (as
defined), and of Tier I Capital (as defined) to Average Assets (as
defined).
     As of December 31, 2003, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as
Well Capitalized under the regulatory framework for prompt
corrective action. To be categorized as Well Capitalized, the Bank
must maintain minimum Total Risk-Based, Tier I Risked-Based and
Tier I Leverage Ratios as set forth in the table. There are no
conditions or events since the notification that management
believes have changed the Bank's category.


<TABLE>
<CAPTION>

(Amounts in thousands)                                Actual
                                                 ___________________
                                               Amount         Ratio
                                               ______         _____

                                        <c>             <c>
As of December 31, 2003:
  Total Capital
    (to Risk Weighted Assets)                   $44,052         14.34%
  Tier I Capital
    (to Risk Weighted Assets)                    40,528         13.19%
  Tier I Capital
    (to Average Assets)                          40,528          8.74%

As of December 31, 2002:
  Total Capital
    (to Risk Weighted Assets)                   $44,211         16.52%
  Tier I Capital
    (to Risk Weighted Assets)                    41,036         15.33%
  Tier I Capital
    (to Average Assets)                          41,036          9.96%


<CAPTION>

(Amounts in thousands)                              For Capital
                                                 Adequacy Purposes
                                                 ___________________
                                               Amount         Ratio
                                               ______         _____

                                        <c>              <c>
As of December 31, 2003:
  Total Capital
    (to Risk Weighted Assets)                   $24,576          8.00%
  Tier I Capital
    (to Risk Weighted Assets)                    12,288          4.00%
  Tier I Capital
    (to Average Assets)                          18,556          4.00%

As of December 31, 2002:
  Total Capital
    (to Risk Weighted Assets)                   $21,409          8.00%
  Tier I Capital
    (to Risk Weighted Assets)                    10,704          4.00%
  Tier I Capital
    (to Average Assets)                          16,484          4.00%


<CAPTION>

(Amounts in thousands)                              To Be Well
                                                 Capitalized Under
                                                 Prompt Corrective
                                                 Action Provisions
                                                 ___________________
                                               Amount         Ratio
                                               ______         _____

                                        <c>             <c>
As of December 31, 2003:
   Total Capital
     (to Risk Weighted Assets)                  $30,720         10.00%
   Tier I Capital
     (to Risk Weighted Assets)                   18,432          6.00%
   Tier I Capital
     (to Average Assets)                         23,196          5.00%

As of December 31, 2002:
   Total Capital
     (to Risk Weighted Assets)                  $26,761         10.00%
   Tier I Capital
     (to Risk Weighted Assets)                   16,057          6.00%
   Tier I Capital

<PAGE>
     (to Average Assets)                         21,605          5.00%

</TABLE>

     The Corporation's capital ratios are not materially different
from those of the Bank.


NOTE 15  -  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
            AND CONCENTRATIONS OF CREDIT RISK
     The Corporation 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
include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its
financial instruments with off-balance sheet risk.
     The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those
instruments.
     The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance sheet instruments.
     The Corporation may require collateral or other security to
support financial instruments with off-balance sheet credit risk.


                                   2003 ANNUAL REPORT * 27

<PAGE>

     The contract or notional amounts at December 31, 2003 and 2002
were as follows:

<TABLE>
<CAPTION>
                                                   2003              2002
                                                   ____              ____

                                           <c>             <c>
Financial instruments whose contract
  amounts represent credit risk:
  Commitments to extend credit                     $25,203,634     $24,742,078
  Financial standby letters of credit              $ 2,923,630     $ 3,242,509
  Performance standby letters of credit            $   655,913     $   387,706

</TABLE>

     Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses that may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the
Corporation upon extension of credit, is based on management's
credit evaluation of the counter-party. Collateral held varies but
may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
     Standby letters of credit are conditional commitments issued
by the Corporation to guarantee payment to a third party when a
customer either fails to repay an obligation or fails to perform
some non-financial obligation. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation may hold
collateral to support standby letters of credit for which
collateral is deemed necessary.
     The Corporation grants commercial, agricultural, real estate
mortgage and consumer loans to customers primarily in the counties
of Columbia, Luzerne and Montour, Pennsylvania. The concentrations
of credit by type of loan are set forth in Note 4, "Loans". It is
management's opinion that the loan portfolio was well balanced and
diversified at December 31, 2003, to the extent necessary to avoid
any significant concentration of credit risk. However, its debtors
ability to honor their contracts may be influenced by the region's
economy.


NOTE 16  -  COMPREHENSIVE INCOME
     The components of other comprehensive income and related tax
effects are as follows:

<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                                    _______________________
                                                              2003
                                                              ____

                                                    <c>
Unrealized holding gains (losses) on
  Available-for-Sale investment securities                 $(1,842,691)
Less reclassification adjustment for gains
  realized in income                                           298,975
                                                           ___________
Net unrealized gains (losses)                              $(1,543,716)
Tax effects                                                    488,275
                                                           ___________
Net of tax amount                                          $(1,055,441)
                                                           ===========


<CAPTION>

                                                     Years Ended December 31,
                                                    _______________________
                                                              2002
                                                              ____

                                                     <c>
Unrealized holding gains (losses) on
  Available-for-Sale investment securities                  $8,878,707
Less reclassification adjustment for gains
  realized in income                                            28,647
                                                            __________
Net unrealized gains (losses)                               $8,850,060
Tax effects                                                 (3,020,680)
                                                            __________
Net of tax amount                                           $5,829,380
                                                            ==========


<CAPTION>

                                                     Years Ended December 31,
                                                    _______________________
                                                              2001
                                                              ____

                                                      <c>
Unrealized holding gains (losses) on
  Available-for-Sale investment securities                   $(405,435)
Less reclassification adjustment for gains
  realized in income                                           278,474
                                                             _________
Net unrealized gains (losses)                                $(126,961)
Tax effects                                                     27,119
                                                             _________
Net of tax amount                                            $ (99,842)
                                                             =========

</TABLE>


NOTE 17  -  STOCKHOLDERS' EQUITY
     On June 25, 2002, the Board of Directors declared a 5% stock
dividend payable August 6, 2002, to shareholders of record July 16,
2002. A total of 141,453 shares were issued as a result of this
stock dividend, with a total value transferred from retained
earnings of $3,111,966, including cash in lieu of fractional
shares.
     The Corporation also offers to its shareholders a Dividend
Reinvestment and Stock Purchase Plan. First Keystone Corporation is
authorized to issue up to 100,000 shares of its common stock under
the plan. The plan provides First Keystone shareholders a
convenient and economical way to purchase additional shares of
common stock by reinvesting dividends. A plan participant can elect
full dividend reinvestment or partial dividend reinvestment
provided at least 25 shares are enrolled in the plan. In addition,
plan participants may make additional voluntary cash purchases of
common stock under the plan of not less than $100 per calendar
quarter or more than $2,500 in any calendar quarter.
     Shares of First Keystone common stock are purchased for the
plan either in the open market by an independent broker on behalf
of the plan, directly from First Keystone as original issue shares,
or through negotiated transactions. A combination of the previous
methods could also occur.


28 * FIRST KEYSTONE CORPORATION

<PAGE>

     Participation in this plan by shareholders began in 2001.
Shares issued under this plan were:

<TABLE>
<CAPTION>

                       Year              Number of Shares
                       ____              ________________
                   
                <c>
                       2001                     3,260
                       2002                    10,469
                       2003                     8,000

</TABLE>


NOTE 18  -  STOCK OPTIONS
     On February 10, 1998, the Board of Directors adopted a stock
option incentive plan and reserved 100,000 shares of common stock
for issuance under the plan for certain employees of the Bank.
Under the Plan, options are granted at fair market value and the
time period during which any option granted may be exercised may
not commence before six months or continue beyond the expiration of
ten years after the option is awarded.
     The Corporation had accounted for its stock option plan in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees". No stock-based employee compensation cost is reflected
in consolidated net income for the years ended December 31, 2002
and 2001, as all options under the stock option incentive plan had
an exercise price equal to the market value of the underlying
common stock on the date of grant. Effective January 1, 2003 the
Corporation adopted prospectively to all employee awards granted,
modified or settled after January 1, 2003 the fair value
recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation" following the guidelines provided by FASB
Statement No. 148 "Accounting for Stock-Based Compensation-
          Transition and Disclosure- An Amendment of FASB Statement No. 123".
Awards under the Corporation's stock option incentive plan vest
over a period of six months. Therefore, the cost related to the
stock-based employee compensation included in the determination of
consolidated net income for the year ended December 31, 2003 is
less than that which would have been recognized if the fair value
based method had been applied to all awards since the original
effective date of FASB Statement No. 123. The following table
illustrates the effect on consolidated net income and earnings per
share if the fair value based method had been applied to all
outstanding and unvested awards each period.


<TABLE>
<CAPTION>

                                      2003          2002          2001
                                      ____          ____          ____

                              <c>           <c>           <c>
Net income as reported                $7,316,992    $6,587,149    $5,433,401

Add: stock-based employee
  compensation expense
  included in reported net
  income net of related
  tax effect                              48,131         -             -

Deduct: total stock-based
  employee compensation
  expense determined under
  fair value based method
  for all awards, net of
  related tax effects                    (75,669)      (27,538)      (22,218)
                                      __________    __________    __________

Pro forma net income                  $7,289,454    $6,559,611    $5,411,183
                                      ==========    ==========    ==========
Earnings Per Share:
  Basic- As Reported                  $     2.48    $     2.22    $     1.83
                                      ==========    ==========    ==========
  Basic- Pro Forma                    $     2.48    $     2.21    $     1.83
                                      ==========    ==========    ==========

  Diluted- As Reported                $     2.48    $     2.21    $     1.83
                                      ==========    ==========    ==========
  Diluted- Pro Forma                  $     2.47    $     2.20    $     1.83
                                      ==========    ==========    ==========

</TABLE>


     The fair value of each option grant is estimated on the date
of grant using the Binomial Option Pricing Model derived from the
Black-Scholes Option Pricing Model with the following weighed-
          average assumptions used for options granted in 2003 and 2002,
respectively (no options were granted in 2001): dividend yield of
2.89% and 3.58%; expected volatility of 22.70% and 28.00%; risk-
          free interest rate of 4.24% and 3.69%; and an expected life of 10
years and 10 years.


                                   2003 ANNUAL REPORT * 29

<PAGE>

     Information about stock options outstanding at December 31,
2003, is summarized as follows:

<TABLE>
<CAPTION>

                                                     2003
                                              _____________________
                                                           Weighted
                                                             Average
                                               Stock       Exercise
                                              Options        Price
                                               ______       _______

                                       <c>           <c>
Balance at January 1                               46,068        $23.93
Granted                                            11,000         33.25
Granted due to stock dividend                         -             -
Exercised                                          (8,568)        17.60
Forfeited                                          (1,050)        28.45
                                                   ______        ______
Balance at December 31                             47,450        $27.13
                                                   ======        ======
Exercisable at December 31                         36,450        $25.29
                                                   ======        ======
Weighted average fair value of
options granted during the year                                  $ 8.75
                                                                 ======


<CAPTION>
                                                     2002
                                              _____________________
                                                           Weighted
                                                             Average
                                               Stock       Exercise
                                              Options        Price
                                               ______       _______

                                       <c>           <c>
Balance at January 1                               34,750        $25.23
Granted                                            12,750         23.75
Granted due to stock dividend                       1,568         24.00
Exercised                                          (1,000)        17.00
Forfeited                                          (2,000)        29.88
                                                   ______        ______
Balance at December 31                             46,068        $23.93
                                                   ======        ======
Exercisable at December 31                         33,318        $24.00
                                                   ======        ======
Weighted average fair value of
options granted during the year                                  $ 6.55
                                                                 ======


<CAPTION>

                                                     2001
                                              _____________________
                                                           Weighted
                                                             Average
                                               Stock       Exercise
                                              Options        Price
                                               ______       _______

                                       <c>           <c>
Balance at January 1                               34,750        $25.23
Granted                                               -             -
Granted due to stock dividend                         -             -
Exercised                                             -             -
Forfeited                                             -             -
                                                   ______        ______
Balance at December 31                             34,750        $25.23
                                                   ======        ======
Exercisable at December 31                         34,750        $25.23
                                                   ======        ======
Weighted average fair value of
options granted during the year                                    N/A
                                                                 ======

</TABLE>

     Under the terms of the stock option incentive plan, the stock
options including amendments as to price and terms were adjusted
for the stock dividend in 2002 (See Note 17).
     Exercise prices of options outstanding as of December 31,
2003, ranged from $16.19 to $33.25 per share. The weighted average
remaining contracted life is approximately 7 years.
     The following table summarizes information concerning the 1998
Employee Stock Option Plan at December 31, 2003.

<TABLE>
<CAPTION>

                                     Options Outstanding
                     ___________________________________________________
                                           Weighted               Weighted
                     Number               Average                Average
                   Outstanding            Remaining               Exercise
Year                 <F1>              Contractual Life           Price
____                _________         _______________             _____

              <c>                     <c>                   <c>
1998                   9,707                  4.75                  $31.90
1999                  10,756                  5.75                   25.00
2000                   4,837                  6.75                   16.19
2002                  11,150                  8.75                   23.75
2003                  11,000                  9.75                   33.25
                      ______                  ____                  ______
                      47,450                  7.27                  $27.13
                      ______                  ____                  ______
_______________
<FN>
<F1>
As adjusted for stock dividend noted above.

</FN>
</TABLE>


<TABLE>
<CAPTION>
                                     Options Exercisable
                                 ___________________________
                                                      Weighted
                                                     Average
                                 Number               Exercise
                               Exercisable             Price
                               ___________             _____

                           <c>                  <c>
1998                                9,707               $31.90
1999                               10,756                25.00
2000                                4,837                16.19
2002                               11,150                23.75
2003                                  -                    -
                                   ______               ______
                                   36,450               $25.29
                                   ______               ______

</TABLE>


NOTE 19  -  FAIR VALUES OF FINANCIAL INSTRUMENTS
     Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments,
whether or not required to be recognized in the consolidated
balance sheet, for which it is practicable to estimate such fair
value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other
valuation techniques. These techniques are significantly affected
by the assumptions used, including the discount rate and estimates
of future cash flows. Fair value estimates derived through these
techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Corporation.


30 * FIRST KEYSTONE CORPORATION

<PAGE>

     The following methods and assumptions were used by the
Corporation in estimating its fair value disclosures for financial
instruments:

     CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS, ACCRUED
     INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
     The fair values are equal to the current carrying values.

     INVESTMENT SECURITIES
          Fair values have been individually determined based on
     currently quoted market prices. If a quoted market price is
     not available, fair value is estimated using quoted market
     prices for similar securities.

     LOANS
          Fair values are estimated for categories of loans with
     similar financial characteristics. Loans were segregated by
     type such as commercial, tax-exempt, real estate mortgages and
     consumer. For estimation purposes each loan category was
     further segmented into fixed and adjustable rate interest
     terms and also into performing and non-performing
     classifications.
          The fair value of each category of performing loans is
     calculated by discounting future cash flows using the current
     rates at which similar loans would be made to borrowers with
     similar credit ratings and for the same remaining maturities.
          Fair value for non-performing loans is based on
     management's estimate of future cash flows discounted using a
     rate commensurate with the risk associated with the estimated
     future cash flows. The assumptions used by management are
     judgmentally determined using specific borrower information.

     CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
          Fair value is equal to the cash surrender value of life
     insurance policies.

     DEPOSITS
          Under SFAS No. 107, the fair value of deposits with no
     stated maturity, such as Demand Deposits, Savings Accounts and
     Money Market Accounts is equal to the amount payable on demand
     at December 31, 2003, and 2002.
          Fair values for fixed-rate certificates of deposit are
     estimated using a discounted cash flow calculation that
     applies interest rates currently being offered on certificates
     to a schedule of aggregated expected monthly maturities on
     time deposits.

     SHORT-TERM AND LONG-TERM BORROWINGS
          The fair values of short-term and long-term borrowings
     are estimated using discounted cash flow analyses based on the
     Corporation's incremental borrowing rate for similar
     instruments.

     COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
          Management estimates that there are no material
     differences between the notional amount and the estimated fair
     value of those off-balance sheet items since they are
     primarily composed of unfunded loan commitments which are
     generally priced at market at the time of funding.


                                   2003 ANNUAL REPORT * 31

<PAGE>

     At December 31, 2003 and 2002, the carrying values and
estimated fair values of financial instruments of the Corporation
are presented in the table below:

<TABLE>
<CAPTION>



                                                          2003
                                                 ________________________
                                                Carrying         Estimated
                                                 Amount          Fair Value
                                                 ______          __________

                                        <c>               <c>
FINANCIAL ASSETS:
  Cash and due from banks                      $  5,912,709      $  5,912,709
  Short-term investments                             28,123            28,123
  Investment securities                         231,272,111       228,616,816
  Net loans                                     225,548,988       228,195,276
  Accrued interest receivable                     2,871,354         2,871,354
  Cash Surrender Value of Life
    Insurance                                    10,586,964        10,586,964

FINANCIAL LIABILITIES:
  Deposits                                      343,020,150       345,209,011
  Short-term borrowings                          11,744,392        11,740,681
  Long-term borrowings                           62,945,000        69,358,038
  Accrued interest payable                          889,953           889,953

OFF-BALANCE SHEET FINANCIAL
  INSTRUMENTS:
  Commitments to extend credit                                     25,203,634
  Financial standby letters of
    credit                                                          2,923,630
  Performance standby letters of
    credit                                                            655,913


<CAPTION>

                                                          2002
                                                 ________________________
                                                Carrying         Estimated
                                                 Amount          Fair Value
                                                 ______          __________

                                        <c>               <c>
FINANCIAL ASSETS:
  Cash and due from bank                       $  7,396,004      $  7,396,004
  Short-term investments                             60,060            60,060
  Investment securities                         215,754,998       220,775,066
  Net loans                                     198,342,876       201,619,853
  Accrued interest receivable                     3,068,952         3,068,952
  Cash Surrender Value of Life
    Insurance                                    10,102,069        10,102,069

FINANCIAL LIABILITIES:
  Deposits                                      330,745,278       331,708,248
  Short-term borrowings                           9,067,145         9,065,644
  Long-term borrowings                           45,750,000        52,186,009
  Accrued interest payable                          952,459           952,459

OFF-BALANCE SHEET FINANCIAL
  INSTRUMENTS:
  Commitments to extend credit                                     24,742,078
  Financial standby letters of
    credit                                                          3,242,509
  Performance standby letters
    of credit

</TABLE>


32 * FIRST KEYSTONE CORPORATION

<PAGE>

NOTE 20  -  PARENT COMPANY FINANCIAL INFORMATION
     Condensed financial information for First Keystone Corporation
(parent company only) was as follows:


<TABLE>
<CAPTION>

BALANCE SHEETS
                                                          December 31
                                                     ____________________
                                                    2003            2002
                                                    ____            ____

                                            <c>            <c>
ASSETS
  Cash in subsidiary bank                          $ 3,616,509     $   495,051
  Investment in subsidiary bank                     45,595,222      47,205,639
  Investment in other equity securities              2,655,296       2,001,070
  Prepayments and other assets                           5,732         239,594
  Advance to subsidiary bank                            39,311          -
                                                   ___________     ___________
    TOTAL ASSETS                                   $51,912,070     $49,941,354
                                                   ===========     ===========
LIABILITIES
  Accrued expenses and other
    liabilities                                    $   560,729     $   598,539
  Advance from subsidiary bank                          -              246,774
                                                   ___________     ___________
    TOTAL LIABILITIES                              $   560,729     $   845,313
                                                   ___________     ___________
STOCKHOLDERS' EQUITY
  Preferred stock                                  $    -          $    -
  Common stock                                       6,154,414       6,150,360
  Surplus                                           12,535,284      12,583,626
  Retained earnings                                 31,828,342      27,394,962
  Accumulated other comprehensive
    income                                           5,488,540       6,543,981
  Treasury stock, at cost                           (4,655,239)     (3,576,888)
                                                   ___________     ___________
    TOTAL STOCKHOLDERS' EQUITY                     $51,351,341     $49,096,041
                                                   ___________     ___________
    TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY                         $51,912,070     $49,941,354
                                                   ===========     ===========

</TABLE>



<PAGE>
<TABLE>
<CAPTION>

STATEMENTS OF INCOME
                                                    Year Ended December 31
                                                    _______________________
                                                    2003            2002
                                                    ____            ____

                                             <c>            <c>
INCOME
  Dividends from Subsidiary Bank                    $7,510,341      $2,757,703
  Dividends - other                                     57,460          53,715
  Securities gains                                      -               17,160
  Interest                                              19,900           7,972
                                                    __________      __________
    TOTAL INCOME                                    $7,587,701      $2,836,550

Operating Expenses                                      51,882          41,145
                                                    __________      __________
  Income Before Taxes and Equity
    in Undistributed Net Income
    of Subsidiary                                   $7,535,819      $2,795,405
  Income tax expense (benefit)                          (6,483)             41
                                                    __________      __________
  Income Before Equity in
    Undistributed Net Income of
    Subsidiary                                      $7,542,302      $2,795,364
  Equity in (excess of)
    undistributed net income
    of Subsidiary                                     (225,310)      3,791,785
                                                    __________      __________
NET INCOME                                          $7,316,992      $6,587,149
                                                    ==========      ==========


<CAPTION>
                                                    Year Ended December 31
                                                    ______________________
                                                    2001
                                                    ____

                                             <c>
INCOME
  Dividends from Subsidiary Bank                    $2,376,319
  Dividends - other                                     49,598
  Securities gains                                      89,048
  Interest                                               9,000
                                                    __________
    TOTAL INCOME                                    $2,523,965

Operating Expenses                                      52,219
                                                    __________
  Income Before Taxes and Equity
    in Undistributed Net Income
    of Subsidiary                                   $2,471,746
  Income tax expense (benefit)                          24,644
                                                    __________
  Income Before Equity in
    Undistributed Net Income
    of Subsidiary                                   $2,447,102
  Equity in (excess of)
    undistributed net income
    of Subsidiary                                    2,986,299
                                                    __________
    NET INCOME                                      $5,433,401
                                                    ==========

</TABLE>


                                   2003 ANNUAL REPORT * 33

<PAGE>

<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS
                                                    Year Ended December 31
                                                     _____________________
                                                   2003             2002
                                                   ____             ____

                                           <c>             <c>
OPERATING ACTIVITIES
Net income                                        $ 7,316,992     $ 6,587,149
Adjustments to reconcile net
  income to net cash provided
  by operating activities:
  Securities gains                                     -              (17,160)
  Distributions in excess of
   (equity in undistributed) net
   income of subsidiary                               225,310      (3,791,785)
  (Increase) decrease in prepaid
    expenses and other assets                         233,862        (239,394)
  (Increase) decrease in advanced
    receivable from subsidiary bank,
    net of 2003 stock option expense
    due from subsidiary bank                            8,820         126,069
  Increase (decrease) in advances
    payable to subsidiary bank                       (246,774)        246,774
  Increase (decrease) in accrued
    expenses and other liabilities                   (263,075)        121,169
                                                  ___________     ___________
  NET CASH PROVIDED BY OPERATING
    ACTIVITIES                                    $ 7,275,135     $ 3,032,822
                                                  ___________     ___________
INVESTING ACTIVITIES
Purchase of equity securities                     $   (99,295)    $   (37,340)
Proceeds from sale of equity
  securities                                           -              105,293
                                                  ___________     ___________
  NET CASH PROVIDED BY (USED IN)
    INVESTING ACTIVITIES                          $   (99,295)    $    67,953
                                                  ___________     ___________
FINANCING ACTIVITIES
Proceeds from issuance of
  common stock                                    $    52,236     $    -
Proceeds from sale of treasury
  stock                                               150,812          17,000
Acquisition of treasury stock                      (1,373,818)       (503,707)
Cash dividends paid                                (2,883,612)     (2,524,933)
Dividends paid in lieu of
  fractional shares                                    -               (4,725)
                                                  ___________     ___________
  NET CASH (USED IN) BY
    FINANCING ACTIVITIES                          $(4,054,382)    $(3,016,365)
                                                  ___________     ___________

  INCREASE IN CASH AND CASH
    EQUIVALENTS                                   $ 3,121,458     $    84,410
  CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR                                 495,051         410,641
                                                  ___________     ___________
  CASH AND CASH EQUIVALENTS AT
    END OF YEAR                                   $ 3,616,509     $   495,051
                                                  ===========     ===========


<CAPTION>

STATEMENTS OF CASH FLOWS
                                                    Year Ended December 31
                                                     _____________________
                                                   2001
                                                   ____

                                           <c>
OPERATING ACTIVITIES
Net income                                        $ 5,433,401
Adjustments to reconcile net
  income to net cash provided
  by operating activities:
  Securities gains                                    (89,048)
  Distributions in excess of
   (equity in undistributed) net
   income of subsidiary                            (2,986,299)
  (Increase) decrease in prepaid
    expenses and other assets                           4,082
  (Increase) decrease in advanced
    receivable from subsidiary bank,
    net of 2003 stock option expense
    due from subsidiary bank                          (57,835)
  Increase (decrease) in advances
    payable to subsidiary bank                         -
  Increase (decrease) in accrued
    expenses and other liabilities                    132,047
                                                  ___________
  NET CASH PROVIDED BY OPERATING
    ACTIVITIES                                    $ 2,436,348
                                                  ___________
INVESTING ACTIVITIES
Purchase of equity securities                     $   (89,482)
Proceeds from sale of equity
  securities                                          144,255
                                                  ___________
NET CASH PROVIDED BY (USED IN)
  INVESTING ACTIVITIES                            $    54,773
                                                  ___________
FINANCING ACTIVITIES
Proceeds from issuance of
  common stock                                    $    -
Proceeds from sale of treasury
  stock                                                -
Acquisition of treasury stock                          -
Cash dividends paid                                (2,295,319)
Dividends paid in lieu of
  fractional shares                                    -
                                                  ___________
  NET CASH (USED IN) BY
    FINANCING ACTIVITIES                          $(2,295,319)
                                                  ___________
  INCREASE IN CASH AND CASH
    EQUIVALENTS                                   $   195,802
  CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR                                 214,839
                                                  ___________
  CASH AND CASH EQUIVALENTS AT
    END OF YEAR                                   $   410,641
                                                  ===========

</TABLE>


34 * FIRST KEYSTONE CORPORATION

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


            MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
           RESULTS OF OPERATIONS AND FINANCIAL CONDITION


     The purpose of Management's Discussion and Analysis of First
Keystone Corporation, a bank holding company (the Corporation), and
its wholly owned subsidiary, The First National Bank of Berwick
(the Bank), is to assist the reader in reviewing the financial
information presented and should be read in conjunction with the
consolidated financial statements and other financial data
contained herein.
     This annual report contains certain forward-looking statements
(as defined in the Private Securities Litigation Reform Act of
1995), which reflect management's beliefs and expectations based on
information currently available. These forward-looking statements
are inherently subject to significant risks and uncertainties,
including changes in general economic and financial market
conditions, the Corporation's ability to effectively carry out its
business plans and changes in regulatory or legislative
requirements. Other factors that could cause or contribute to such
differences are changes in competitive conditions. Although
management believes the expectations reflected in such forward-
           looking statements are reasonable, actual results may differ
materially.

RESULTS OF OPERATIONS
Year Ended December 31, 2003 Versus Year Ended December 31, 2002

     Net income increased to $7,317,000 for the year ended December
31, 2003, as compared to $6,587,000 for the prior year, an increase
of 11.1%. The net income for 2003 marked the 21st consecutive year
that earnings and earnings per share have increased. Earnings per
share, both basic and diluted, for 2003 were $2.48 as compared to
$2.22 and $2.21, respectively in 2002.
     The Corporation's return on average assets remained steady at
1.57% in 2003 as compared to 1.59% in 2002. Return on average
equity decreased to 14.27% in 2003 from 14.93% in 2002. Even though
there was an increase in average earning assets in 2003, the low
interest rate environment resulted in a small overall decrease of
interest income to $25,063,000 down 3.1% from 2002. A lowering of
interest rates and the accompanying decrease in the cost of funds
resulted in interest expense of $10,200,000 in 2003, a decrease of
10.1% from 2002.
     Net interest income, as indicated below in Table 1, increased
by $343,000 or 2.4% to $14,863,000 for the year ended December 31,
2003. The Corporation's net interest income on a fully taxable
equivalent basis increased $451,000, or 2.8% to $16,327,000 in 2003
as compared to an increase of $2,259,000, or 16.6% to $15,875,000
in 2002.

Year Ended December 31, 2002 Versus Year Ended December 31, 2001

     Net income increased to $6,587,000 for the year ended December
31, 2002, as compared to $5,433,000 in 2001. Earnings per share,
both basic and diluted, for 2002 were $2.22 and $2.21, respectively
as compared to $1.83 in 2001. The Corporation's return on average
assets and return on average equity was 1.59% and 14.93%,
respectively in 2002, as compared to 1.41% and 13.85%, respectively
in 2001.
     Net interest income increased by $2,149,000 or 17.4% to
$14,520,000 for the year ended 2002. The Corporation's net interest
income on a fully taxable equivalent basis increased 16.6% in 2002
or $2,259,000 to $15,875,000 as indicated in Table 1 as compared to
$13,617,000 for the year ended 2001.

<TABLE>

TABLE 1  -  NET INTEREST INCOME

<CAPTION>

(Amounts in thousands)                                  2003/2002
                                             ________________________________
                                                  Increase/(Decrease)
                                                   _________________

                                           2003      Amount   %        2002
                                           ____     _____    ___      ____

                                 <c>        <c>       <c>      <c>
Interest Income                          $25,063    $ (799)    (3.1)   $25,862
Interest Expense                          10,200    (1,142)   (10.1)    11,342
                                         _______    ______             _______
Net Interest Income                       14,863       343      2.4     14,520
Tax Equivalent Adjustment                  1,464       108      8.0      1,356
                                         _______    ______             _______
Net Interest Income (fully
  tax equivalent)                        $16,327    $  451      2.8    $13,617
                                         =======    ======             =======

<CAPTION>

(Amounts in thousands)                                  2002/2001
                                             ________________________________
                                                  Increase/(Decrease)
                                                   _________________
                                           2002      Amount   %        2001
                                           ____      ______  ___      ____

                                 <c>        <c>       <c>      <c>
Interest Income                          $25,862    $ (974)    (3.6)   $26,836
Interest Expense                          11,342    (3,123)   (21.6)    14,465
                                         _______    ______             _______
Net Interest Income                       14,520     2,149     17.4     12,371
Tax Equivalent Adjustment                  1,356       110      8.8      1,246
                                         _______    ______             _______
Net Interest Income (fully
  tax equivalent)                        $15,875    $2,259     16.6    $13,617
                                         =======    ======             =======

</TABLE>


                                       2003 ANNUAL REPORT * 35

    <PAGE>

<TABLE>

TABLE 2  -  DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY

<CAPTION>
                                                       2003
                                          _________________________________
                                        Avg.              Revenue     Yield
                                        Balance           /Expense     /Rate
                                      ___________         ________     _____

                               <c>              <c>              <c>
Interest Earning Assets:
Loans:
Commercial <F1>                        $ 30,194,080     $  1,838,673     6.09%
Real Estate <F1>                        158,467,947       10,575,300     6.67%
Installment Loans,
  Net <F1><F2>                           24,169,365        1,964,423     8.13%
Fees on Loans                                     0           71,992        0%
                                       ____________     ____________     _____
  Total Loans (Including
    Fees) <F3>                         $212,831,392      $14,450,388     6.79%
                                       ____________      ___________     _____

Investment Securities:
Taxable                                $167,550,472      $ 7,797,253     4.65%
Tax Exempt <F1>                          61,188,333        4,248,384     6.94%
                                       ____________      ___________     _____
  Total Investment
    Securities                         $228,738,805      $12,045,637     5.27%
Interest Bearing Deposits
  in Banks                                3,104,334           31,858     1.03%
                                       ____________      ___________     _____
  Total Interest-Earning
    Assets                             $444,674,531      $26,527,883     5.97%
                                       ____________      ___________     _____
Non-Interest Earning Assets:
Cash and Due From Banks                $  6,613,738
Allowance for Loan Losses                (3,308,809)
Premises and Equipment                    3,683,539
Foreclosed Assets Held
  for Sale                                        0
Other Assets                             14,750,606
                                       ____________
  Total Non-Interest
    Earning Assets                       21,739,074
                                       ____________
  Total Assets                         $466,413,605
                                       ============
Interest-Bearing
  Liabilities:
Savings, NOW Accounts,
  and Money Markets                    $133,137,604      $ 1,454,414     1.09%
Time Deposits                           183,357,999        6,014,799     3.28%
Short-Term Borrowings                     4,421,481           52,664     1.19%
Long-Term Borrowings                     53,272,385        2,588,345     4.86%
Securities Sold U/A to
  Repurchase                              6,016,022           90,333     1.50%
                                       ____________      ___________     _____
  Total Interest-Bearing
    Liabilities                        $380,205,491      $10,200,555     2.68%

Non-Interest Bearing
  Liabilities:
Demand Deposits                        $ 30,102,277
Other Liabilities                         4,816,950
Stockholders' Equity                     51,288,887
                                       ____________
  Total Liabilities/
    Stockholders' Equity               $466,413,605
                                       ============
  Net Interest Income
    Tax Equivalent                                       $16,327,328
                                                         ===========

Net Interest Spread                                                      3.28%

Net Interest Margin                                                      3.67%


    36 * FIRST KEYSTONE CORPORATION

    <PAGE>

    Management's Discussion and Analysis
    _________________________________________________________________

<CAPTION>

                                                       2002
                                          _________________________________
                                        Avg.              Revenue     Yield
                                        Balance           /Expense     /Rate
                                      ___________         ________     _____

                               <c>               <c>             <c>
Interest Earning Assets:
Loans:
Commercial <F1>                        $ 28,279,604      $ 1,794,534     6.35%
Real Estate <F1>                        146,707,839       10,929,961     7.45%
Installment Loans,
  Net <F1><F2>                           26,159,391        2,269,464     8.68%
Fees on Loans                                     0          117,830        0%
                                       ____________      ___________     _____
  Total Loans (Including
    Fees) <F3>                         $201,146,834      $15,111,789     7.51%
                                       ____________      ___________     _____
Investment Securities:
Taxable                                $141,884,015      $ 8,212,523     5.79%
Tax Exempt <F1>                          52,610,989        3,814,105     7.25%
                                       ____________      ___________
  Total Investment
    Securities                         $194,495,004      $12,026,628     6.18%
Interest Bearing Deposits
  in Banks                                5,193,664           78,211     1.51%
                                       ____________      ___________     _____
  Total Interest-Earning
    Assets                             $400,835,502      $27,216,627     6.79%

Non-Interest Earning Assets:
Cash and Due From Banks                $  6,619,448
Allowance for Loan Losses                (3,060,762)
Premises and Equipment                    3,364,978
Foreclosed Assets Held
  for Sale                                   26,224
Other Assets                              6,260,316
                                       ____________
  Total Non-Interest
    Earning Assets                       13,210,204
                                       ____________
  Total Assets                         $414,045,706
                                       ============
Interest-Bearing
  Liabilities:
Savings, NOW Accounts,
  and Money Markets                    $123,269,195      $ 1,844,737     1.50%
Time Deposits                           161,261,870        6,271,880     3.89%
Short-Term Borrowings                     1,378,545           25,125     1.82%
Long-Term Borrowings                     46,929,744        3,078,389     6.56%
Securities Sold U/A to
  Repurchase                              6,357,032          121,489     1.91%
                                       ____________      ___________     _____
  Total Interest-Bearing
    Liabilities                        $339,196,386      $11,341,620     3.34%
                                       ____________      ___________     _____

Non-Interest Bearing
  Liabilities:
Demand Deposits                        $ 27,401,124
Other Liabilities                         3,317,857
Stockholders' Equity                     44,130,339
                                       ____________
  Total Liabilities/
    Stockholders' Equity               $414,045,706
                                       ============

  Net Interest Income
    Tax Equivalent                                       $15,875,007
                                                         ===========

Net Interest Spread                                                      3.45%

Net Interest Margin                                                      3.96%


<CAPTION>
                                                       2001
                                         __________________________________
                                        Avg.             Revenue/      Yield/
                                        Balance          Expense      Rate
                                      ___________         ________     _____

                               <c>               <c>             <c>
Interest Earning Assets:
Loans:
Commercial <F1>                        $ 27,392,753      $ 2,048,474     7.48%
Real Estate <F1>                        139,085,901       11,289,600     8.12%
Installment Loans,
  Net <F1><F2>                           28,006,285        2,566,160     9.16%
Fees on Loans                                     0           64,923        0%
                                       ____________      ___________     _____
  Total Loans (Including
    Fees) <F3>                         $194,484,939      $15,969,157     8.21%
                                       ____________      ___________     _____
Investment Securities:
Taxable                                $127,746,749      $ 8,285,399     6.49%
Tax Exempt <F1>                          47,343,277        3,599,148     7.60%
                                       ____________      ___________     _____
  Total Investment
    Securities                         $175,090,026      $11,884,547     6.79%
Interest Bearing Deposits
  in Banks                                5,841,066          228,391     3.91%
                                       ____________      ___________     _____
  Total Interest-Earning
    Assets                             $375,416,031      $28,082,095     7.48%

Non-Interest Earning Assets:
Cash and Due From Banks                $  6,179,589
Allowance for Loan Losses                (2,687,787)
Premises and Equipment                    3,419,464
Foreclosed Assets Held
  for Sale                                  171,911
Other Assets                              3,605,284
                                       ____________
  Total Non-Interest
    Earning Assets                       10,688,461
                                       ____________
  Total Assets                         $386,104,492
                                       ============

Interest-Bearing
  Liabilities:
Savings, NOW Accounts,
  and Money Markets                    $114,253,426      $ 3,115,844     2.73%
Time Deposits                           155,627,518        8,574,970     5.51%
Short-Term Borrowings                     1,017,907           35,892     3.53%
Long-Term Borrowings                     41,439,394        2,427,519     5.86%
Securities Sold U/A to
  Repurchase                              8,008,903          310,835     3.88%
                                       ____________      ___________     _____
  Total Interest-Bearing
    Liabilities                        $320,347,148      $14,465,060     4.52%
                                       ____________      ___________     _____

Non-Interest Bearing
  Liabilities:
Demand Deposits                        $ 23,647,180
Other Liabilities                         2,892,640
Stockholders' Equity                     39,217,524
                                       ____________
  Total Liabilities/
    Stockholders' Equity               $386,104,492
                                       ============

  Net Interest Income
    Tax Equivalent                                       $13,617,035
                                                         ===========

Net Interest Spread                                                      2.96%

Net Interest Margin                                                      3.63%
____________________
<FN>
<F1>
Tax-exempt income has been adjusted to a tax equivalent basis using an
incremental rate of 34%, and statutory interest expense disallowance.
<F2>
Installment loans are stated net of unearned interest.
<F3>
Average loan balances include non-accrual loans.  Interest income on non-accrual loans is not included.

</FN>
</TABLE>

                                   2003 ANNUAL REPORT * 37

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


NET INTEREST INCOME
     The major source of operating income for the Corporation is
net interest income. Net interest income is the difference between
interest income on earning assets, such as loans and securities,
and the interest expense on liabilities used to fund those assets,
including deposits and other borrowings. The amount of interest
income is dependent upon both the volume of earning assets and the
level of interest rates. In addition, the volume of non-performing
loans affects interest income. The amount of interest expense
varies with the amount of funds needed to support earning assets,
interest rates paid on deposits and borrowed funds, and finally,
the level of interest free deposits.
      Table 2 on the preceding pages provides a summary of average
outstanding balances of earning assets and interest bearing
liabilities with the associated interest income and interest
expense as well as average tax equivalent rates earned and paid as
of year-end 2003, 2002, and 2001.
     The yield on earning assets was 5.97% in 2003, 6.79% in 2002,
and 7.48% in 2001. The rate paid on interest bearing liabilities
was 2.68% in 2003, 3.34% in 2002, and 4.52% in 2001. This resulted
in a decrease in our net interest spread to 3.28% in 2003 as
compared to 3.45% in 2002. As Table 2 illustrates, our net interest
margin also declined in 2003.
     The net interest margin, which is interest income less
interest expenses divided by average earnings assets, was 3.67% in
2003 as compared to 3.96% in 2002 and 3.63% in 2001. The net
interest margins are presented on a tax-equivalent basis. The
decrease in net interest margin in 2003 was due primarily to the
interest rate on earning assets decreasing more than the interest
rate on liabilities. The net interest margin did improve in 2002 as
the liabilities costs declined more than asset yields. The
Corporation elected to prepay some higher rate long-term borrowings
with the Federal Home Loan Bank in 2002. This resulted in the
overall effective rate on long-term borrowings decreasing to 4.86%
in 2003 from 6.56% in 2002 as illustrated in Table 2.
     Table 3 sets forth changes in interest income and interest
expense for the periods indicated for each category of interest
earning assets and interest bearing liabilities. Information is
provided on changes attributable to (i) changes in volume (changes
in average volume multiplied by prior rate); (ii) changes in rate
(changes in average rate multiplied by prior average volume); and,
(iii) changes in rate and volume (changes in average volume
multiplied by change in average rate).

<TABLE>

TABLE 3  -  CHANGES IN INCOME AND EXPENSE, 2003 AND 2002

<CAPTION>

(Amounts in thousands)                          2003 COMPARED TO 2002
                                           ______________________________
                                        VOLUME          RATE           NET
                                         _____          ____           ___

                                  <c>           <c>           <c>
Interest Income:
Loans, Net                                $  878        $(1,539)      $  (661)
Taxable Investment Securities              1,486         (1,901)         (415)
Tax-Exempt Investment
  Securities                                 622           (188)          434
Other Short-Term Investments                 (32)           (15)          (47)
                                          ______        _______       _______
  TOTAL INTEREST INCOME                   $2,954        $(3,643)      $  (689)
                                          ______        _______       _______
Interest Expense:
Savings, Now, and Money Markets           $  148        $  (538)      $  (390)
Time Deposits                                859         (1,116)         (257)
Short-Term Borrowings                         55            (28)           27
Long-Term Borrowings                         416           (906)         (490)
Securities Sold U/A to
  Repurchase                                  (6)           (25)          (31)
                                          ______        _______       _______
  TOTAL INTEREST EXPENSE                  $1,472        $(2,613)      $(1,141)
                                          ______        _______       _______
  NET INTEREST INCOME                     $1,482        $(1,030)      $   452
                                          ======        =======       =======


<CAPTION>

(Amounts in thousands)                          2002 COMPARED TO 2001
                                           ______________________________
                                        VOLUME          RATE           NET
                                         _____          ____           ___

                                  <c>           <c>           <c>
Interest Income:
Loans, Net                                $  547        $(1,404)      $  (857)
Taxable Investment Securities                917           (990)          (73)
Tax-Exempt Investment
  Securities                                 400           (185)          215
Other Short-Term Investments                 (25)          (125)         (150)
                                          ______        _______       _______
  TOTAL INTEREST INCOME                   $1,839        $(2,704)      $  (865)

Interest Expense:
Savings, Now, and Money Markets           $  246        $(1,517)      $(1,271)
Time Deposits                                310         (2,614)       (2,304)
Short-Term Borrowings                         13            (23)          (10)
Long-Term Borrowings                         322            329           651
Securities Sold U/A to
  Repurchase                                 (64)          (125)         (189)
                                          ______        _______       _______
  TOTAL INTEREST EXPENSE                  $  827        $(3,950)      $(3,123)
                                          ______        _______       _______
  NET INTEREST INCOME                     $1,012        $ 1,246       $ 2,258
                                          ======        =======       =======
________________________

The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of the change in each.

Balance on non-accrual loans are included for computational purposes.
Interest income on non-accrual loans is not included.
Interest income exempt from federal tax was $3,090,817 in 2003, $2,928,225
in 2002, and $2,804,205 in 2001.  Tax-exempt income has been adjusted to a
tax-equivalent basis using an incremental rate of 34%.

</TABLE>


38 * FIRST KEYSTONE CORPORATION

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


     In 2003, the increase in net interest income of $452,000
resulted from a change in volume of $1,482,000 and a decrease of
$1,030,000 due to changes in rate. In 2002, there was an increase
in net interest income of $2,258,000 resulted from a change in
volume of $1,012,000 and an increase of $1,246,000 due to rate.

PROVISION FOR LOAN LOSSES
     For the year ended December 31, 2003, the provision for loan
losses was $500,000 as compared to $550,000 as of December 31,
2002, a decrease of 9.1%. The Corporation's provision for loan
losses for the year ended December 31, 2001, was $610,000. The
provision in 2003, decreased primarily because of the reduced net
charge-offs and an overall decrease in past-due loans. Net charge-
          offs by the Corporation for the fiscal year end December 31, 2003,
2002, and 2001, were $150,000, $298,000, and $390,000,
respectively.
     The allowance for loan losses as a percentage of loans, net of
unearned interest, was 1.54% as of December 31, 2003, 1.58% as of
December 31, 2002, and 1.47% as of December 31, 2001.
     On a quarterly basis, the Corporation's Board of Directors and
management performs a detailed analysis of the adequacy of the
allowance for loan losses. This analysis includes an evaluation of
credit risk concentration, delinquency trends, past loss
experience, current economic conditions, composition of the loan
portfolio, classified loans and other relevant factors.
     The Corporation will continue to monitor its allowance for
loan losses and make future adjustments to the allowance through
the provision for loan losses as conditions warrant. Although the
Corporation believes that the allowance for loan losses is adequate
to provide for losses inherent in the loan portfolio, there can be
no assurance that future losses will not exceed the estimated
amounts or that additional provisions will not be required in the
future.
     The Bank is subject to periodic regulatory examination by the
Office of the Comptroller of the Currency (OCC).  As part of the
examination, the OCC will assess the adequacy of the bank's
allowance for loan losses and may include factors not considered by
the Bank. In the event that an OCC examination results in a
conclusion that the Bank's allowance for loan losses is not
adequate, the Bank may be required to increase its provision for
loan losses.

NON-INTEREST INCOME
     Non-interest income is derived primarily from trust department
revenue, service charges and fees, income on bank owned life
insurance, other miscellaneous revenue and the gain on the sale of
mortgage loans. In addition, investment security gains or losses
also impact total non-interest income.
      For the year ended December 31, 2003, non-interest income
increased $990,000, or 43.3% as compared to a decrease of $60,000,
or 2.6% for the year ended
December 31, 2002. Table 4 provides the major categories
of non-interest income and each respective change comparing the
past three years.
     Excluding investment security gains, non-interest income in
2003 increased $720,000, or 31.9%. This compares to an increase of
$189,000, or 9.1% in 2002 before investment security gains. Income
from the trust department, which consists of fees generated from
individual and corporate accounts, decreased in 2003 by $24,000
after decreasing by $45,000 in 2002.  Decreased income from the
trust department in 2003 and 2002 was due primarily to the decline
in market value of accounts.
     Service charges and fees, consisting primarily of service
charges on deposit accounts, was the largest source of non-interest
income in 2003 and 2002. Service charges and fees increased by
$351,000, or 25.6% in 2003 compared to an increase of $141,000, or
11.4% in 2002. The increase in 2003 resulted primarily from
increasing revenue from NSF charges generated from a new courtesy
overdraft program.
     Income on Bank Owned Life Insurance (BOLI) increased $383,000
to $485,000 in 2003 as a full year of income was recognized. In
October 2002 the Bank purchased $10 million of Bank Owned Life
Insurance. The income from BOLI represents the increase in the cash
surrender value of BOLI and is intended to partially cover the
costs of the Bank's employee benefit plan, including group life,
disability, and health insurance.
     The gain on sale of mortgages provided $234,000 in 2003 as
compared to $228,000 in 2002. The increase in gains on sale of
mortgages was largely a function of the increased volume of
mortgages originated for sale in the secondary market during the
past year. Since the Corporation continues to service the mortgages
which are sold, this provides a source for additional non-interest
income on an ongoing basis.
     Other income amounted to $47,000 for 2003, an increase of
$4,000 or 9.3% over the $43,000 reported in 2002.


                                   2003 ANNUAL REPORT * 39

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


<TABLE>

TABLE 4  -  NON-INTEREST INCOME

<CAPTION>

(Amounts in thousands)                                 2003/2002
                                             ______________________________
                                                 Increase/(Decrease)
                                                   __________________
                                          2003      Amount      %      2002
                                          ____       _____    __       ____

                                  <c>         <c>      <c>      <c>
Trust Department                          $  486      $(24)     (4.7)   $  510
Service Charges and Fees                   1,724       351      25.6     1,373
Income on Bank Owned Life
  Insurance                                  485       383     375.5       102
Gain on Sale of Mortgages                    234         6       2.6       228
Other                                         47         4       9.3        43
                                          ______      ____              ______
  Subtotal                                $2,976      $720      31.9    $2,256
Investment Securities Gains                  299       270     931.0        29
                                          ______      ____              ______
  Total                                   $3,275      $990      43.3    $2,285
                                          ======      ====              ======


<CAPTION>

(Amounts in thousands)                                 2002/2001
                                             ______________________________
                                                 Increase/(Decrease)
                                                  _________________
                                          2002      Amount      %      2001
                                          ____       _____    __       ____

                                  <c>         <c>      <c>      <c>
Trust Department                          $  510      $(45)     (8.1)   $  555
Service Charges and Fees                   1,373       141      11.4     1,232
Income on Bank Owned Life
  Insurance                                  102       102     100.0         0
Gain on Sale of Mortgages                    228        44      23.9       184
Other                                         43       (53)    (55.2)       96
                                          ______      ____              ______
  Subtotal                                $2,256      $189       9.1    $2,067
Investment Securities Gains                   29      (249)    (89.6)      278
                                          ______      ____              ______
  Total                                   $2,285      $(60)     (2.6)   $2,345
                                          ======      ====              ======

</TABLE>


NON-INTEREST EXPENSE
     Non-interest expense consists of salaries and benefits,
occupancy, furniture and equipment, and other miscellaneous
expenses. Table 5 provides the yearly non-interest expense by
category, along with the amount, dollar changes, and percentage of
change.
     Total non-interest expense increased by $560,000, or 7.2% in
2003 compared to an increase of $630,000, or 8.8% in 2002. Expenses
associated with employees (salaries and employee benefits) continue
to be the largest non-interest expenditure. Salaries and employee
benefits amounted to 53.1% of total non-interest expense in 2003
and 54.1% in 2002. Salaries and employee benefits increased
$224,000, or 5.3% in 2003 and $326,000, or 8.4% in 2002. The
increases in both years were due to an increase in the profit
sharing contribution, plus normal salary adjustments and increased
benefit costs. The number of full time equivalent employees was 129
as of December 31, 2003, and 131 as of December 31, 2002.
     Net occupancy expense increased $81,000, or 16.7% in 2003 as
compared to an increase of $39,000, or 8.7% in 2002. Furniture and
equipment expense increased $27,000, or 4.4% in 2003 compared to an
increase of $48,000, or 8.5% in 2002. The increase in occupancy and
furniture and equipment expense in 2003 relate primarily to a full
year of expense at our Kingston Office. Other operating expenses
increased $228,000, or 9.2% in 2003 as compared to an increase of
$217,000, or 9.6% in 2002. Increases in professional fees, postage,
supplies, insurance, marketing, advertising, and state shares tax
account for much of the increase in other operating expenses in
both 2003 and 2002.
     The overall level of non-interest expense remains low,
relative to our peers. In fact, our total non-interest expense was
less than 2% of average assets in both 2003 and 2002. Non-interest
expense as a percentage of average assets under 2% places us among
the leaders in our peer financial institution categories in
controlling non-interest expense.

<TABLE>

TABLE 5  -  NON-INTEREST EXPENSE

<CAPTION>

(Amounts in thousands)                                 2003/2002
                                             ______________________________
                                                 Increase/(Decrease)
                                                  _________________
                                        2003       Amount      %        2002
                                        ____        _____     ___       ____

                                  <c>        <c>         <c>    <c>
Salaries and Employee Benefits            $4,446     $224        5.3    $4,222
Occupancy, Net                               567       81       16.7       486
Furniture and Equipment                      643       27        4.4       616
Other and State Shares Tax                 2,715      228        9.2     2,487
                                          ______     ____               ______
  Total                                   $8,371     $560        7.2    $7,811
                                          ======     ====               ======


<CAPTION>

(Amounts in thousands)                                 2002/2001
                                             ______________________________
                                                 Increase/(Decrease)
                                                   __________________
                                        2002       Amount      %        2001
                                        ____       ______     ___       ____

                                  <c>        <c>         <c>    <c>
Salaries and Employee Benefits            $4,222     $326        8.4    $3,896
Occupancy, Net                               486       39        8.7       447
Furniture and Equipment                      616       48        8.5       568
Other and State Shares Tax                 2,487      217        9.6     2,270
                                          ______     ____               ______
  Total                                   $7,811     $630        8.8    $7,181
                                          ======     ====               ======

</TABLE>


40 * FIRST KEYSTONE CORPORATION

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


INCOME TAX EXPENSE
     Income tax expense for the year ended December 31, 2003, was
$1,950,000 as compared to $1,857,000 and $1,493,000 for the years
ended December 31, 2002, and December 31, 2001, respectively. In
2003, our income tax expense increased because income before taxes
increased $823,000 to $9,267,000 from $8,444,000 in 2002. In 2002,
our income before taxes increased $1,517,000 as compared to 2001.
The corporation looks to maximize its tax exempt interest derived
from both tax free loans and tax free municipal investments without
triggering alternative minimum tax. The effective income tax rate
was 21.1% in 2003, 22.0% in 2002, and 21.5% in 2001. The limited
availability of tax free municipal investments at attractive
interest rates may result in a higher effective tax rate in future
years.

FINANCIAL CONDITION

GENERAL
     Total assets increased to $481,840,000, at year-end 2003, an
increase of 9.6% over year-end 2002. As of December 31, 2003, total
deposits amounted to $343,020,000, an increase of 3.7% over 2002.
Assets as of December 31, 2002, were $439,526,000, an increase of
11.7% over 2001, while total deposits as of year-end 2002 amounted
to $330,745,000, an increase of 12.2% from 2001.
     In 2003, the increase in assets primarily reflects the
deployment of deposits into loans and investment securities. The
Corporation continues to maintain and manage its asset growth. Our
strong equity capital position provides us an opportunity to
further leverage our asset growth. Borrowings increased in 2003 by
$19,872,000 after decreasing in 2002 by $1,999,000. Lower deposit
growth in 2003 did not allow us to fund our substantial loan growth
without increasing our borrowings. Core deposits, which include
demand deposits and interest bearing demand deposits (NOWs), money
market accounts, savings accounts, and time deposits of individuals
continues to be our most significant source of funds. In 2003 and
2002, several successful sales campaigns attracted new customers
and generated growth in retail certificates of deposit (time
deposits of individuals) as well as savings and money market
accounts.

EARNING ASSETS
     Earning assets are defined as those assets that produce
interest income. By maintaining a healthy asset utilization rate,
i.e., the volume of earning assets as a percentage of total assets,
the Corporation maximizes income. The earning asset ratio (average
interest earning assets divided by average total assets) equaled
95.3% for 2003, compared to 96.8% for 2002, and 97.2% for 2001.
This indicates that the management of earning assets is a priority
and non-earning assets, primarily cash and due from banks, fixed
assets and other assets, are maintained  at minimal levels. The
primary earning assets are loans and investment securities.

LOANS
     Total loans, net of unearned income, increased to $229,073,000
as of December 31, 2003, as compared to a balance of $201,517,000
as of December 31, 2002. Table 6 provides data relating to the
composition of the Corporation's loan portfolio on the dates
indicated. Total loans, net of unearned income increased
$27,555,000, or 13.7% in 2003 compared to an increase of
$3,293,000, or 1.7% in 2002. The low interest rate environment
prevalent during 2003 resulted in a substantial increase in
residential mortgage lending.
     The loan portfolio is well diversified and increases in the
portfolio in 2003 were in commercial and real estate loans
(primarily residential mortgage loans). In 2002, the increase in
loans was primarily in commercial real estate and residential
mortgage loans. Outstanding balances on tax exempt loans and
consumer loans declined in both 2003 and 2002. Real estate loans
increased in 2003 and 2002, even though we sold residential
mortgage loans in the secondary market. The Corporation will
continue to originate and sell long-term fixed rate residential
mortgage loans which conform to secondary market requirements. The
Corporation derives ongoing income from the servicing of mortgages
sold in the secondary market.
     The noted loan growth was achieved without compromising loan
quality. The Corporation internally underwrites each of its loans
to comply with prescribed policies and approval levels established
by its Board of Directors.


                                   2003 ANNUAL REPORT * 41

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


<TABLE>

TABLE 6  -  LOANS OUTSTANDING, NET OF UNEARNED INCOME

<CAPTION>


<PAGE>
(Amounts in thousands)                                  December 31,
                                                   ________________________
                                                2003      2002        2001
                                                ____      ____        ____

                                       <c>         <c>         <c>
Commercial, financial and
  agricultural:
  Commercial secured by real
    estate                                     $ 48,634    $ 65,352    $ 61,135
  Commercial - other                             33,890      23,639      24,062
Tax exempt                                        3,930       4,393       7,958
Real estate (primarily
  residential mortgage loans)                   121,221      85,145      79,483
Consumer loans                                   25,626      28,640      32,075
                                               ________    ________    ________
Total Gross Loans                              $233,301    $207,169    $204,713
  Less: Unearned income and
  unamortized loan fees net
  of costs                                        4,228       5,652       6,489
                                               ________    ________    ________
Total Loans, net of unearned
  income                                       $229,073    $201,517    $198,224
                                               ========    ========    ========

<CAPTION>

(Amounts in thousands)                                  December 31,
                                                   ________________________
                                                2000      1999
                                                ____      ____

                                       <c>         <c>
Commercial, financial and
  agricultural:
  Commercial secured by real
    estate                                     $ 53,608    $ 55,514
  Commercial - other                             22,674      17,864
Tax exempt                                        3,798       4,133
Real estate (primarily
  residential mortgage loans)                    84,330      83,099
Consumer loans                                   32,845      30,595
                                               ________    ________
Total Gross Loans                              $197,255    $191,205
  Less: Unearned income and
  unamortized loan fees net
  of costs                                        6,583       5,974
                                               ________    ________
Total Loans, net of unearned
  income                                       $190,672    $185,231
                                               ========    ========

</TABLE>


INVESTMENT SECURITIES
     The Corporation uses investment securities to not only
generate interest and dividend revenue, but also to help manage
interest rate risk and to provide liquidity to meet operating cash
needs.
     The investment portfolio has been allocated between securities
available for sale and securities held to maturity. No investment
securities were established in a trading account. Available for
sale securities increased to $226,043,000 in 2003, a 7.7% increase
over 2002. At December 31, 2003, the net unrealized gain, net of
the tax effect, on these securities was $5,489,000 and is included
in stockholders' equity as accumulated other comprehensive gain. At
December 31, 2002, accumulated other comprehensive income, net of
tax effect, amounted to $6,544,000. In 2003, held-to-maturity
securities declined $703,000, or a 11.9% decrease from 2002 after
declining $77,000, or a 1.3% decrease in 2002. Table 7 provides
data on the carrying value of our investment portfolio on the dates
indicated. The vast majority of investment security purchases are
allocated as available-for-sale. This provides the Corporation with
increased flexibility should  there be a need or desire to
liquidate an investment security.
     The investment portfolio includes U.S. Government Corporations
and Agencies, corporate obligations, mortgage backed securities,
state and municipal securities, and other debt securities. In
addition, the investment portfolio includes restricted equity
securities consisting primarily of common stock investments in the
Federal Reserve Bank and the Federal Home Loan Bank. Marketable
equity securities consists of common stock investments in other
commercial banks and bank holding companies.
     Securities available-for-sale may be sold as part of the
overall asset and liability management process. Realized gains and
losses are reflected in the results of operations on our statements
of income. The investment portfolio does not contain any structured
notes, step-up bonds, or any off-balance sheet derivatives.

<TABLE>

TABLE 7  -  CARRYING VALUE OF INVESTMENT SECURITIES

<CAPTION>

(Amounts in thousands)                              December 31,
                                              _______________________
                                                        2003
                                              _______________________
                                            Available           Held to
                                              for Sale          Maturity

                                       <c>                 <c>
U. S. Government Corporations
  and Agencies                                 $100,487            $3,153
State and Municipal                              78,710             2,076
Corporate                                        36,025                 0
Marketable Equity Securities                      5,654                 0
Restricted Equity Securities                      5,167                 0
                                               ________            ______
Total Investment Securities                    $226,043            $5,229
                                               ========            ======


<CAPTION>

(Amounts in thousands)                              December 31,
                                                ______________________
                                                        2002
                                              _______________________
                                            Available           Held to
                                              for Sale          Maturity

                                       <c>                 <c>
U. S. Government Corporations
  and Agencies                                 $ 77,806            $4,272
State and Municipal                              84,809             1,660
Corporate                                        38,446                 0
Marketable Equity Securities                      5,310                 0
Restricted Equity Securities                      3,452                 0
                                               ________            ______
Total Investment Securities                    $209,823            $5,932
                                               ========            ======


<CAPTION>

(Amounts in thousands)                              December 31,
                                               ________________________
                                                        2001
                                               ________________________
                                            Available           Held to
                                              for Sale          Maturity

                                       <c>                 <c>
U. S. Government Corporations
  and Agencies                                 $ 55,267            $5,332
State and Municipal                              74,184               677
Corporate                                        41,334                 0
Marketable Equity Securities                      4,286                 0
Restricted Equity Securities                      3,027                 0
                                               ________            ______
Total Investment Securities                    $178,098            $6,009
                                               ========            ======

</TABLE>


42 * FIRST KEYSTONE CORPORATON

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


     During 2003, interest bearing deposits in other banks
decreased to $28,000 from $60,000 in 2002. Balances in interest
bearing deposits in other banks were kept relatively low as funds
were invested in marketable securities to maximize income while
still addressing liquidity needs.

ALLOWANCE FOR LOAN LOSSES
     The allowance for loan losses constitutes the amount available
to absorb losses within the loan portfolio. As of December 31,
2003, the allowance for loan losses was $3,524,000 as compared to
$3,174,000 and $2,922,000 as of December 31, 2002 and 2001,
respectively. The allowance for loan losses is established through
a provision for loan losses charged to expenses. Loans are charged
against the allowance for possible loan losses when management
believes that the collectibility of the principal is unlikely. The
risk characteristics of the loan portfolio are managed through the
various control processes, including credit evaluations of
individual borrowers, periodic reviews, and diversification by
industry. Risk is further mitigated through the application of
lending procedures such as the holding of adequate collateral and
the establishment of contractual guarantees.
     Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses. The methodology in
determining adequacy incorporates specific and general allocations
together with a risk/loss analysis on various segments of the
portfolio according to an internal loan review process. This
assessment results in an allocated allowance. Management maintains
its loan review and loan classification standards consistent with
those of its regulatory supervisory authority.
     Management feels based upon its methodology, that the
allowance for loan losses is adequate to cover foreseeable future
losses. Table 8 contains an analysis of our Allowance for Loan
Losses indicating charge-offs and recoveries by the year and annual
additional provisions charged to operations. In 2003, net charge-offs
          as a percentage of average loans were .07% compared to .15% in
2002 and .20% in 2001. Net charge-offs amounted to $150,000 in 2003
as compared to $298,000 and $390,000 in 2002 and 2001,
respectively.

<TABLE>

TABLE 8  -  ANALYSIS OF ALLOWANCE FOR LOAN LOSSES


<PAGE>
<CAPTION>

(Amounts in thousands)                              Years Ended December 31,
                                                    _______________________
                                                  2003       2002       2001
                                                  ____       ____      _____

                                           <c>         <c>       <c>
Balance at beginning of period                     $3,174      $2,922    $2,702
  Charge-offs:
  Commercial, financial, and
    agricultural                                       43          66       109
  Real estate - mortgage                               22         140       111
  Installment loans to individuals                    133         196       238
                                                   ______      ______    ______
                                                      198         402       458
Recoveries:
  Commercial, financial, and
    agricultural                                        1           0        21
  Real estate - mortgage                                1          77         3
  Installment loans to individuals                     46          27        44
                                                   ______      ______    ______
                                                       48         104        68

Net charge-offs                                       150         298       390
Additions charged to operations                       500         550       610
                                                   ______      ______    ______
Balance at end of period                           $3,524      $3,174    $2,922
                                                   ======      ======    ======

Ratio of net charge-offs during
  the period to average loans
  outstanding during the period                      .07%        .15%      .20%
Allowance for loan losses to
  average loans outstanding
  during the period                                 1.66%       1.58%     1.50%


<CAPTION>

(Amounts in thousands)                                                            Years Ended December 31,
                                                      ______________________
                                                  2000       1999
                                                  ____       ____

                                           <c>         <c>
Balance at beginning of period                     $2,600      $2,421
  Charge-offs:
  Commercial, financial, and
    agricultural                                       79          25
  Real estate - mortgage                               44          20
  Installment loans to individuals                    226         213
                                                   ______      ______
                                                      349         258
  Recoveries:
  Commercial, financial, and
    agricultural                                        0          23
  Real estate - mortgage                               10          62
  Installment loans to individuals                     16          27
                                                   ______      ______
                                                       26         112

Net charge-offs                                       323         146
Additions charged to operations                       425         325
                                                   ______      ______
Balance at end of period                           $2,702      $2,600
                                                   ======      ======

Ratio of net charge-offs during
  the period to  average loans
  outstanding during the period                      .17%        .08%
Allowance for loan losses to
  average loans outstanding
  during the period                                 1.44%       1.49%

</TABLE>


                                   2003 ANNUAL REPORT * 43

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


     It is the policy of management and the Corporation's Board of
Directors to provide for losses on both identified  and
unidentified losses inherent in its loan portfolio. A provision for
loan losses is charged to operations based upon an evaluation of
the potential losses in the loan portfolio. This evaluation takes
into account such factors  as portfolio concentrations,
delinquency, trends, trends of non-accrual and classified loans,
economic conditions, and other relevant factors.
     The loan review process which is conducted quarterly, is an
integral part of our evaluation of the loan portfolio. A detailed
quarterly analysis to determine the adequacy of the Corporation's
allowance for loan losses is reviewed by our Board of Directors.
     With our manageable level of net charge-offs and the additions
to the reserve from our provision out of operations, the allowance
for loan losses as a percentage of average loans amounted to 1.66%
to 2003, 1.58% in 2002, and 1.50% in 2001.
     Table 9 sets forth the allocation of the Bank's allowance for
loan losses by loan category and the percentage of loans in each
category to total loans receivable at the dates indicated. The
portion of the allowance for loan losses allocated to each loan
category does not represent the total available for future losses
that may occur within the loan category, since the total loan loss
allowance is a valuation reserve applicable to the entire loan
portfolio.

<TABLE>

TABLE 9  -  ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

(Amounts in thousands)                                   December 31,
                                                       _________________
                                                     2003           % <F1>
                                                     ____          _____

                                               <c>           <c>
Commercial, financial, and agricultural                $  775         15.4
Real estate - mortgage                                  2,106         72.6
Consumer and other loans                                  378         12.0
Unallocated                                               265          N/A
                                                       ______        _____
                                                       $3,524        100.0
                                                       ======        =====


<CAPTION>

(Amounts in thousands)                                   December 31,
                                                       _________________
                                                     2002           % <F1>
                                                     ____          _____

                                               <c>           <c>
Commercial, financial, and agricultural                $  488         12.4
Real estate - mortgage                                  1,812         75.0
Consumer and other loans                                  357         12.6
Unallocated                                               517          N/A
                                                       ______        _____
                                                       $3,174        100.0
                                                       ======        =====


<CAPTION>

(Amounts in thousands)                                   December 31,
                                                       _________________
                                                     2001           % <F1>
                                                     ____          _____

                                               <c>           <c>
Commercial, financial, and agricultural                $  605         14.9
Real estate - mortgage                                  1,826         71.2
Consumer and other loans                                  458         13.9
Unallocated                                                33          N/A
                                                       ______        _____
                                                       $2,922        100.0
                                                       ======        =====


<CAPTION>

(Amounts in thousands)                                   December 31,
                                                       _________________
                                                     2000           % <F1>
                                                     ____          _____

                                               <c>           <c>
Commercial, financial, and agricultural                $  316         10.7
Real estate - mortgage                                  1,606         71.1
Consumer and other loans                                  557         18.2
Unallocated                                               223          N/A
                                                       ______        _____
                                                       $2,702        100.0
                                                       ======        =====


<CAPTION>

(Amounts in thousands)                                   December 31,
                                                       _________________
                                                     1999           % <F1>
                                                     ____          _____

                                               <c>           <c>
Commercial, financial, and agricultural                $  308         11.2
Real estate - mortgage                                  1,431         75.5
Consumer and other loans                                  425         13.3
Unallocated                                               436          N/A
                                                       ______        _____
                                                       $2,600        100.0
                                                       ======        =====
____________________
<FN>
<F1>
Percentage of loans in each category to total loans.

</FN>
</TABLE>


NON-PERFORMING ASSETS
     With the continuing economic slowdown in 2003, the Corporation
experienced an increase in delinquencies and non-performing loans.
Table 10 details the Corporation's non-performing assets at the
dates indicated.
     Non-accrual loans are generally delinquent on which principal
or interest is past-due approximately 90 days or more, depending
upon the type of credit and the collateral. When a loan is placed
on non-accrual status, any unpaid interest is charged against
income. Restructured loans are loans where the borrower has been
granted a concession in the interest rate or payment amount because
of financial problems. Foreclosed assets held for sale represents
property acquired through foreclosure, or considered to be an
          in-substance foreclosure.
     The total of non-performing assets increased to $768,000 as of
December 31, 2003, as compared to $458,000 as of December 31, 2002.
Non-accrual and restructured loans increased to $735,000 in 2003
from $458,000 in 2002. Foreclosed assets remained at zero in 2003
and 2002. Loans past-due 90 days or more and still accruing also
increased to $33,000 in 2003 from zero in 2002. Our allowance for
loan losses to total non-performing assets remains very strong at
458.9% in 2003 as compared to 693.7% in 2002. With our fine loan
quality, we continue to rank well ahead of peer banks on
measurements of delinquency and overall asset quality.
     Loan quality is monitored closely, and we actively work with
borrowers to resolve credit problems. Excluding the assets
disclosed in Table 10, management is not aware of any information
about borrowers' possible credit problems, which cause serious
doubt as to their ability to comply with present loan repayment
terms.
     Should the economic climate no longer continue to be stable or
begin to deteriorate, borrowers may experience difficulty, and the
level of non-performing loans and assets, charge-offs and
delinquencies could rise and possibly require additional increases
in our allowance for loan losses.
     In addition, regulatory authorities, as an integral part of
their examinations, periodically review the allowance for possible
loan and lease losses. They may require additions to allowances
based upon their judgements about information available to them at
the time of examination.


44 * FIRST KEYSTONE CORPORATION

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


     Interest income received on non-performing loans in 2003 and
2002 was $37,669 and $19,179, respectively. Interest income, which
would have been recorded on these loans under the original terms in
2003 and 2002 was $60,778 and $38,956, respectively. At December
31, 2003, the Corporation had no outstanding commitments to advance
additional funds with respect to these non-performing loans.
     A concentration of credit exists when the total amount of
loans to borrowers, who are engaged in similar activities that are
similarly impacted by economic or other conditions, exceed 10% of
total loans. As of December 31, 2003, 2002 and 2001, management is
of the opinion that there were no loan concentrations exceeding 10%
of total loans.

<TABLE>

TABLE 10  -  NON-PERFORMING ASSETS

<CAPTION>

(Amounts in thousands)                                 December 31,
                                                     _______________
                                             2003       2002      2001
                                             ____       ____      ____

                                         <c>       <c>        <c>
Non-accrual and restructured loans                 $735      $458     $1,102
Foreclosed assets                                     0         0         75
Loans past-due 90 days or more
  and still accruing                                 33         0        217
                                                   ____      ____     ______
  Total non-performing assets                      $768      $458     $1,394
                                                   ====      ====     ======
Non-performing assets to period end
  loans and foreclosed assets                      .34%      .23%       .70%
Total non-performing assets to
  total assets                                     .16%      .10%       .35%
Total allowance for loan losses
  to total non-performing assets                 458.9%    693.7%     209.6%


<CAPTION>

(Amounts in thousands)                                 December 31,
                                                     _______________
                                             2000       1999
                                             ____       ____

                                         <c>       <c>
Non-accrual and restructured loans                 $719      $618
Foreclosed assets                                    13        85
Loans past-due 90 days or more
  and still accruing                                 10        47
                                                   ____      ____
  Total non-performing assets                      $742      $750
                                                   ====      ====
Non-performing assets to period-end
  loans and foreclosed assets                      .39%      .40%
Total non-performing assets to
  total assets                                     .21%      .22%
Total allowance for loan losses
  to total non-performing assets                 364.2%    346.6%

</TABLE>


     There is a concentration of real estate mortgage loans in the
loan portfolio. Real estate mortgages comprise 74.1% of the loan
portfolio as of December 31, 2003, down from 74.7% in 2002. Real
estate mortgages consist of both residential and commercial real
estate loans. The real estate loan portfolio is well diversified in
terms of borrowers, collateral, interest rates, and maturities.
Also, the real estate loan portfolio has a mix of both fixed rate
and adjustable rate mortgages. The real estate loans are
concentrated primarily in our marketing area and are subject to
risks associated with the local economy.

DEPOSITS AND OTHER BORROWED FUNDS
     Consumer and commercial retail deposits are attracted
primarily by First Keystone's subsidiary bank's ten full service
office locations. The Bank offers a broad selection of deposit
products and continually evaluates its interest rates and fees on
deposit products. The Bank regularly reviews competing financial
institutions interest rates along with prevailing market rates,
especially when establishing interest rates on certificates of
deposit.
     Deposits increased by $12,275,000, or a 3.7% increase when
comparing December 31, 2003, to December 31, 2002. This increase
compares to a deposit increase of 12.2% in 2002 and an increase of
8.5% in 2001.
     During 2003, the Corporation experienced a deposit increase in
interest bearing deposits. Non-interest bearing deposits amounted
to $30,052,000 as of December 31, 2003, a decrease of $4,000 from
2002. Interest bearing deposits amounted to $312,968,000 as of
December 31, 2003, an increase of $12,279,000, or 4.1% over 2002.
     During 2003, the Corporation increased its reliance on
borrowings. Short-term borrowings amounted to $11,744,000 as of
year-end 2003, an increase of $2,677,000 from 2002. Long-term
borrowings increased $17,195,000 in 2003 to $62,945,000 as of
December 31, 2002. Total borrowings were $74,689,000 as of December
31, 2003, compared to $54,817,000 on December 31, 2002. Short-term
borrowings are comprised of federal funds purchased, securities
sold under agreements to repurchase, U.S. Treasury demand notes,
and short-term borrowings from the Federal Home Loan Bank (FHLB).
     Long-term borrowings are typically FHLB term borrowings with a
maturity of one year or more. Some of the additional term
borrowings were made to take advantage of special rates offered by
the FHLB. In connection with FHLB borrowings and securities sold
under agreements to repurchase, the Corporation maintains certain
eligible assets as collateral.


                                   2003 ANNUAL REPORT * 45

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


CAPITAL STRENGTH
     Normal increases in capital are generated by net income, less
cash dividends paid out. Also, the net unrealized gains on
investment securities available-for-sale, net of taxes, increased
shareholders' equity or capital in 2003 and 2002, referred to as
accumulated other comprehensive income. The total net increase in
capital was $2,255,000 in 2003 after an increase of $9,400,000 in
2002. The accumulated other comprehensive income amounted to
$5,489,000 in 2003 and $6,544,000 in 2002. One factor which
decreased equity capital in 2003 and 2002 relates to our stock
repurchase plan. The Corporation had 152,600 shares of common stock
as of December 31, 2003, and 119,181 shares in 2002, at a cost of
$4,655,000 and $3,577,000, respectively as treasury stock.
     Return on equity (ROE) is computed by dividing net income by
average stockholders' equity.  This ratio was 14.27% for 2003,
14.93% for 2002, and 13.85% for 2001. Refer to Performance Ratios
on Page 2 - Summary of Selected Financial Data for a more expanded
listing of the ROE.
     Adequate capitalization of banks and bank holding companies is
required and monitored by regulatory authorities. Table 11 reflects
risk-based capital ratios and the leverage ratio for our
Corporation and Bank. The Corporation's leverage ratio was 9.83% at
December 31, 2003, and 10.27% at December 31, 2002.
     The Corporation has consistently maintained regulatory capital
ratios at or above the "well capitalized" standards. For additional
information on capital ratios, see Note 14 to the Consolidated
Financial Statements. The risk-based capital ratios also decreased
somewhat in 2003 from 2002 for both the Corporation and the Bank,
but remain strong. The risk-based capital calculation assigns
various levels of risk to different categories of bank assets,
requiring higher levels of capital for assets with more risk. Also
measured in the risk-based capital ratio is credit risk exposure
associated with off-balance sheet contracts and commitments. Table
11 indicates capital ratios as of December 31, 2003.

<TABLE>

TABLE 11  -  CAPITAL RATIOS

<CAPTION>

                                                          December 31, 2003
                                                          ________________
                                                         Corporation  Bank
                                                         __________    ____

                                                     <c>         <c>
Risk-Based Capital:
  Tier I risk-based capital ratio                       14.82%      13.19%
  Total risk-based capital ratio
    (Tier 1 and Tier 2)                                 16.11%      14.34%
Leverage Ratio:
  Tier I capital to average assets                      9.83%       8.74%


<CAPTION>

                                                          December 31, 2002
                                                          ________________
                                                         Corporation  Bank
                                                         __________    ____

                                                     <c>         <c>
Risk-Based Capital:
  Tier I risk-based capital ratio                       15.80%      15.33%
  Total risk-based capital ratio
    (Tier 1 and Tier 2)                                 17.11%      16.52%
Leverage Ratio:
  Tier I capital to average assets                      10.27%      9.96%

</TABLE>


LIQUIDITY MANAGEMENT

     Effective liquidity management ensures that the cash flow
requirements of depositors and borrowers, as well as the operating
cash needs of the Corporation, are met.
     Liquidity is needed to provide the funding requirements of
depositors withdrawals, loan growth, and other operational needs.
Asset liquidity is provided by investment securities maturing in
one year or less, other short-term investments, federal funds sold,
and cash and due from banks. At year-end 2003, cash and due from
banks and interest-bearing deposits in other banks totaled
$5,941,000 as compared to $7,456,000 at year-end 2002.
Additionally, maturing loans and repayment of loans are another
source of asset liquidity.
     Liability liquidity is accomplished by maintaining a core
deposit base, acquired by attracting new deposits and retaining
maturing deposits.  Also, short-term borrowings provide funds to
meet liquidity.
     Management feels its current liquidity position is
satisfactory given the fact that the Corporation has a very stable
core deposit base which has increased annually. Secondly, our loan
payments and principal paydowns on our mortgage backed securities
provide a steady source of funds. Also, short-term investments and
maturing investments represent additional sources of liquidity.
     Finally, the Corporation's subsidiary bank does have access to
funds on a short-term basis from the Federal Reserve Bank discount
window. Also, Fed funds can be purchased by means of a borrowing
line at the Atlantic Central Bankers Bank. The Corporation has
indirect access to the capital markets through its membership in
the Federal Home Loan Bank. Advances on borrowings, both short-term
and long-term, are available to help address any liquidity needs.


46 * FIRST KEYSTONE CORPORATION

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


FORWARD LOOKING STATEMENTS
     The sections that follow, Market Risk and Asset/ Liability
Management contain certain forward looking statements. These
forward looking statements involve significant risks and
uncertainties, including changes in economic and financial market
conditions.  Although First Keystone Corporation believes that the
expectations reflected in such forward looking statements are
reasonable, actual results may differ materially.

MARKET RISK
     Market risk is the risk of loss arising from adverse changes
in the fair value of financial instruments due to changes in
interest rates, exchange rates and equity prices.  First Keystone
Corporation's market risk is composed primarily of interest rate
risk. The Corporation's interest rate risk results from timing
differences in the repricing of assets, liabilities, off-balance
sheet instruments, and changes in relationships between ratio
indices and the potential exercise of explicit or embedded options.
     Increases in the level of interest rates also may adversely
affect the fair value of the Corporation's securities and other
earning assets. Generally, the fair value of fixed-rate instruments
fluctuates inversely with changes in interest rates. As a result,
increases in interest rates could result in decreases in the fair
value of the Corporation's interest-earning assets, which could
adversely affect the Corporation's results of operations if sold,
or, in the case of interest earning assets classified as available
for sale, the Corporation's stockholders' equity, if retained.
Under The Financial Accounting Standards Board (FASB) Statement
115, changes in the unrealized gains and losses, net of taxes, on
securities classified as available for sale will be reflected in
the Corporation's stockholders' equity. The Corporation does not
own any trading assets.

Asset/Liability Management
__________________________

     The principal objective of asset liability management is to
manage the sensitivity of the net interest margin to potential
movements in interest rates and to enhance profitability through
returns from managed levels of interest rate risk. The Corporation
actively manages the interest rate sensitivity of its assets and
liabilities. Table 12 presents an interest sensitivity analysis of
assets and liabilities as of December 31, 2003. Several techniques
are used for measuring interest rate sensitivity. Interest rate
risk arises from the mismatches in the repricing of assets and
liabilities within a given time period, referred to as a rate
sensitivity gap. If more assets than liabilities mature or reprice
within the time frame, the Corporation is asset sensitive. This
position would contribute positively to net interest income in a
rising rate environment. Conversely, if more liabilities mature or
reprice, the Corporation is liability sensitive. This position
would contribute positively to net interest income in a falling
rate environment.
     Limitations of interest rate sensitivity gap analysis as
illustrated in Table 12 include:  a) assets and liabilities which
contractually reprice within the same period may not, in fact,
reprice at the same time or to the same extent; b) changes in
market interest rates do not affect all assets and liabilities to
the same extent or at the same time, and c) interest rate
sensitivity gaps reflect the Corporation's position on a single day
(December 31, 2003 in the case of the following schedule) while the
Corporation continually adjusts its interest sensitivity throughout
the year. At one year, the Corporation is relatively balanced with
the ratio of interest rate sensitive assets to interest rate
sensitive liabilities at .93.

<TABLE>

TABLE 12  -  INTEREST RATE SENSITIVITY ANALYSIS

<CAPTION>

(Amounts in thousands)                             December 31, 2003
                                            _____________________________
                                            One          1 - 5        Beyond
                                            Year          Years      5 Years
                                            ______       ______       _____

                                    <c>          <c>          <c>
Assets                                      $115,492     $184,206     $163,064

Liabilities/Stockholders Equity              124,726      149,194      143,791
                                            ________     ________     ________
Interest Rate Sensitivity Gap                 (9,234)      35,012       19,273

Cumulative Gap                                (9,234)      25,778       45,051

<CAPTION>

(Amounts in thousands)                             December 31, 2003
                                            _____________________________
                                           Not Rate
                                         Sensitive        Total
                                           ________      _____

                                     <c>         <c>          <c>
Assets                                       $19,079     $481,841

Liabilities/Stockholders Equity               64,130      481,841

Interest Rate Sensitivity Gap

Cumulative Gap

</TABLE>


                                   2003 ANNUAL REPORT * 47

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


Earnings at Risk
________________

     The Bank's Asset/Liability Committee (ALCO) is responsible for
reviewing the interest rate sensitivity position and establishing
policies to monitor and limit exposure to interest rate risk. The
guidelines established by ALCO are reviewed by the Corporation's
Board of Directors. The Corporation recognizes that more
sophisticated tools exist for measuring the interest rate risk in
the balance sheet beyond interest rate sensitivity gap. Although
the Corporation continues to measure its interest rate sensitivity
gap, the Corporation utilizes additional modeling for interest rate
risk in the overall balance sheet. Earnings at risk and economic
values at risk are analyzed.
     Earnings simulation modeling addresses earnings at risk and
net present value estimation addresses economic value at risk.
While each of these interest rate risk measurements has
limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the
Corporation.

Earnings Simulation Modeling
____________________________

     The Corporation's net income is affected by changes in the
level of interest rates.  Net income is also subject to changes in
the shape of the yield curve.  For example, a flattening of the
yield curve would result in a decline in earnings due to the
compression of earning asset yields and funds rates, while a
steepening would result in increased earnings as investment margins
widen.
     Earnings simulation modeling is the primary mechanism used in
assessing the impact of changes in interest rates on net interest
income. The model reflects management's assumptions related to
asset yields and rates paid on liabilities, deposit sensitivity,
size and composition of the balance sheet. The assumptions are
based on what management believes at that time to be the most
likely interest rate environment. Earnings at risk is the change in
net interest income from a base case scenario under an increase and
decrease of 200 basis points in the interest rate earnings
simulation model.
     Table 13 presents an analysis of the changes in net-interest
income and net present value of the balance sheet resulting from an
increase or decrease of two percentage points (200 basis points) in
the level of interest rates. The calculated estimates of change in
net interest income and net present value of the balance sheet are
compared to current limits approved by ALCO and the Board of
Directors. The earnings simulation model projects net-interest
income would decrease by approximately 5.08% if rates fell by two
percentage points over one year. The model projects a decrease of
approximately 3.33% in net-interest income if rates rise by two
percentage points over one year. Both of these forecasts are within
the one year policy guidelines.

Net Present Value Estimation
____________________________

     The net present value measures economic value at risk and is
used for helping to determine levels of risk at a point in time
present in the balance sheet that might not be taken into account
in the earnings simulation model. The net present value of the
balance sheet is defined as the discounted present value of asset
cash flows minus the discounted present value of liability cash
flows. At year-end, a 200 basis point immediate decrease in rates
is estimated to increase net present value by 18.67%. Additionally,
net present value is projected to decrease by 9.78% if rates
increase immediately by 200 basis points, both within policy
guidelines. If management is concerned market interest rates may
begin to rise in 2004, it can take steps to reduce liability
sensitivity by attracting long-term deposits and reducing short-term borrowings.
     The computation of the effects of hypothetical interest rate
changes are based on many assumptions. They should not be relied
upon solely as being indicative of actual results, since the
computations do not contemplate actions management could undertake
in response to changes in interest rates.

<TABLE>

TABLE 13  -  EFFECT OF CHANGE IN INTEREST RATES

<CAPTION>

                                                       Projected Change
                                                        _______________

                                                     <c>
Effect on Net Interest Income
1-year Net Income simulation Projection
  -200 bp Shock vs Stable Rate                               (5.08%)
  +200 bp Shock vs Stable Rate                               (3.33%)

Effect on Net Present Value of Balance Sheet
Static Net Present Value Change
  -200 bp Shock vs Stable Rate                               18.67%
  +200 bp Shock vs Stable Rate                               (9.78%)

</TABLE>


48 * FIRST KEYSTONE CORPORATION

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________


MARKET PRICE/DIVIDEND HISTORY

     As of December 31, 2003, the corporation had 2,924,607 shares
of $2.00 par value common stock outstanding held by shareholders of
record. First Keystone Corporation's common stock is quoted on the
Over The Counter (OTC) Bulletin Board under the symbol "FKYS".
     Table 14 reports the highest and lowest per share prices known
to the Corporation and the dividends paid during the periods
indicated. The market prices and dividend paid have been adjusted
to reflect the 5% stock dividend paid August 6, 2002. These prices
do not necessarily reflect any dealer or retail markup, markdown or
commission.

<TABLE>

TABLE 14  -  MARKET PRICE/DIVIDEND HISTORY

<CAPTION>
                                          2003
                                 _________________________
                               Common Stock       Dividends
                                 High/Low            Paid
                                  _______            ____

                          <c>                    <c>
First Quarter                $31.15/$25.75               $.24
Second Quarter               $32.50/$29.25                .24
Third Quarter                $34.00/$32.00                .24
Fourth Quarter               $36.50/$33.75                .26


<CAPTION>

                                          2002
                                 _________________________
                               Common Stock       Dividends
                                 High/Low            Paid
                                  _______            ____

                          <c>                    <c>
First Quarter                $22.86/$18.57               $.20
Second Quarter               $22.38/$20.10                .20
Third Quarter                $24.00/$19.19                .21
Fourth Quarter               $26.25/$23.95                .24


<CAPTION>

                                          2001
                                 _________________________
                               Common Stock       Dividends
                                 High/Low            Paid
                                  _______            ____

                          <c>                    <c>
First Quarter                $15.95/$12.86               $.19
Second Quarter               $18.10/$13.70                .19
Third Quarter                $25.24/$17.38                .19
Fourth Quarter               $20.18/$18.10                .20

</TABLE>


     The following brokerage firms make a market in First Keystone
Corporation stock:

Legg Mason Wood Walker, Inc.
1735 Market Street, 10th Floor
Mellon Bank Center
Philadelphia, PA  19103
(800) 888-6673

Janney Montgomery Scott, Inc.
1801 Market Street
Philadelphia, PA  19103
(800) 526-6397

Ryan, Beck and Company
Millenium One
20 Ash Street, 4th Floor
Conshohocken, PA  19428
(800) 223-6807

F. J. Morrissey & Co./
Boenning & Scattergood, Inc.
200 Barr Harbor Drive   Suite 300
West Conshohocken, PA 19428
(800) 842-8928

Ferris Baker Watts, Inc.
3100 Market Street
Camp Hill, PA  17011
(800) 638-7411


                                   2003 ANNUAL REPORT * 49

<PAGE>

Management's Discussion and Analysis
_________________________________________________________________



<TABLE>

TABLE 15  -  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands, except per share)

<CAPTION>

                                              Three Months Ended
                                    ______________________________________
2003                             March      June        September     December
                                 31           30          30           31
                                 _____      ____        ________      _______

                           <c>         <c>         <c>          <c>
Interest income                    $6,257      $6,185      $6,231       $6,390
Interest expense                    2,592       2,575       2,575        2,458
Net interest income                $3,665      $3,610      $3,656       $3,932
Provision for loan
  losses                              150         125          75          150
Other non-interest
  income                              745         909         844          777
Non-interest expense                2,019       2,030       2,100        2,222
                                   ______      ______      ______       ______
Income before income
  taxes                            $2,241      $2,364      $2,325       $2,337
Income taxes                          463         507         491          489
                                   ______      ______      ______       ______
Net income                         $1,778      $1,857      $1,834       $1,848
                                   ======      ======      ======       ======
Per share                          $  .60      $  .63      $  .62       $  .63



<CAPTION>

                                              Three Months Ended
                                    ______________________________________
2002                             March      June        September     December
                                 31           30          30           31
                                 _____      ____        ________      _______

                           <c>         <c>         <c>          <c>
Interest income                    $6,392      $6,465      $6,583       $6,422
Interest expense                    2,712       2,643       3,069        2,918
                                   ______      ______      ______       ______
Net interest income                $3,680      $3,822      $3,514       $3,504
Provision for loan
  losses                              175         125         125          125
Other non-interest
  income                              515         465         548          757
Non-interest expense                1,816       1,905       1,992        2,098
                                   ______      ______      ______       ______
Income before income
  taxes                            $2,204      $2,257      $1,945       $2,038
Income taxes                          532         538         397          390
                                   ______      ______      ______       ______
Net income                         $1,672      $1,719      $1,548       $1,648
                                   ======      ======      ======       ======
Per share                          $  .56      $  .58      $  .52       $  .56

</TABLE>


50 * FIRST KEYSTONE CORPORATION

<PAGE>

MANAGEMENT'S STATEMENT OF RESPONSIBILITY


To Our Stockholders:

     The management of First Keystone Corporation is responsible
for the preparation, integrity and the objectivity of the
consolidated financial statements and other financial information
presented in this annual report.  The consolidated financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and
reflect the effects of certain estimates and judgments made by
management.

     The Corporation's management maintains an effective system of
internal control that is designed to provide reasonable assurance
that assets are safe-guarded and transactions are properly recorded
and executed in accordance with management's authorization.  The
system is continuously monitored by direct management review and by
internal auditors who conduct an effective program of internal
audits.  The Corporation selects and trains qualified people who
are provided with and expected to adhere to its standards of
business conduct.  These standards which set forth the highest
principles of business ethics and conduct are a key element of the
Corporation's control system.

     The consolidated financial statements of the Corporation have
been audited by J. H. Williams & Co., LLP, Independent Certified
Public Accountants.  Their audits were conducted in accordance with
auditing standards generally accepted in the United States of
America and included a review of the internal control structure and
such other procedures and tests of the accounting records as they
considered necessary in the circumstances.

     The Audit Committee of the Board of Directors, which consists
of five outside directors, meets regularly with management, the
internal auditors, and the independent certified public accountants
to review accounting, reporting, and internal control matters.  The
Audit Committee has direct and private access to both internal and
external auditors.



                         /s/ J. Gerald Bazewicz
                         J. Gerald Bazewicz,
                         President & CEO


                         /s/ David R. Saraicno
                         David R. Saracino,
                         Treasurer & Assistant Secretary




Berwick, Pennsylvania
March 5, 2004


                                   2003 ANNUAL REPORT * 51