(THIS PAGE INTENTIONALLY LEFT BLANK)

2. Basic Earnings Per Share

4. Comprehensive Income

The review that follows focuses on the significant factors affecting the financial condition and results of operations of Chemung Financial Corporation during the three and six month periods ended June 30, 2002, with comparisons to the comparable periods in 2001, as applicable. The unaudited condensed consolidated interim financial statements and related notes, as well as the 2001 Annual Report to Shareholders, should be read in conjunction with this review. Amounts in prior periods' unaudited condensed consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.

Forward-looking Statements

Statements included in this report include "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Chemung Financial Corporation cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, could cause Chemung Financial Corporation's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Corporation disclaims any obligation to subsequently revise any forward-looking statements to reflec t events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

Consolidated assets at June 30, 2002 totaled $742.0 million, an increase of $16.9 million or 2.3% since the beginning of the year. Earning assets increased $20.3 million or 3.0% from year end 2001 to June 30, 2002. This increase is reflected primarily in the loan portfolio (+ $9.1 million), securities portfolio (+ $4.6 million) and federal funds sold (+ $6.7 million).

As noted above, total loans increased $9.1 million or 2.1% with $6.7 million of this growth in the commercial portfolio. Despite the weakness in the economy, commercial loan volume, while not as robust as a year ago, remains steady. While real estate lending has slowed somewhat, our mortgage and home equity portfolios have grown $775 thousand and $2.8 million, respectively, since the beginning of the year. The above increases have been somewhat offset primarily by a $1.0 million decrease in installment loans, however, we have seen some recent improvement in the indirect auto lending segment of this business.

The Available for Sale segment of the securities portfolio totaled $244.8 million at June 30, 2002, compared to $239.1 million at the end of 2001, an increase of $5.7 million. At amortized cost, major changes include increases in mortgage-backed securities ($8.1 million) and U.S. Treasury notes ($4.8 million), offset primarily by a decrease in federal agency bonds ($8.7 million). The pre-tax valuation adjustment for net unrealized gains has increased $1.5 million since the beginning of the year, reflecting the impact that lower intermediate and long-term market rates have had on the bond portfolio. The Held to Maturity segment of the portfolio, consisting primarily of local municipal obligations, totaled $6.0 million as compared to $7.1 million at the end of 2001, a decrease of $1.1 million.

The $1.6 million increase in premises and equipment is related primarily to continuing renovations to our main office first floor as well as the purchase of a new mainframe computer system. These investments are part of an ongoing commitment to provide quality service to both existing and new clients. The asset increases were offset primarily by a $4.4 million decrease in cash and due from banks due to lower period-end branch cash balances.

The year to date asset growth has been supported primarily by a $17.5 million or 3.4% increase in deposits. Period-end public funds deposit balances were up approximately $6.7 million. All other deposits increased $10.8 million primarily the result of higher personal account balances reflected in demand deposits, savings and investment certificates. The $8.7 million increase in securities sold under agreements to repurchase is the result of the purchase of a $10.0 million federal agency bond that was leveraged with a $10.0 million term repurchase agreement entered into with the Federal Home Loan Bank of New York. The fact that the growth in deposits and securities sold under agreements to repurchase has exceeded the growth in the loan and securities portfolios is the primary factor for the $6.7 million increase in federal funds sold, as well as the $12.6 million repayment of Federal Home Loan Bank advances.

The Corporation has shown solid growth with earning assets averaging $25.6 million or 3.9% higher than during the second quarter of 2001. Approximately $17.7 million of this growth is in the loan portfolio, with the commercial portfolio representing $12.7 million or approximately 71.7% of the average loan increase. Additionally, the securities portfolio has increased $2.3 million on average, with overnight federal funds sold and interest bearing deposits averaging $5.5 million more than during the second quarter of 2001. The growth in earning assets did result in a $23 thousand increase in net interest income. Total interest and dividend income on earning assets was $11.247 million as compared to $12.469 million a year earlier, a decrease of $1.222 million or 9.8%. This decrease is related to the interest rate declines throughout 2001, with the yield on average earning assets declining 100 basis points from 7.58% to 6.58%.

Total average funding liabilities have increased $21.3 million or 3.4% when compared to the second quarter of 2001. Of this growth, average securities sold under agreements to repurchase are up $19.5 million, the result of an increase in securities purchases funded by term repurchase agreements with the Federal Home Loan Bank of New York. Average deposits when compared to the second quarter of last year are up $4.6 million despite public fund balances averaging approximately $31.2 million lower than last year. All other deposits are up approximately $35.8 million on average, with much of this growth in personal demand deposit, savings and investment certificate averages. Due to the decline in interest rates, interest expense totaled $4.443 million as compared to $5.688 million during the second quarter of last year, a decrease of $1.245 million or 21.9%. The total cost of funds, including the effect of non-interest-bearing funding sources (such as demand deposits) decreased 88 basis points from 3.60% to 2.72%. The above yields and costs resulted in a net interest margin during the second quarter of 2002 of 3.98% as compared to 4.12% during the second quarter of 2001.

Other operating income increased $268 thousand or 9.3%. Included in this increase is a $130 thousand increase in non-taxable gains on stock donations. Early in the quarter we determined that given the value of the stock used for these donations, and the volatility of the market, it would be advantageous to accelerate some future years' capital campaign contributions, resulting in the above noted increase. Excluding the increase in these non-taxable gains, all other non-interest income rose $138 thousand or 5.0%. The areas having the greatest impact on this increase include: trust and investment services fee income (+ $61 thousand), revenue generated by CFS Group, Inc. (+ $45 thousand), credit card merchant earnings (+ $37 thousand) and checkcard interchange income (+ $25 thousand.) During the second quarter of 2001 we did realize a $71 thousand net gain on the sale of securities. No such gains were realized during the second quarter of 2002.

Operating expenses were $466 thousand or 7.7% higher than the comparable period last year. Approximately $290 thousand of this increase was in salaries and wages, and pension and other employee benefits. The $193 thousand increase in salaries and wages is related to a higher number of employees as well as compensation increases since the second quarter of 2001. The increase in pension and other employee benefits is primarily due to the increase in pension costs noted earlier in this report. Other significant increases include credit card and merchant services processing costs, which have increased $107 thousand, primarily related to higher levels of credit card merchant activity. Additionally, depreciation expense has increased $70 thousand, resulting from increased investment in property and equipment. In accordance with the provisions of SFAS No. 142, the Corporation did not incur any amortization expense related to goodwill during the second quarter of 2002. During the second quarter of 2001, amort ization of goodwill totaled $47 thousand.

The $231 thousand decrease in income tax expense is the result of lower pre-tax earnings as well as an increase in non-taxable income.

Net income for the six month period ended June 30, 2002 was $4.092 million, a 4.0% decrease as compared to June 30, 2001 results. Earnings per share declined 2.9%, from $1.05 to $1.02 on 58,212 fewer average shares outstanding. As was the case with second quarter results, the year to date results have clearly been impacted by the increase in the provision for loan losses (+ $325 thousand) and the increase in pension expense (+ $250 thousand). These increases impacted year-to-date net earnings by approximately $349 thousand or $0.09 per share.

Net interest income for the first six months of this year has increased $402 thousand or 3.1% as compared to the first six months of 2001. Total interest and dividend income on earning assets was $22.503 million as compared to $24.671 million a year earlier, a decrease of $2.168 million or 8.8%. While on average, total earning assets have increased by $32.4 million or 5.0%, this increase has been offset by a lower interest rate environment as reflected in a yield decline of 101 basis points from 7.68% to 6.67%. A major factor in the increase in average earning assets was the $21.6 million or 5.3% increase in average loans outstanding. Year to date, average commercial loans have increased $18.4 million or 10.8%, with average mortgages showing an $8.5 million or 8.9% increase. Other significant growth was evidenced by a $4.0 million or 9.0% average increase in the home equity portfolio. The above loan growth was somewhat offset by a $9.2 million decrease in average consumer installment loans, this declin e related primarily to a lower volume of indirect retail auto financing. In addition to loan growth, the securities portfolio and federal funds sold and interest bearing deposits have increased on average $7.9 million and $2.9 million, respectively.

While average funding liabilities increased $28.8 million or 4.6%, interest expense for the six-month period ended June 30, 2002 was down $2.570 million or 22.4%. This is reflective of the interest rate declines over the past year which have resulted in a 96 basis point decline in the cost of funds from 3.72% to 2.76%. While public fund average balances are down $33.3 million, other personal and non-personal account averages have increased $35.5 million. Much of this growth ($27.8 million) is in personal deposit accounts, primarily reflected in higher average time deposits (+ $9.4 million), savings (+ $11.6 million) and demand deposits (+ $4.8 million). Securities sold under agreements to repurchase have increased $27.1 million on average due primarily to an increase in securities purchases funded by term repurchase agreements entered into with the Federal Home Loan Bank of New York. The net interest margin for the first six months of 2002 was 4.03% as compared to 4.10% during the first six months of la st year.

Other operating income has increased $515 thousand or 9.7% to $5.844 million. As discussed above, the acceleration of stock donations during the second quarter has resulted in a $132 thousand year-to-date increase in non-taxable gains on stock donations. Excluding these gains, all other operating income has increased $383 thousand or 7.5%. Net gains on the sale of securities are up $175 thousand. This increase relates to the sale of a $10.0 million federal agency bond in March. It was expected that this bond, yielding 7.00%, along with another $22.0 million in agency bonds, would be called toward the end of April. In order to mitigate the re-investment rate risk on the full $32.0 million, management determined it prudent to sell the $10.0 million agency bond during March in order to lock in a 6.00% rate at that time. In addition to the above, we have realized year-to-date increases in credit card merchant earnings (+ $101 thousand), revenue generated by CFS Group, Inc. (+ $77 thousand), checkcard inte rchange income (+ $46 thousand) and service charges (+ $41 thousand). These increases were somewhat offset primarily by a $64 thousand decrease in trust and investment services income.

Operating expenses year-to-date have increased $1.071 million or 9.0%. The most significant factor impacting this increase is a $671 thousand increase in salaries and wages, and pension and other employee benefits. The $385 thousand increase in salaries and wages reflects both an increase in the number of employees as well as salary increases since the second quarter of last year. Of the $287 thousand increase in pension and other employee benefits, $250 thousand is related to the pension expense increase discussed earlier in this report. As have been discussed above, other significant factors in the operating expense increase include credit card and merchant deposit services processing costs (+ $214 thousand) and depreciation expense (+ $140 thousand). In compliance with the provisions of SFAS No. 142, the Corporation has not incurred any amortization expense related to goodwill during the first six months of this year. During the first six months of 2001, this expense totaled $95 thousand.

The $306 thousand decrease in income tax expense is reflective of both a lower level of pre-tax earnings as well as an increase in non-taxable income.

Liquidity and Capital Resources

During the first six months of 2002, cash and cash equivalents increased $2.2 million as compared to a decrease of $2.5 million during the first six months of last year. In addition to cash provided by operating activities, other primary sources of cash in 2002 included proceeds from maturities, sales and principal payments on securities ($66.6 million), an increase in deposits ($17.5 million), and an increase in securities sold under agreements to repurchase ($8.7 million). During the first six months of 2001, primary sources of cash included proceeds from maturities, sales and principal payments on securities ($76.0 million), an increase in securities sold under agreements to repurchase ($29.9 million), an increase in deposits ($12.3 million) and an increase in Federal Home Loan Bank advances, net of repayments ($6.3 million).

Cash generated in both periods has been used primarily to fund growth in earning assets. During the first six months of 2002, the purchase of securities and the funding of loans, net of repayments, totaled $69.8 million and $11.3 million, respectively. Other significant uses of cash during the first six months of 2002 included the repayment of Federal Home Loan Bank advances ($12.6 million), purchases of premises and equipment ($2.5 million), the payment of cash dividends ($1.8 million) and the purchase of treasury shares ($1.0 million). During the first six months of 2001, the purchase of securities and funding of loans, net of repayments, totaled $100.4 million and $28.2 million, respectively. Other significant uses of cash during the first six months of 2001 included the payment of cash dividends ($1.8 million), purchases of premises and equipment ($1.3 million) and the purchase of treasury shares ($1.2 million).

As of June 30, 2002, the Corporation's consolidated leverage ratio was 9.75%. The Tier I and Total Risk Adjusted Capital ratios were 15.07% and 16.84%, respectively. All of the above ratios are in excess of the requirements for being considered "well capitalized" by the FDIC, the Federal Reserve and the New York State Banking Department.

Cash dividends declared year-to-date total $0.46 per share, an increase of 4.5% compared to the $0.44 per share declared during the first six months of 2001.

On May 9, 2001, the Corporation announced that its Board of Directors authorized the repurchase of up to 400,000 shares, or approximately 10% of its outstanding common shares, principally through open market transactions from time to time as market conditions warrant. Through June of 2002, 80,442 shares have been acquired since the commencement of this repurchase program, including 34,803 shares acquired at an average price of $28.75 during the first six months of 2002.

Non-performing loans at June 30, 2002 totaled $9.456 million as compared to $5.633 million at December 31, 2001, an increase of $3.823 million. This increase is due primarily to the addition of one commercial relationship totaling $4.467 million at June 30, 2002 to the non-accrual loans category during the first quarter. Also included in non-performing loans at June 30, 2002 and December 31, 2001 are loans totaling $2.895 million and $3.480 million, respectively, to one client which are greater than 90 days past due and still accruing interest. These loans are well-collateralized, and we anticipate that all interest will be brought current during the quarter, and further that a substantial reduction in the principal will occur. The increase in non-performing loans is directly related to the continuation of a weak economy that began during 2001, and is reflective of the impact this has had on our clients, particularly some large commercial relationships.

In addition to non-performing loans, as of June 30, 2002, the Corporation, through its loan review function, has identified 19 commercial relationships totaling $9.983 million which it has internally classified as substandard, which are currently in the accrual status, as compared to $7.049 million at December 31, 2001. Given the increased level of non-performing and classified relationships, and in recognition of the increased inherent risk of loss in the current loan portfolio, the Corporation increased its provision for loan losses during the first six months of this year to $700 thousand as compared to $375 thousand during the first six months of 2001. The Corporation anticipates that this higher level of provision will continue throughout 2002 if the various risk indicators noted above continue to show signs of increased inherent risk of loss. At June 30, 2002, the Corporation's allowance for loan losses totaled $5.501 million resulting in a coverage ratio of allowance to non-performing loans of 58.1 7%. Excluding the impact of the $2.895 million in loans mentioned above which are greater than 90 days past due and still accruing interest, and for which the Corporation anticipates no loss, this ratio would be 83.84%. An internal review of non-performing loans and the collateral coverage indicates that the current coverage ratio is adequate. The allowance for loan losses to total loans at June 30, 2002 was 1.27% as compared to 1.20% as of December 31, 2001.

Transactions in the allowance for loan losses are as follows:

The following table summarizes the Corporation's non-performing loans (in thousands):

The Corporation's securities available for sale portfolio at June 30, 2002 includes an investment in a $2.50 million par value corporate bond with a book value of $2.288 million, which, as of June 30, 2002, had been downgraded by nationally recognized rating agencies on two separate occasions since the purchase of the bond in October 2001. As of June 30, 2002, the bond was still categorized as investment grade.

In late July 2002, the bond was downgraded to below investment grade status. Management intends to closely monitor this bond and anticipates that unless there are positive developments with respect to this bond, it may become other-than-temporarily impaired in the third quarter of 2002, resulting in a charge to earnings to write the investment down to its estimated fair value. As of June 30, 2002, the estimated fair value of the bond was 65% of par value (71% of amortized cost). As of August 12, 2002, the most recently available market price for the bond was 55% of par value (60% of amortized cost). However, the bond is not actively traded.

The Corporation realizes a major source of income by acting as intermediary between borrowers and savers. The differential or spread between interest earned on earning assets, primarily loans and investments, and the interest paid to depositors and on other interest-bearing liabilities is affected by changes to market interest rates. Additionally, because of assumptions made relative to the Corporation's loan and investment portfolios and to its deposit base, changes in interest rates can materially affect the projected maturities of these balance sheet classes and thus alter the Corporation's sensitivity to future changes in interest rates.

The Asset/Liability Committee (ALCO) has the strategic responsibility for setting the policy guidelines on acceptable interest rate risk exposure. The ALCO is made up of the president, two executive vice presidents, asset liability management officer, senior lending officer, senior marketing officer, chief financial officer and others representing key functions. All guidelines set by this committee are board approved. The ALCO's primary focus is on maintaining consistent growth in net interest income with an acceptable level of volatility as a result of changes to interest rates. At June 30, 2002, it is estimated that an immediate 200-basis-point increase in interest rates would positively impact our net interest income by 0.32% and an immediate 200-basis-point decrease in interest rates would negatively impact our net interest income by 14.61%. The risk to declining interest rates is slightly over the estimated tolerance of 12.00% set forth in our internal policy. Management attributes this to the over all low level of current interest rates and corresponding large percentage decrease that results when a 200-basis-point shock is modeled. Also, the nature of the Corporation's callable US Agency portfolio, as well as potential prepayments in the mortgage-backed securities portfolio and mortgage loan portfolio, results in less interest income in periods of declining interest rates, as called bonds and increased prepayments result in higher levels of repricing of assets at lower rates. Although currently outside of the policy guideline, management is comfortable with this exposure, as an immediate decrease in interest rates across the yield curve is unlikely at this time.

The Corporation uses an industry standard earnings simulation model as its primary method to identify and manage its interest rate risk profile. The model is based on projected cash flows using historical data for all financial instruments. Also incorporated into the model are assumptions of deposit rates and balances in relation to changes in interest rates. These assumptions are based on internal historical data. The ALCO recognizes that the assumptions made are inherently uncertain.

Additionally, the ALCO monitors the expected fluctuation of the Corporation's market value of equity with changes to interest rates. Appropriate risk limits have been established in the event of adverse changes to interest rates. At June 30, 2002, the exposure to changing interest rates was within the guidelines established by management.

Other types of market risk, such as foreign exchange rate risk and commodity price risk do not arise in the normal courses of the Corporation's business activities.