DEF 14A 1 def14a2009.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Filed by the Registrant [ ] Filed by a Party other than the Registrant Check the appropriate box: [ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-12 FIRST KEYSTONE CORPORATION _____________________________________________________ (Exact name of registrant as specified in its Charter) _____________________________________________________ (Name of Person(s) Filing Proxy Statement if other than Registrant) Payment of Filing Fee (check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11 (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applied: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rul 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: FIRST KEYSTONE CORPORATION _________________________________________________________________ 111 West Front Street Berwick, Pennsylvania 18603 March 25, 2009 Dear Fellow Shareholders of First Keystone Corporation: It is my pleasure to invite you to attend the 2009 Annual Meeting of Shareholders of First Keystone Corporation to be held on Tuesday, May 5, 2009, at 10:00 a.m., Eastern Daylight Time. The Annual Meeting this year will be held at the McBride Memorial Library, Community Room, 500 Market Street, Berwick, Pennsylvania 18603. The Notice of the Annual Meeting and the Proxy Statement on the following pages address the formal business of the meeting. The formal business schedule includes: * The election of 3 Class A Directors; and * The ratification of the selection of J. H. Williams & Co., LLP, as the independent auditors for the corporation for the fiscal year ending December 31, 2009. At the meeting, members of the corporation's management will review the corporation's operations during the past year and will be available to respond to questions. We strongly encourage you to vote your shares, whether or not you plan to attend the meeting. It is very important that you sign, date and return your proxy form as soon as possible. The execution and delivery of your proxy does not affect your right to vote in person if you attend the meeting. You may revoke your proxy any time prior to its exercise, and you may attend the meeting and vote in person, even if you have previously returned your proxy. Thank you for your continued support. I look forward to seeing you at the Annual Meeting if you are able to attend. Sincerely, /s/ J. Gerald Bazewicz J. Gerald Bazewicz President [ THIS PAGE INTENTIONALLY LEFT BLANK ] FIRST KEYSTONE CORPORATION ________________________________________ NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 5, 2009 ________________________________________ TO THE SHAREHOLDERS OF FIRST KEYSTONE CORPORATION: Notice is hereby given that the Annual Meeting of Shareholders of First Keystone Corporation will be held at 10:00 a.m., Eastern Daylight Time, on Tuesday, May 5, 2009, at the McBride Memorial Library, Community Room, 500 Market Street, Berwick, Pennsylvania 18603, for the following purposes: 1. To elect 3 Class A Directors to serve for a three-year term and until their successors are properly elected and qualified; 2. To ratify the selection of J. H. Williams & Co., LLP as the independent auditors for the corporation for the fiscal year ending December 31, 2009; and 3. To transact any other business as may properly come before the Annual Meeting and any adjournment or postponement of the meeting. In accordance with the bylaws of the corporation and action of the Board of Directors, the corporation is giving notice of the Annual Meeting only to those shareholders on the corporation's records as of the close of business on March 10, 2009, and only those shareholders may vote at the Annual Meeting and any adjournment or postponement of the Annual Meeting. A copy of the corporation's Annual Report for the fiscal year ended December 31, 2008 may be obtained, at no cost, by contacting Cheryl Wynings, Investor Relations, First Keystone Corporation, 111 West Front Street, Berwick, Pennsylvania 18603, telephone: (570) 752-3671. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 5, 2009: THE 2009 PROXY STATEMENT AND THE 2008 ANNUAL REPORT ON FORM 10K ARE ALSO AVAILABLE AT: WWW.FKYSCORP.COM. Whether or not you expect to attend the Annual Meeting in person, we ask you to complete, sign, date and promptly return your proxy form. By so doing, you will ensure your proper representation at the meeting. The prompt return of your signed proxy will also save the corporation the expense of additional proxy solicitation. The execution and delivery of your proxy does not affect your right to vote in person if you attend the meeting. By Order of the Board of Directors, /s/ J. Gerald Bazewicz J. Gerald Bazewicz, President Berwick, Pennsylvania March 25, 2009 PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS OF FIRST KEYSTONE CORPORATION TO BE HELD ON MAY 5, 2009 Table of Contents _________________ Page General Information 3 Introduction, Date, Time and Place of Annual Meeting 3 Solicitation and Voting of Proxies 3 Revocability of Proxy 4 Voting Securities, Record Date and Quorum 4 Vote Required for Approval of Proposals 4 Governance of the Company 5 Code of Ethics 5 Committees of the Board of Directors 5 Committees of the Bank 6 Board Meetings and Attendance 7 Shareholder Communications 7 Shareholder Proposals and Nominations 7 Proposal No. 1: Election of Directors 8 Information as to Directors and Nominees 8 Share Ownership 10 Principal Owners 10 Beneficial Ownership by Officers, Directors and Nominees 11 Directors' Compensation Table 13 Compensation of Directors 13 Report of the Audit Committee 13 Compensation Discussion and Analysis 15 Summary Compensation Table 22 Principal Officers of the Bank and the Corporation 31 Legal Proceedings 32 Proposal No. 2: Ratification of Independent Auditors 32 Section 16(A) Beneficial Ownership Reporting Compliance 32 Availability of Form 10-K 33 Other Matters 33 PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS OF FIRST KEYSTONE CORPORATION TO BE HELD ON MAY 5, 2009 GENERAL INFORMATION INTRODUCTION, DATE, TIME AND PLACE OF ANNUAL MEETING ____________________________________________________ First Keystone Corporation, a Pennsylvania business corporation and registered bank holding company, furnishes this Proxy Statement in connection with the solicitation, by its Board of Directors, of proxies to be voted at the Annual Meeting of Shareholders and at any adjournment or postponement of the Annual Meeting. The corporation will hold the meeting on Tuesday, May 5, 2009, at 10:00 a.m., Eastern Daylight Time, at the McBride Memorial Library, Community Room, 500 Market Street, Berwick, Pennsylvania 18603. The principal executive office of the corporation is located at First Keystone National Bank, 111 West Front Street, Berwick, Pennsylvania 18603. The bank is the sole, wholly owned subsidiary of the corporation. The telephone number for the corporation is (570) 752-3671. All inquiries should be directed to J. Gerald Bazewicz, President of the corporation and the bank. SOLICITATION AND VOTING OF PROXIES __________________________________ By properly completing and returning your proxy form, a shareholder is appointing the proxy holders to vote his or her shares as the shareholder specifies on the proxy. If a shareholder signs the proxy but does not make any selection, the proxy holders will vote the proxy: * FOR the election of the nominees for Class A Director named below; and * FOR the ratification of the selection of J. H. Williams & Co. as the independent auditors for the corporation for the year ending December 31, 2009. The execution and return of your proxy will not affect your right to attend the Annual Meeting and vote in person. The corporation will pay the cost of preparing, assembling, printing, mailing and soliciting proxies and any additional material that the corporation may furnish shareholders in connection with the Annual Meeting. In addition to the use of the mail, directors, officers and employees of the corporation and the bank may solicit proxies personally, by telephone, telecopier or other electronic means. The corporation will not pay any additional compensation for the solicitation. The corporation will make arrangements with brokerage houses and other custodians, nominees and fiduciaries to forward proxy solicitation material to the beneficial owners and will reimburse them for their reasonable forwarding expenses. Proxy Statement Page 3 REVOCABILITY OF PROXY _____________________ A shareholder who returns a proxy may revoke the proxy at any time before it is voted only: * By executing a later-dated proxy; or * By attending the Annual Meeting and voting in person. VOTING SECURITIES, RECORD DATE AND QUORUM _________________________________________ At the close of business on March 10, 2009, the corporation had 5,440,126 shares of common stock outstanding, par value $2.00 per share. Our common stock is the corporation's only issued and outstanding class of stock. The corporation also had 247,641 shares held in treasury, as issued but not outstanding shares on that date. The corporation's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of common stock and up to 500,000 shares of preferred stock. As of March 10, 2009, no shares of preferred stock were issued or outstanding. Only shareholders of record as of the close of business on March 10, 2009 may vote at the Annual Meeting. Cumulative voting rights do not exist with respect to the election of directors. On all matters to come before the Annual Meeting, each shareholder is entitled to one vote for each share of common stock held on the record date. Pennsylvania law and the bylaws of the corporation require the presence of a quorum for each matter that shareholders will vote on at the Annual Meeting. The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast constitutes a quorum for the transaction of business at the Annual Meeting. The corporation will count votes withheld and abstentions in determining the presence of a quorum for a particular matter. The corporation will not count broker non votes in determining the presence of a quorum for a particular matter. A broker non vote occurs when a broker nominee, holding shares for a beneficial owner, does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item, and has not received instructions from the beneficial owner. Those shareholders present, in person or by proxy, may adjourn the meeting to another time and place if a quorum is lacking. VOTE REQUIRED FOR APPROVAL OF PROPOSALS _______________________________________ Assuming the presence of a quorum, the 3 nominees for director receiving the highest number of votes cast by shareholders will be elected. Votes withheld from a nominee and broker non votes will not be cast for the nominee. Assuming the presence of a quorum, ratification of the selection of independent auditors requires the affirmative vote of a majority of all votes cast by shareholders, in person or by proxy, on the matter. Abstentions and broker non votes are not votes cast and, therefore, do not count either for or against ratification. Abstentions and broker non votes, however, have the practical effect of reducing the number of affirmative votes required to achieve a majority for each matter by reducing the total number of shares voted from which the majority is calculated. Page 4 First Keystone Corporation GOVERNANCE OF THE COMPANY Our Board of Directors believes that the purpose of corporate governance is to ensure that we maximize shareholder value in a manner consistent with legal requirements and the highest standards of integrity. The Board has adopted and adheres to corporate governance practices which the Board and senior management believe promote this purpose and are sound and represent best practices. The corporation's Board of Directors oversees all business, property and affairs of the corporation. The Chairman and the corporation's officers keep the members of the Board informed of the corporation's business through discussions at Board meetings and by providing them with reports and other materials. The directors of the corporation also serve as the directors of the corporation's wholly owned bank subsidiary, First Keystone National Bank, upon election by the corporation. Currently, our Board of Directors has 9 members. Until June 9, 2008, the Board of Directors consisted of 11 members. At this time, Dudley P. Cooley reached the mandatory retirement age of 70. Mr. Cooley's unexpired term was not filled and the Board of Directors consisted of 10 members. In February 2009, the Board of Directors became 9 members with the death of Robert J. Wise. Based on the qualifications for independence established under the Securities and Exchange Commission ("SEC") and NASDAQ standards for independence, John Arndt, Don E. Bower, Joseph B. Conahan, Jr., Jerome F. Fabian, and David R. Saracino meet the standards for independence. Only independent directors serve on our Audit Committee. In determining the directors' independence, the Board of Directors considered loan transactions between the bank and the directors, their family members and businesses with whom they are associated, as well as any contributions made to non profit organizations with whom they are associated. CODE OF ETHICS As required by law and regulation, in 2003 we adopted our Code of Ethics to be applicable to our directors and senior officers. The Code of Ethics is posted on our website at www.firstkeystonecorporation.com, which we filed with the SEC as exhibit 14 on Form 8K on January 11, 2007. COMMITTEES OF THE BOARD OF DIRECTORS The corporation's board of directors has, at present, an audit committee. AUDIT COMMITTEE. Members of the Audit Committee, during 2008, were Dudley P. Cooley, Chairman, Don E. Bower, and Jerome F. Fabian, each of whom the Board of Directors has determined satisfies the independence and audit committee qualification standards. The Audit Committee met 4 times during 2008. The principal duties of the Audit Committee are set forth in its charter which is available on our website at www.firstkeystonecorporation.com under the governance documents menu. The duties include reviewing significant audit and accounting principles, policies and practices, reviewing performance of internal auditing procedures, reviewing reports of examination received from regulatory authorities and recommending annually, to the Board of Directors, the engagement of an independent certified public accountant. Proxy Statement Page 5 The Board of Directors has determined that Dudley P. Cooley is an "audit committee financial expert" and "independent" as defined under applicable SEC and NASDAQ rules in 2008. The Board deemed Mr. Cooley a "financial expert" in 2008 and David R. Saracino a "financial expert" as of March 2009 as each possess the following attributes: * An understanding of financial statements; * Proficiency in assessing the general utilization of such principles in connection with accounting for estimates, accruals and reserves; * Lengthy experience preparing, auditing, analyzing and evaluating financial statements; * Understanding of internal controls and procedures for financial reporting; and * Understanding of audit committee functions. During 2008, the corporation did not have formal nominating or compensation committees. The Board determined that it is appropriate for the corporation not to have a nominating or compensation committee in view of the corporation's relative size, stability of the corporation's Board of Directors, and the historic involvement of the entire Board in the director selection process and in the compensation process. Because there is no formal nominating or compensation committee, the corporation does not have a formal charter for such committees. COMMITTEES OF THE BANK The Bank's board of directors maintains standing committees: trust, asset liability management, marketing, loan administration, human resources, building and executive. The composition of these committees is described below:

Name Trust ALCO Marketing ____ _____ _____ ________ John E. Arndt X X J. Gerald Bazewicz X X* X Don E. Bower X Robert A. Bull X X X Robert E. Bull X X Joseph B. Conahan, Jr. X* X Jerome F. Fabian X* John G. Gerlach X X David R. Saracino X Number of Meetings Held in 2008 12 4 4

Loan Human Name Administration Resources ____ _____________ ________ John E. Arndt X* J. Gerald Bazewicz X X Don E. Bower X* X Robert A. Bull Robert E. Bull X Joseph B. Conahan, Jr. X X Jerome F. Fabian X X John G. Gerlach X David R. Saracino X Number of Meetings Held in 2008 4 1

Name Executive Building ____ _________ ________ John E. Arndt X J. Gerald Bazewicz X X Don E. Bower X Robert A. Bull Robert E. Bull X* X Joseph B. Conahan, Jr. Jerome F. Fabian X John G. Gerlach X* David R. Saracino X X Number of Meetings Held in 2008 1 2 *Denotes Chairman of Respective Committee

TRUST COMMITTEE - This committee ensures that all trust activities of the bank are performed in a manner that is consistent with the legal instrument governing the account, prudent trust administration practices and approved trust policy. Page 6 First Keystone Corporation ASSET/LIABILITY COMMITTEE - This committee reviews asset/liability committee reports and provides support and discretion in managing the bank's net interest income, liquidity and interest rate sensitivity positions. MARKETING COMMITTEE - This committee provides guidance to management in formulating marketing/sales plans and programs to assist in evaluating the performance of the bank relative to these plans. LOAN ADMINISTRATION COMMITTEE - This committee monitors loan review and compliance activities. Also, the committee ensures that loans are made and administered in accordance with the loan policy. HUMAN RESOURCES COMMITTEE - This committee helps ensure that a sound human resources management system is developed and maintained. This committee determines compensation for non executive officers and employees. The entire Board of Directors acts as the Compensation Committee for the corporation and determines compensation for the executive officers. EXECUTIVE COMMITTEE - This committee exercises the authority of the Board of Directors in the management of the business of the bank between the dates of regular Board of Directors meetings. BUILDING COMMITTEE - This committee makes recommendations to the Board relating to the bank's physical assets, including both current and proposed physical assets. BOARD MEETINGS AND ATTENDANCE _____________________________ The members of the Board of Directors of the corporation also serve as members of the Board of Directors of First Keystone National Bank. During 2008, the corporation's Board of Directors held 7 meetings. Each of the directors attended at least 75% of the combined total number of meetings of the corporation's Board of Directors and the committees of which he is a member. Although there is no formal policy, all directors are expected to attend the Annual Meeting of Shareholders. All directors attended the 2008 Annual Meeting of Shareholders. SHAREHOLDER COMMUNICATIONS __________________________ The Board of Directors does not have a formal process for shareholders to send communications to the Board. Due to the infrequency of shareholder communications to the Board of Directors, the Board does not believe that a formal process is necessary. SHAREHOLDER PROPOSALS AND NOMINATIONS _____________________________________ If a shareholder wants us to include a proposal in our proxy statement for presentation at our 2010 Annual Meeting of Shareholders, the proposal must be received by us at our principal executive offices at 111 West Front Street, Berwick, Pennsylvania 18603, no later than November 30, 2009. Any proposal must comply with Securities and Exchange Commission regulations regarding the inclusion of shareholder proposals in company sponsored proxy materials. If a shareholder proposal is submitted to the company after November 30, 2009, it is considered untimely; and, although the proposal may be considered at the annual meeting, the company is not obligated to include it in the 2010 Proxy Statement. The corporation's Board of Directors nominates individuals for the position of director. Neither the corporation nor the bank has a nominating committee. In addition, a shareholder who desires to propose an individual for consideration by the Board of Directors as a nominee for director should submit a proposal in writing to the Secretary of the corporation in accordance with Section 10.1 Proxy Statement Page 7 of the corporation's bylaws. Any shareholder who intends to recommend nomination of any candidate for election to the Board of Directors must notify the Secretary of the corporation in writing not less than 45 days prior to the date of any meeting of shareholders called for the election of directors and must provide the specific information listed in Section 10.1 of the bylaws. You may obtain a copy of the corporation's bylaws by writing to John E. Arndt, Secretary, First Keystone Corporation, 111 West Front Street, Berwick, Pennsylvania 18603. PROPOSAL NO. 1: ELECTION OF CLASS A DIRECTORS The corporation's bylaws provide that its Board of Directors will manage the corporation's business. Sections 10.2 and 10.3 of the Bylaws provide that the number of directors on the Board will not be less than 7 nor more than 25 and that the Board of Directors will be classified into 3 classes, each class to be elected for a term of 3 years. Within the foregoing limits, the Board of Directors may, from time to time, fix the number of directors and their classifications. No person over 70 years old may serve as director with the exception of Mr. Robert E. Bull. Section 11.1 of the bylaws require that a majority of the remaining members of the Board of Directors, even if less than a quorum, will select and appoint directors to fill vacancies on the Board, and each person so appointed will serve as director until the expiration of the term of office of the class of directors to which he or she was appointed. Section 10.3 of the bylaws provide for a classified Board of Directors with staggered three year terms of office. Accordingly, at the 2009 Annual Meeting of Shareholders, 3 Class A Directors will be elected to serve for a three-year term and until their successors are properly elected and qualified. The Board of Directors of the corporation has nominated the current Class A Directors to serve as Class A Directors for the next three-year term of office. The nominees for reelection this year are as follows: * Jerome F. Fabian, director since 1998; * John G. Gerlach, director since 2007; and * David R. Saracino, director since 2006. Each nominee has consented to serve a three year term of office and until his successor is elected and qualified. Unless otherwise instructed, the proxy holders will vote the proxies for the election of these 3 nominees. If any nominee should become unavailable for any reason, proxies will be voted in favor of a substitute nominee named by the Board of Directors of the corporation. A majority of the directors of the corporation, in office, may appoint a new director to fill any vacancy occurring on the Board for any reason, and the new director will serve until the expiration of the term of the class of directors to which he or she was appointed. The corporation's Articles of Incorporation provide that cumulative voting rights will not exist with respect to the election of directors. Accordingly, each share of common stock entitles its owner to cast one vote for each nominee. For example, if a shareholder owns 10 shares of common stock, he or she may cast up to 10 votes for each director to be elected. The Board of Directors recommends that shareholders vote FOR the election of the above named nominees. INFORMATION AS TO DIRECTORS AND NOMINEES ________________________________________ The following selected biographical information about the directors and nominees for director is accurate as of March 10, 2009, and includes each person's business experience for at least the past 5 years. Page 8 First Keystone Corporation CURRENT CLASS A DIRECTORS WHOSE TERM EXPIRES IN 2009 AND NOMINEES FOR CLASS A DIRECTOR WHOSE TERM WILL EXPIRE IN 2012 Jerome F. Fabian Mr. Fabian (age 66), is the President and owner of Tile Distributors of America, Inc., located in Wilkes-Barre, Pennsylvania. He has served as a director of the corporation and the bank since 1998. John G. Gerlach Mr. Gerlach (age 67), is the President of Pocono Community Bank, a division of First Keystone National Bank. He has been a director of the corporation and the bank since 2007. David R. Saracino Mr. Saracino (age 64), is the former Vice President, Cashier, and Chief Financial Officer of First Keystone National Bank. Mr. Saracino has served as a director of the corporation and the bank since 2006. CLASS B DIRECTORS WHOSE TERM EXPIRES IN 2010 John E. Arndt Mr. Arndt (age 47), is an insurance broker and the owner of Arndt Insurance Agency in Berwick, Pennsylvania. He has served as a director of the corporation and the bank since 1995. J. Gerald Bazewicz Mr. Bazewicz (age 60), serves as the President and Chief Executive Officer of the corporation and the bank, a position he has held since 1987. He has served as a director of the corporation and the bank since 1986. Robert E. Bull Mr. Bull (age 86), now retired, practiced as an attorney at the law firm Bull, Bull & Knecht, LLP, of which he remains a partner. He has been the Chairman of the Board of the corporation since 1983 and of the bank since 1981. He has served as a director of the corporation since 1983 and of the bank since 1956. Joseph B. Conahan, Jr. Dr. Conahan (age 65), is an Ophthalmologist and President of Pocono Eye Associates, Inc. Dr. Conahan has been a director of the corporation and the bank since 2007. CLASS C DIRECTORS WHOSE TERM EXPIRES IN 2011 Don E. Bower Mr. Bower (age 60), is the President and owner of Don E. Bower, Inc., an excavation contracting corporation located in Berwick, Pennsylvania. He has been a director of the corporation and the bank since 2001. Robert A. Bull Mr. Bull (age 56), is an attorney at the law firm Bull, Bull, & Knecht, LLP. Mr. Bull has been a director of the corporation and the bank since 2006. Robert E. Bull is the father of Robert A. Bull. Proxy Statement Page 9 SHARE OWNERSHIP PRINCIPAL OWNERS ________________ The following table sets forth, as of March 10, 2009, the name and address of each person who owns of record or who is known by the Board of Directors to be the beneficial owner of more than 5% of the corporation's outstanding common stock, the number of shares beneficially owned by the person and the percentage of the corporation's outstanding common stock so owned.

________________________________________________________________________ Amount and Percent of Nature of Outstanding Beneficial Common Stock Name and Address Ownership Beneficially Owned ________________________________________________________________________ Berbank 459,134 8.49% First Keystone National Bank Trust Department 111 West Front Street Berwick, PA 18603 ____________________ The securities "beneficially owned" by an individual are determined in accordance with the definitions of "beneficial ownership" set forth in the General Rules and Regulations of the Securities and Exchange Commission and may include securities owned by or for the individual's spouse and minor children and any other relative who has the same home, as well as securities to which the individual has or shares voting or investment power or has the right to acquire beneficial ownership within 60 days after March 10, 2009. Beneficial ownership may be disclaimed as to certain of the securities. Nominee registration for the common stock held by the Trust Department of the bank on behalf of various trusts, estates and other accounts for which the bank acts as fiduciary with sole voting and dispositive power over 375,733 shares and as fiduciary with shared voting and dispositive power over 83,401 shares. Total does not include 139,714 shares held by the Trust Department of the bank for which the bank does not have sole or shared voting or dispositive power. The Trust Department intends to cast all shares under its voting power for the election of the nominees for director named below and for the ratification of J. H. Williams & Co., LLP, independent auditors of the corporation.

Page 10 First Keystone Corporation BENEFICIAL OWNERSHIP BY OFFICERS, DIRECTORS AND NOMINEES ________________________________________________________ The following table sets forth, as of March 10, 2009, the amount and percentage of the outstanding common stock beneficially owned by each director, nominee for director, and other named executive officer of the corporation. The table also indicates the total number of shares owned by all directors, nominees for director, and executive officers of the corporation and the bank as a group. A person owns his shares directly as an individual unless otherwise indicated.

Number of Name Shares Owned Percentage ____ _____________ _______ Nominee for Class A Directors (to serve until 2012) And Class A Director ____________________ Jerome F. Fabian 39,042 John G. Gerlach 8,139 David R. Saracino 12,053 Class B Director (to serve until 2010) _____________________ John E. Arndt 8,187 J. Gerald Bazewicz 40,320 Robert E. Bull 204,231 3.76% Joseph B. Conahan, Jr. 50,920 Class C Director (to serve until 2011) _____________________ Don E. Bower 47,358 Robert A. Bull 65,703 1.21% Other Named Executive Officer _____________________________ Matthew P. Prosseda 5,269 Diane C. Rosler 2,668 All Directors and Executive Officers as a Group (13 Persons in Total) 493,138 9.07% ____________________ The securities "beneficially owned" by an individual are determined in accordance with the definitions of "beneficial ownership" set forth in the General Rules and Regulations of the Securities and Exchange Commission and may include securities owned by or for the individual's spouse and minor children and any other relative who has the same home, as well as securities to which the individual has or shares voting or investment power or has the right to acquire beneficial ownership within 60 days after March 10, 2009. Beneficial ownership may be disclaimed as to certain of the securities. Information furnished by the directors and the corporation. Less than 1% unless otherwise indicated. Includes 7,500 shares held individually by Mr. Fabian, 14,417 shares by the Jerome F. Fabian Trust Under Agreement for which Mr. Fabian exercises dispositive power, and 17,125 shares held jointly with his spouse. Proxy Statement Page 11 Includes 500 shares held individually by Mr. Gerlach, 6,889 shares held jointly with his spouse, and 750 shares which may be purchased upon the exercise of stock options. Includes 3,228 shares pledged securities. Includes 7,082 shares held individually by Mr. Arndt, and 1,105 shares held individually by his spouse. Includes 18,757 shares held individually by Mr. Bazewicz, 7,431 shares held in his bank 401(k) plan, 5,894 shares held jointly with his spouse, 833 shares held individually by his spouse, and 7,405 shares which may be purchased upon the exercise of stock options. Includes 116,095 shares held individually by Mr. R.E. Bull, 4,466 shares held by Bull, Bull & Knecht, LLP, a law firm of which Mr. Bull is a partner, and 83,670 shares held by the Sara E. Bull Decedent Estate Trust of which Mr. Bull is the trustee. Includes 41,449 shares held individually by Dr. Conahan and 9,471 shares held jointly with his spouse. Includes 45,944 shares held individually by Mr. Bower, 700 shares held jointly with his spouse, and 714 shares held as custodian for his grandchildren. Includes 25,057 shares held individually by Mr. R.A. Bull, 4,466 shares held by Bull, Bull & Knecht, LLP, a law firm of which Mr. Bull is a partner, 28,946 shares held jointly with his spouse, and 7,234 shares held individually by his spouse. Includes 3,281 shares held individually by Mr. Prosseda, 713 shares held in his bank 401(k) plan, and 1,275 shares which may be purchased upon the exercise of stock options. Includes 682 shares held in her bank 401(k) plan and 1,986 shares which may be purchased upon the exercise of stock options.

Page 12 First Keystone Corporation DIRECTORS' COMPENSATION TABLE

FEES EARNED OR PAID IN CASH STOCK NAME ($) AWARDS ____ _______ ______ John Arndt 26,150.00 --- Don E. Bower 24,200.00 --- Robert A. Bull 26,600.00 --- Robert E. Bull 28,200.00 --- Joseph B. Conahan, Jr. 22,700.00 --- Dudley P. Cooley 12,583.34 --- Jerome F. Fabian 23,000.00 --- David R. Saracino 25,900.00 --- Robert J. Wise 27,950.00 ---

NON-EQUITY OPTION INCENTIVE PLAN NAME AWARDS COMPENSATION ____ ______ ____________ John Arndt --- --- Don E. Bower --- --- Robert A. Bull --- --- Robert E. Bull --- --- Joseph B. Conahan, Jr. --- --- Dudley P. Cooley --- --- Jerome F. Fabian --- --- David R. Saracino --- --- Robert J. Wise --- ---

CHANGE IN PENSION VALUE AND NON-QUALIFIED DEFERRED ALL OTHER COMPENSATION COMPENSATION NAME EARNINGS ($) ____ ________ ____________ John Arndt --- --- Don E. Bower --- --- Robert A. Bull --- --- Robert E. Bull --- --- Joseph B. Conahan, Jr. --- --- Dudley P. Cooley --- --- Jerome F. Fabian --- --- David R. Saracino --- --- Robert J. Wise --- ---

TOTAL ($) _____ John Arndt 26,150.00 Don E. Bower 24,200.00 Robert A. Bull 26,600.00 Robert E. Bull 28,200.00 Joseph B. Conahan, Jr. 22,700.00 Dudley P. Cooley 12,583.34 Jerome F. Fabian 23,000.00 David R. Saracino 25,900.00 Robert J. Wise 27,950.00 Deceased February 20, 2009.

COMPENSATION OF DIRECTORS _________________________ During 2008, each member of the corporation's Board of Directors received $600 for his attendance at the Annual Meeting. Other corporate Board meetings met concurrently with the bank's Board, and directors received no additional compensation. The bank's directors received $600 for each directors' meeting attended. Non-employee directors received a $5,000 retainer and $300 for each committee meeting attended. In addition, Chairman Bull received an annual stipend of $1,000, and Vice Chairman Wise and Secretary Arndt each received an annual stipend of $750. In the aggregate, the Board of Directors received $248,483 for all Board of Directors' meetings and committee meetings attended in 2008, including all fees and stipends paid to all directors in 2008. REPORT OF THE AUDIT COMMITTEE The Audit Committee oversees the corporation's financial reporting process on behalf of the Board of Directors. In that connection, the committee, along with the Board of Directors, has formally adopted an audit committee charter setting forth its responsibilities. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal control. In fulfilling its oversight responsibilities, the committee reviewed the audited financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. Proxy Statement Page 13 The committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the corporation's accounting principles and such other matters as are required to be discussed with the committee under generally accepted auditing standards. In addition, the committee has discussed with the independent auditors the auditors' independence from management and the corporation including the matters in written disclosures required by the Independence Standards Board and considered the compatibility of non audit services with the auditors' independence. The committee discussed the overall scope and plans for their audits with the corporation's internal and independent auditors. The committee meets with the internal and independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the corporation's internal controls and the overall quality of the corporation's financial reporting. The corporation believes that it has established appropriate policies and procedures to comply with requirements of the Sarbanes-Oxley Act of 2002. The committee held 4 meetings during fiscal year 2008 in addition to reviewing the quarterly results with the financial auditors prior to press release. In reliance on the reviews and discussions referred to above, the committee recommended to the Board of Directors (and the Board has approved) that the audited financial statements be included in the Annual Report on Form 10K for the year ended December 31, 2008 for filing with the Securities and Exchange Commission. The committee and the Board of Directors have also approved the selection of the corporation's independent auditors for 2009. With respect to the corporation's outside auditors, the committee, among other things, discussed with J.H. Williams & Co., LLP matters relating to its independence, including the written disclosures made to the committee by the outside auditors and the letter from the outside auditors as required by the Independence Standards Board No. 1 (Independence Discussions with Audit Committees). Aggregate fees billed to the corporation and the bank by J. H. Williams & Co., LLP for services rendered during the years ended December 31, 2008 and 2007 were as follows:

Year Ended December 31, 2008 2007 ____ ____ Audit fees $116,000 $ 84,100 Audit related fees 0 23,145 Tax fees 7,500 6,400 All other fees 0 0 ________ ________ Total $123,500 $113,645 ======== ======== ________________ Audit Fees include fees billed for professional services rendered for the audit of annual financial statement and fees billed for the review of financial statements included in First Keystone Corporation's Forms 10Q or services that are normally provided by J. H. Williams & Co., LLP in connection with statutory and regulatory filings or engagements. Audit Related Fees include fees reasonably related to the audit services provided by J. H. Williams & Co, LLP but not reported under Audit Fees. These services include review of certain financial information related to an acquisition of a financial institution in 2007. Tax Fees include fees billed for professional services rendered by J. H. Williams & Co., LLP for tax compliance. These services include preparation of Federal and State Annual Tax Returns for the Corporation.

Page 14 First Keystone Corporation Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor _______________________________ The Audit Committee pre approves all audit and permissible non audit services provided by the independent auditors. These services may include audit services, audit related services, tax services, and other services. The Audit Committee has adopted a policy for the pre approval of services provided by the independent auditors. Under the policy, pre approval is generally provided for up to one year and any pre approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre approve particular services on a case by case basis. For each proposed service, the independent auditor is required to provide a detailed engagement letter. The committee is comprised of 3 directors, all of whom are considered "independent" as defined by the NASDAQ listing standards. The Board of Directors has determined that no member of the committee has a relationship with the corporation that should interfere with his independence from the corporation or its management. The foregoing report has been furnished by the current members of the committee. MEMBERS OF THE AUDIT COMMITTEE ______________________________ David R. Saracino, Chairman Don E. Bower Jerome F. Fabian COMPENSATION DISCUSSION AND ANALYSIS INTRODUCTION ____________ The Board of Directors serves as the Compensation Committee for the Bank and develops the bank's and the corporation's executive compensation policy, with the guidance of the Human Resources Committee. The Human Resources Committee consists of independent directors and the Chief Executive Officer and helps ensure that a sound human resources management system is developed and maintained. Executive compensation includes base salary, cash bonuses, long term incentives, and health and welfare and pension plans. The basic mission of the corporation's executive compensation policy is to provide executives with a competitive compensation package that attracts and retains qualified executives while placing a portion of total pay at risk. At risk elements of compensation may have no value or may be worth less than the target value if goals are not met. At risk compensation includes all components of core compensation other than base salary, pension plans, and health and welfare benefits. Equity based compensation provides an incentive for the executives which are aligned with the interests of the shareholders. The compensation program is designed to reward the named executive officers based on their level of assigned management responsibilities, individual performance levels, and individual value in the job marketplace. The Chief Executive Officer's individual performance objectives are the same as the strategic and financial performance objectives of the bank as a whole. For other executives, individual performances objectives are set by the Chief Executive Officer and a year end performance appraisal on each executive is prepared and reviewed by the Board of Directors. Proxy Statement Page 15 The executive compensation established by the Board of Directors is based upon its overall subjective assessment of the value of the services provided by each executive officer with consideration performance factors and peer group compensation information. The Board considers information provided by the Chief Executive Officer in determining the appropriate level of compensation for other executives, including the Chief Executive Officer's views on the appropriate levels of compensation for other named executive officers for the ensuing year. No executive officer other than the Chief Executive Officer attends those portions of the Board meetings during which the performance of the other named executive officers is evaluated or their compensation is being determined. For compensation provided to the Chief Executive Officer, the Board considers his performance, the results of management decisions made by him, and the earnings of the organization. The Chief Executive Officer is not present during these discussions. COMPENSATION CONSULTANT _______________________ The firm of L.R. Webber & Associates acts as a compensation consultant for the bank. L.R. Webber was hired by the Board of Directors. The bank requested that the consultant provide compensation survey information and be available to address the bank's questions. The consultant did not play a role in setting compensation. BENCHMARKING ____________ The Board of Directors uses data from the L. R. Webber & Associates compensation survey of the Pennsylvania banking and thrift industry to assist in determining executive pay. The peer group of financial institutions chosen by the Board of Directors for purposes of making a comparative analysis of executive compensation does include some of the same financial institutions incorporated in the peer group established to compare shareholder returns as indicated in the performance graph included in the Form 10K. From the L. R. Webber survey, the financial institutions chosen to benchmark included (14) banks and (2) thrifts with assets between $500 million and $1 billion, or financial institutions with headquarters located in Northeastern Pennsylvania. The financial institutions included: - Citizens Savings Bank (Clarks Summit) - First Columbia Bank (Bloomsburg) - Community Bank & Trust Company (Clarks Summit) - Dime Bank (Honesdale) - Ephrata National Bank (Ephrata) - ESSA Bank & Trust (Stroudsburg) - Fidelity Deposit & Discount Bank (Dunmore) - First Citizens National Bank (Mansfield) - First Liberty Bank & Trust (Jermyn) - First National Community Bank (Dunmore) - Jersey Shore State Bank (Williamsport) - Luzerne Bank (Luzerne) - Mauch Chunk Trust Company (Jim Thorpe) - Merchants National Bank of Bangor (Bangor) - Orrstown Bank (Shippensburg) - Peoples National Bank (Hallstead) Page 16 First Keystone Corporation As a result of the benchmarking, after reviewing base salaries and benefits, no adjustments to compensation were necessary in 2008, other than the normal annual salary increases. The goal of First Keystone Corporation is to compensate at approximately the average range mid point for each job classification with at risk portion of compensation for the executives to reward favorable overall bank earnings performance. The executive positions reviewed were all in the mid point range except for the Chief Financial Officer, which was below the mid point range because of the limited amount of time the present CFO served in this position. BASE SALARY ___________ The Board of Directors determines base salary for the executive officers with guidance from the Human Resources Committee and from compensation surveys. For the base salary paid to executive officers other than the Chief Executive Officer, the Board of Directors considers information provided by the Chief Executive Officer as to each executive officer's level of individual performance, contribution to the organization, scope of responsibilities, salary history and market levels. For the base salary paid to the Chief Executive Officer, the Board of Directors, with the Chief Executive Officer not being present, considers his performance level, the results of management decisions made by him and the earnings of the organization. The Board of Directors considers the return on assets and return on equity when determining whether or not the Chief Executive Officer's base pay should be at the median, below the median, or above the median provided in the compensation surveys. No particular weight is assigned to any of the foregoing individual performance factors. Decisions regarding base salary are made without consideration of other forms of compensation provided. Bonuses and long term incentive awards are intended to provide additional incentive to the executives to achieve a higher level of success. Adjusting the base salary to correspond with the amount of the bonuses and long term incentive awards would defeat the purpose of having at risk compensation. The at risk compensation incorporates a performance target for the corporation as described in cash bonuses below. CASH BONUSES ____________ The purpose of the Management Incentive Compensation Plan (the "Plan") is to provide incentives and awards to top management employees who, through high levels of performance, contribute to the success and profitability of the bank. The bonus plan serves as short term incentives that align executive pay with the annual performance of the corporation and is earned through the achievement of overall annual earnings objectives. It aligns management's interests with those of the shareholders because, generally, the higher the net income for the year, the larger the bonuses paid to management. The Plan is also designed to support organizational objectives and financial goals, as defined by the bank's Strategic and Financial Plans, by making available additional, variable and contingent incentive compensation. The required budget net income figure has generally been 5% to 10% over the previous year's net income for the corporation. The Plan is based upon the achievement of a required budget net income figure of $7.4 million in 2008 before any incentive award "pool" is formed. The calculation of share of profits to be distributed to the Plan participants, and the incentive formulas, are constructed to provide awards that are consistent with achieved profitability levels. The incentive formulas insure a level of incentive award that will enable the bank to attract, retain, and motivate high quality management personnel and support continued growth and profitability. The Plan is also established to augment regular salary and benefits programs already in existence. It is not meant to be a substitute for salary increases, but as a supplement to salary, and, as stated earlier, as an incentive for performance that contributes to outstanding levels of achievement. Proxy Statement Page 17 A committee appointed by the Board recommends performance levels to the Board for final action. Plan participants who are members of that committee shall not be entitled to vote on matters relating to the eligibility for and/or determination of their own incentive compensation awards. The committee, in the exercise of its discretion with respect to the determination of the amount of the incentive plan pool for any given plan year, may take into account the presence or absence of nonrecurring or extraordinary items of income, gain, expense, or loss, and any and all factors that, in its sole discretion, may deem relevant. Extraordinary occurrences may be excluded when calculating performance results to insure that the best interests of the Bank are protected and are not brought into conflict with the best interest of plan participants. Management incentive cash bonuses were approved in 2008 of $55,500, after no management incentive bonuses were paid in 2007 or 2006. Participation in the Plan is limited to the executive management team. This management team includes the following functional job titles: Chief Executive Officer/President, Executive Vice President/Director of Lending, Senior Vice President/Deposit/Operations Division Manager, Senior Vice President/Technology Division Manager, and Vice President/Chief Financial Officer. LONG-TERM INCENTIVES ____________________ Long term company performance is best achieved through an ownership culture that encourages long term performance through the use of stock based awards. The Board of Directors believes that stock option awards under the corporation's 1998 Stock Incentive Plan ("1998 Plan") provide a vehicle for long term incentive compensation through financial rewards dependent on future increases in the market value of the corporation's stock. The purpose of the 1998 Plan is to advance the development, growth and financial condition of the corporation and its subsidiaries by providing incentives through participation in the appreciation of capital stock of the corporation in order to secure, retain and motivate personnel responsible for the operation and management of the corporation and its subsidiaries. The 1998 Plan is designed to attract and retain individuals of outstanding ability as employees of the corporation and its subsidiaries, to encourage employees to acquire a proprietary interest in the corporation, to continue their employment with the corporation and its subsidiaries and to render superior performance during such employment. The 1998 Plan is administered by the board of directors. Persons eligible to receive awards under the 1998 Plan are those key officers and other management employees of the corporation and its subsidiaries as determined by the committee. Thus, executive officers are encouraged to manage the corporation with a view toward maximizing long term shareholder value. Under the 1998 Plan, the corporation makes grants of options to purchase shares of the corporation's common stock to employees, including executives, and the corporation has absolute power to determine what, to whom, when and under what facts and circumstances awards are made. The Board of Directors bases decisions relating to the awards on its overall subjective assessment of the value of the services provided by each executive officer with consideration to performance of the corporation and peer group compensation information. The options generally vest 6 months after issuance and expire ten years from the date of the grant. The options are awarded at the fair market value on the date of grant. The value realized by named executive officers from award grants in prior years is not taken into account in the process of setting compensation for the current year. We also do not maintain any equity or other security ownership guidelines or requirements. 401(K) PLAN ___________ The Board believes that it is essential for employees to save for retirement and as such has provided all employees a vehicle through which to do so. The Bank maintains a 401(k) plan, which has a combined tax qualified savings feature and profit sharing feature. The Plan provides benefits to Page 18 First Keystone Corporation employees who have completed at least one year of service and are at least 21 years of age. The Plan provides that the bank will match employee deferrals to the plan up to 3% of their respective eligible compensation. The bank may make a discretionary contribution annually to the plan. Contributions made by the bank to the plan are allocated to participants in the same portions that each participant's compensation bears to the aggregate compensation of all participants. Each participant in the plan is 100% vested at all times. As employees of the bank, the named executive officers are also eligible to participate in the 401(k) under the same terms and conditions as other employees. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN _____________________________________ The Supplemental Employee Retirement Plan ("SERP") rewards the executive officers for their long-term contributions to the bank. To encourage the executives to continue their employment with the corporation, the Board believed it to be in the best interests of the corporation to enter into certain salary continuation agreements with certain executives. The agreements were also established to reward the executives for past and future services to the corporation. The Board believes the income benefit amounts are reasonable and consistent with the compensation standards of Section 39 of the Federal Deposit Insurance Company Improvement Act of 1991 and the related implementing regulations. The corporation maintains a SERP for which Mr. Bazewicz participates. The SERP provides that if the executive officer continues to serve as an officer of the bank until a stated retirement age of 60 years, the bank will pay 240 guaranteed consecutive monthly payments commencing on the first day of the month following the officer's 60 th birthday and the termination of employment in the amounts indicated in this proxy. Generally, no benefit will be paid if the executive officer voluntarily terminates employment prior to attaining the stated retirement age. The Board has also determined that it is in the best interests of the corporation to finance the SERP benefits by purchasing life insurance on the life of certain executives. The Board selected Bank Compensation Strategies Group, a benefits consulting firm endorsed by the American Banking Association and many other state bank associations to calculate cost projections and choose life insurance appropriate to finance the obligations. HEALTH AND WELFARE PLANS ________________________ Health and welfare plans are not tied to corporation or individual performance. The costs of providing such benefits to all employees are not taken into account when determining specific salaries of the named executives and is seen as a cost of doing business. Group life insurance, group disability, vision benefits and health insurance are available to all employees, as well is an IRS 125 plan. Such plans are standard in the industry and in the geographic area for all industries and necessary to compete for talented employees at all levels of the corporation. Named executives participate in these plans under the same terms and conditions as other employees. Health insurance premiums are partially paid by employees through payroll deductions for the employee share of the health care cost. TRIGGERING EVENTS IN CONTRACTS ______________________________ Mr. Gerlach is the only named executive officer who is a party to an employment agreement with the corporation. His agreement was negotiated as part of the merger agreement with Pocono Community Bank as Mr. Gerlach was also a party to an employment agreement with Pocono Proxy Statement Page 19 Community Bank. The triggering events contained in his employment agreement are typical in the financial services industry including termination without cause, termination by the executive for good reason, termination upon a disability or death and termination subsequent to a change of control. Under the Supplemental Executive Retirement Plan to which both Mr. Bazewicz and Mr. Prosseda are parties, the triggering events are change of control, disability, involuntary termination and death. The Compensation Committee believes that the triggering events in these agreements are appropriate in that they encourage executives to act in the best interests of the shareholders in evaluating any change of control opportunities and it keeps the executives focused on running the corporation in the face of real or rumored corporate transactions. The Compensation Committee also believes that it is appropriate to provide the executives a benefit under the Supplemental Executive Retirement Plan in the event the executive becomes disabled and a benefit to his beneficiaries in the event of this death as consideration for the executive's past employment with the bank. Additionally, as the Supplemental Executive Retirement Plan is a benefit upon which the executive will rely upon for retirement income, the bank also believes that it is important to provide the executive with a benefit under the Supplemental Executive Retirement Plan if the executive is terminated without cause before retirement age. ACCOUNTING AND TAX TREATMENTS _____________________________ Sections 162(m) of the Internal Revenue Code generally limits the tax deductibility of compensation paid in one year to highly compensated employees to $1 million. Performance based compensation is not subject to the limits on deductibility of Section 162(m) provided such compensation meets certain requirements. The Compensation Committee strives to provide the named executive officers with compensation which will preserve the tax deductibility of compensation paid. Given the current level of compensation, the Compensation Committee does not feel that it is necessary to have a formal policy with regard to Section 162(m). MATERIAL DIFFERENCES IN NAMED EXECUTIVE OFFICERS' COMPENSATION ______________________________________________________________ With the exception of Mr. Gerlach, the Named Executive Officers are compensated based upon their respective position and longevity with the bank. Mr. Gerlach's compensation was determined after negotiations between Mr. Gerlach and the corporation during merger negotiations. Mr. Gerlach's compensation also takes into consideration his previous role as president of Pocono Community Bank, the one year term of the employment agreement, followed by a one year consulting agreement and the three year noncompetition provision contained in the employment agreement. Mr. Gerlach is subject to the three year noncompetion and nonsolicitation provision regardless of the reason of his termination of employment. CONCLUSION __________ The Compensation Committee believes the amount and types of compensation provided to the Executives are competitive and appropriate for First Keystone Corporation to attain its short and long term objectives and goals. The compensation programs are designed to provide an incentive to the Executive on both a short term and long term basis. The programs have been tailored by First Keystone Corporation so that the various elements of compensation align the interests of our shareholders and those of the Executives to maximize shareholder value. Page 20 First Keystone Corporation COMPENSATION COMMITTEE REPORT _____________________________ The Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with management, and based on the review and discussions, the Board of Directors concluded that the Compensation Discussion and Analysis be included in the corporation's proxy statement. BOARD OF DIRECTORS Robert E. Bull, Chairman J. Gerald Bazewicz, President John E. Arndt, Secretary Don E. Bower Robert A. Bull Dr. Joseph B. Conahan, Jr. Jerome F. Fabian John G. Gerlach David R. Saracino COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ___________________________________________________________ The Board of Directors, which includes J. Gerald Bazewicz, Chief Executive Officer, functions as the Compensation Committee. For compensation paid to executive officers other than the Chief Executive Officer, the Board of Directors considers information provided by the Chief Executive Officer. For compensation paid to the Chief Executive Officer, the Board of Directors, with Mr. Bazewicz not being present, determines his compensation, as outlined above under "Base Salary". EXECUTIVE COMPENSATION ______________________ The table below shows information concerning the annual and long term compensation for services rendered in all capacities to the corporation and the bank for the fiscal year ended December 31, 2008 of those persons who were: * all individuals who served as the Principal Executive Officer and Principal Financial Officer during 2008, and * the other 3 most highly compensated executive officers of the corporation and the bank at December 31, 2008 whose total compensation exceeded $100,000. Proxy Statement Page 21 SUMMARY COMPENSATION TABLE

NAME AND PRINCIPAL SALARY POSITION YEAR ($) ________ ____ ______ J. Gerald Bazewicz 2008 203,000 Principal Executive Officer 2007 193,000 2006 186,000 Diane C. Rosler 2008 69,558 Chief Financial Officer 2007 57,681 2006 47,115 John G. Gerlach 2008 275,913 President, Pocono Division 2007 42,052 2006 --- Matthew P. Prosseda 2008 151,000 Executive Vice President 2007 145,000 2006 140,000

NAME AND STOCK PRINCIPAL BONUS AWARDS POSITION ($) ($) ________ _____ ______ J. Gerald Bazewicz 24,975 --- Principal Executive Officer --- --- --- --- Diane C. Rosler 5,550 --- Chief Financial Officer --- --- --- --- John G. Gerlach --- --- President, Pocono Division --- --- --- --- Matthew P. Prosseda 13,875 --- Executive Vice President --- --- --- ---

CHANGE IN PENSION VALUE AND NONQUALIFIED DEFERRED NAME AND OPTION COMPENSATION PRINCIPAL AWARDS EARNINGS POSITION ($) ($) ________ ______ ________ J. Gerald Bazewicz 2,884 68,079 Principal Executive Officer 96 77,689 --- 73,541 Diane C. Rosler --- --- Chief Financial Officer --- --- --- --- John G. Gerlach 2,163 --- President, Pocono Division 72 --- --- --- Matthew P. Prosseda 2,163 21,921 Executive Vice President 72 13,902 --- ---

NAME AND ALL OTHER PRINCIPAL COMPENSATION TOTAL POSITION ($) ($) ________ ____ ______ J. Gerald Bazewicz 35,900 334,838 Principal Executive Officer 36,582 307,367 34,065 293,606 Diane C. Rosler 6,956 82,064 Chief Financial Officer 5,910 63,591 4,829 51,944 John G. Gerlach 38,600 316,676 President, Pocono Division 540,280 582,404 --- --- Matthew P. Prosseda 15,100 204,059 Executive Vice President 14,862 173,836 14,350 154,350 ____________________ Bonus earned in 2008 and paid in 2009. Option awards represent the compensation expense and financial reporting value of 2007 grants issued December 27, 2007 and recognized in 2008 for the named executive officers. There can be no assurance that these values will ever be realized by the executive in the future, or that the options will ever be exercised. No option awards were granted in 2008. Amounts shown for Mr. Bazewicz in 2008 include $15,600 in director fees, $6,090 401(k) matching contribution and $14,210 401(k) profit sharing award, in 2007 $16,800 in director fees, $5,790 401(k) matching contribution and $13,992 401(k) profit sharing award, and in 2006 $15,000 in director fees, $5,580 401(k) matching contribution and $13,485 401(k) profit sharing award. Amounts shown for Ms. Rosler in 2008 include $2,087 401(k) matching contribution and $4,869 401(k) profit sharing award, in 2007 $1,730 401(k) matching contribution and $4,180 401(k) profit sharing award, and in 2006 1,413 401(k) matching contribution and $3,416 profit sharing award. Amounts shown for Mr. Gerlach in 2008 include $15,600 in director fees, $6,900 in 401(k) matching contribution and $16,100 401(k) profit sharing award, in 2007 $2,400 in director fees, $3,049 in 401(k) matching contribution, $1,221 401(k) profit sharing award, and $533,610 for the buyout of his Pocono warrants as provided in the merger agreement. Amounts shown for Mr. Prosseda in 2008 include $4,530 401(k) matching contribution and $10,570 401(k) profit sharing award, in 2007 $4,350 401(k) matching contribution and $10,512 401(k) profit sharing award, and in 2006 $4,200 401(k) matching contribution and $10,150 401(k) profit sharing award.

401(K) PLAN ___________ The bank maintains a 401(k) Plan which has a combined tax qualified savings feature and profit sharing feature. The plan provides benefits to employees who have completed at least one year Page 22 First Keystone Corporation of service and are at least 21 years of age. The plan agreement provides that the bank will match employee deferrals to the plan up to 3% of their respective eligible compensations. Additionally, the bank may make a discretionary profit sharing contribution annually to the plan. Contributions made by the bank to the plan are allocated to participants in the same portions that each participant's compensation bears to the aggregate compensation of all participants. Each participant in the plan is 100% vested at all times. Benefits are payable under the plan upon termination of employment, disability, death, or retirement. Of the $494,026 total expenses during 2008, $58,400 was credited among the individual accounts of the 3 most highly compensated executive officers of the bank. Of the $58,400, Mr. Bazewicz was credited with $20,300, Mr. Prosseda with $15,100, and Mr. Gerlach with $23,000. Mr. Bazewicz has been a member of the plan for 23 years, Mr. Prosseda for 3 years, and Mr. Gerlach for 1 year. STOCK OPTION GRANTS IN FISCAL YEAR 2008 _______________________________________ The corporation did not grant stock options to executive officers and other employees during fiscal year ended December 31, 2008. AGGREGATED OPTION EXERCISES IN 2008 YEAR-END OPTION VALUES __________________________________________________________ There were no exercises of stock options by the named executive officer under the 1998 Stock Incentive Plan. OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2008

OPTION AWARDS _______________________ NUMBER OF SECURITIES UNDERLYING UNRESTRICTED OPTIONS (#) NAME EXERCISABLE ____ ___________ J. Gerald Bazewicz 2,205 Principal Executive Officer 3,150 1,050 1,000 Diane C. Rosler 412 Chief Financial Officer 787 787 John G. Gerlach 750 President, Pocono Division Matthew P. Prosseda 525 Executive Vice President 750

OPTION AWARDS _______________________ NUMBER OF SECURITIES UNDERLYING UNRESTRICTED OPTIONS (#) NAME UNEXERCISABLE ____ _____________ J. Gerald Bazewicz --- Principal Executive Officer --- --- --- Diane C. Rosler --- Chief Financial Officer --- --- John G. Gerlach --- President, Pocono Division Matthew P. Prosseda --- Executive Vice President ---

OPTION AWARDS _______________________ EQUITY INCENTIVE PLAN AWARDS: NUMBER OF SECURITIES UNDERLYING UNRESTRICTED NAME UNEARNED OPTIONS (#) ____ _____________ J. Gerald Bazewicz --- Principal Executive Officer Diane C. Rosler --- Chief Financial Officer John G. Gerlach --- President, Pocono Division Matthew P. Prosseda --- Executive Vice President

OPTION AWARDS _______________________ OPTION EXERCISE NAME PRICE ($) ____ _________ J. Gerald Bazewicz 15.88 Principal Executive Officer 21.11 20.95 16.75 Diane C. Rosler Chief Financial Officer 10.28 15.08 21.11 John G. Gerlach 16.75 President, Pocono Division Matthew P. Prosseda 20.95 Executive Vice President 16.75

OPTION AWARDS _______________________ NAME OPTION EXPIRATION DATE ____ ______________________ J. Gerald Bazewicz 09/28/09 Principal Executive Officer 09/23/13 09/27/15 12/27/17 Diane C. Rosler 09/26/10 Chief Financial Officer 09/24/12 09/23/13 John G. Gerlach 12/27/17 President, Pocono Division Matthew P. Prosseda 09/27/15 Executive Vice President 12/27/17

Proxy Statement Page 23 OPTIONS EXERCISED DURING 2008

OPTION AWARDS ____________________________ NUMBER OF SHARES VALUE ACQUIRED REALIZED NAME ON EXERCISE ON EXERCISE (#) ($) ____ ___________ ____________ J. Gerald Bazewicz --- --- Principal Executive Officer Diane C. Rosler --- --- Chief Financial Officer John G. Gerlach --- --- President Matthew P. Prosseda --- --- Executive Vice President

EQUITY COMPENSATION PLAN INFORMATION ____________________________________ The following table provides information about our shares of common stock that may be issued under our existing equity compensation plans as of December 31, 2008.

Number of Securities to Be Issued Upon Exercise of Outstanding Options (A) (#) ______________ Equity Compensation Plans Approved by Stockholders 41,695

Number of Securities Remaining Available For Future Issuance Weighted Under Equity Average Compensation Exercise Plans Excluding Price Of Securities Outstanding Reflected In Options Column (A) (B) ($) (C) (#) ______ ___________ Equity Compensation Plans Approved by Stockholders 16.86 0 ___________________ Includes shares issued under the corporation's 1998 Stock Incentive Plan.

The shares authorized and awarded under this plan have been adjusted to reflect a 5% stock dividend paid by the corporation on December 5, 2006. The corporation has no plans, contracts or arrangements under which the corporation's common stock may be issued to employees or non employees that have not been approved by shareholders. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN _____________________________________ The corporation maintains a Supplemental Employee Retirement Plan ("SERP") covering 2 of the bank's executive officers, J. Gerald Bazewicz and Matthew P. Prosseda. The SERP, which is a salary continuation agreement, provides that if the executive officer continues to serve as an officer of Page 24 First Keystone Corporation the bank until a stated retirement age of 60 years for Bazewicz and age 62 for Prosseda, the bank will pay 240 guaranteed consecutive monthly payments commencing on the first day of the month following the officer's 60th or 62nd birthday and the termination of employment in the amounts indicated below. The established retirement benefit under the SERP for Mr. Bazewicz and Mr. Prosseda will be $3,750 per month and $4,167 per month, respectively, and is not subject to change. If the executive officer attains their stated retirement age, but dies before receiving all of the guaranteed monthly payments, then the bank will make the remaining payments to the officer's beneficiary. In the event the officer dies while serving as an officer, prior to their stated retirement age, the bank will remit the guaranteed monthly payment to the officer's beneficiary commencing the month following the executive's death. In the event of a change of control and the termination of the officer's employment, the guaranteed monthly payments will commence the month following the executive's termination of service. Generally, no benefit will be paid if the executive officer voluntarily terminates employment prior to attaining the stated retirement age or is terminated for cause. The SERP allows the executive officers to achieve a retirement income percentage that is more consistent with their experience and years of service to the bank. The plan objective is to provide the executive officers with a final wage replacement ratio of approximately 75% of projected final salary including projected benefits from the bank 401(k), social security, and salary continuation provided through the agreement. PENSION BENEFITS

NUMBER OF YEARS PLAN CREDITED NAME NAME SERVICE (#) ____ ____ ___________ J. Gerald Bazewicz SERP 12 Chief Executive Officer Matthew P. Prosseda SERP 2 Executive Vice President

PERCENT PAYMENTS VALUE OF DURING ACCUMULATED LAST FISCAL NAME BENEFIT ($) YEAR ($) ____ ___________ ________ J. Gerald Bazewicz 547,646 --- Chief Executive Officer Matthew P. Prosseda 35,823 --- Executive Vice President

EMPLOYMENT AGREEMENT ____________________ In conjunction with the merger of Pocono Community Bank with First Keystone Corporation, Mr. Gerlach was provided an employment agreement for a one-year period followed by a consulting agreement for a one-year period commencing November 1, 2008. The annual base salary under the consulting agreement is $150,000. POST TERMINATION BENEFITS _________________________ JOHN G. GERLACH The following tables and narratives set forth the potential post termination benefits payable to Mr. Gerlach under his Employment Agreement and Consulting Agreement in a lump sum or over a period of time, upon certain termination events assuming that the Executive's employment was terminated as of December 31, 2008. No benefits are shown for the 1998 Stock Incentive Plan since the options granted to Mr. Gerlach were not in the money and the exercise price was higher than the year end market value. Proxy Statement Page 25 TERMINATION FOR CAUSE AND VOLUNTARY TERMINATION. If Mr. Gerlach's employment is terminated for "Cause" as defined in the Employment Agreement or voluntarily terminates his employment, First Keystone Corporation shall not thereafter be obligated to make any further payments. TERMINATION WITHOUT CAUSE OR FOR GOOD REASON- BEFORE A CHANGE IN CONTROL. If Mr. Gerlach terminates his employment for "Good Reason" as defined in the Employment Agreement, or his employment is terminated by First Keystone Corporation "Without Cause," he would be entitled to receive the payment listed below. The Employment Agreement does not provide for other post termination benefits such as medical, dental and vision benefits. Assuming that Mr. Gerlach's employment was terminated Without Cause or for Good Reason as of December 31, 2008, and assuming that First Keystone Corporation did not award a bonus, he would receive the following post termination benefits:

Termination Without Cause ($) ___________ Consulting Agreement 125,000

DEATH OR DISABILITY. In the event of a termination of employment as a result of Mr. Gerlach's death or disability, the Executive's dependents, beneficiaries or estate, as the case may be, will receive benefits as they may be entitled under the terms of First Keystone Corporation's benefit programs, which includes Life Insurance proceeds of twice base salary under the Death Benefit Agreement. Mr. Gerlach's estate will receive the following payments under the employment agreement.

Death Disability ($) ($) _____ __________ Consulting Agreement 125,000 125,000 Life Insurance Proceeds 300,000 ---

TERMINATION UPON OR AFTER A CHANGE IN CONTROL. If a "Change in Control" as defined in the Employment Agreement and ending 180 days after such Change in Control, the Executive is terminated by First Keystone Corporation he would be entitled to the benefits listed below. Assuming that, as of December 31, 2008 the Executive was terminated upon or after a Change in Control, Mr. Gerlach would have received the following post termination benefits:

Change of Control ($) ___________ Consulting Agreement 125,000

Page 26 First Keystone Corporation J. GERALD BAZEWICZ The following tables and narratives set forth the potential post termination benefits payable to Mr. Bazewicz under the Supplemental Employee Retirement Plan in a lump sum or over a period time, upon certain termination events assuming that the Executive's employment was terminated as of December 31, 2008. No benefits are shown for the 1998 Stock Incentive Plan since the options granted to Mr. Bazewicz were not in the money and the exercise price was higher than the year end market value. TERMINATED FOR CAUSE. If Mr. Bazewicz's employment is terminated for "Cause" as defined in the Supplemental Employee Retirement Plan, First Keystone Corporation shall not thereafter be obligated to make any further payments.

Termination for Cause ($) ___________ Supplemental Employee Retirement Plan 0

TERMINATION WITHOUT CAUSE/VOLUNTARY TERMINATION OR FOR GOOD REASON- BEFORE A CHANGE OF CONTROL. If Mr. Bazewicz's employment is terminated "Without Cause" or "Good Reason," he would be entitled to receive the following payments.

Voluntary Termination/ Termination Without Cause/ Good Reason($) ___________ Supplemental Employee Retirement Plan 547,646

Executive shall be entitled to payment since he has reached the normal retirement age of "60" as outlined in the SERP. Benefit would be paid in guaranteed monthly payments of $3,750 per month for 240 months commencing the month following the executive's termination of service. DEATH OR DISABILITY. In the event of a termination of employment as a result of Mr. Bazewicz's death or disability, his dependents, beneficiaries or estate, as the case may be, will receive benefits as they may be entitled under the terms of First Keystone Corporation's benefit programs, which includes Life Insurance proceeds of twice base salary under the Death Benefit Agreement and as follows.

Death Disability ($) ($) _____ __________ Supplemental Employee Retirement Plan 547,646 547,646 Life Insurance Proceeds 406,000 ---

Proxy Statement Page 27 The SERP benefit under death would be paid to the beneficiary in monthly payments of $3,750 for 240 months commencing following the executive's death. The SERP benefit under disability shall be paid in a lump sum within 60 days after the executive's termination of employment. TERMINATION UPON OR AFTER A CHANGE IN CONTROL. If a "Change of Control" as defined in the Supplemental Executive Retirement Agreement occurs, Mr. Bazewicz shall be entitled to the following payments.

Change of Control ($) ___________ Supplemental Employee Retirement Plan 547,646

The SERP benefit under a change of control would be paid in monthly payments of $3,750 for 240 months commencing with the month following the executive's termination of service. MATTHEW P. PROSSEDA The following tables and narratives set forth the potential post termination benefits payable to Mr. Prosseda under the Supplemental Employee Retirement Plan in a lump sum or over a period of time upon certain termination events assuming that the executive's employment was terminated as of December 31, 2008. No benefits are shown for the 1998 Stock Incentive Plan since the options granted to Mr. Prosseda were not in the money and the exercise price was higher than the year end market value. TERMINATION FOR CAUSE AND VOLUNTARY TERMINATION. If Mr. Prosseda's employment is terminated for "Cause" as defined in the Supplemental Employee Retirement Plan or he voluntarily terminates his employment, First Keystone Corporation shall not thereafter be obligated to make any further payments. TERMINATION WITHOUT CAUSE OR FOR GOOD REASON- BEFORE A CHANGE OF CONTROL. If Mr. Prosseda's employment is terminated "Without Cause" or "Good Reason," he would be entitled to receive the following payments.

Termination Without Cause ($) ___________ Supplemental Employee Retirement Plan 35,823

SERP benefit would be paid in 12 equal payments of $627 for 240 months commencing the month following the executive's termination of service. DEATH OR DISABILITY. In the event of a termination of employment as a result of Mr. Prosseda's death or disability, his dependents, beneficiaries or estate, as the case may be, will receive benefits as they may be entitled under the terms of First Keystone Corporation's benefit programs, which includes Life Insurance proceeds of twice base salary under the Death Benefit Agreement and as follows. Page 28 First Keystone Corporation

Death Disability ($) ($) _____ __________ Supplemental Employee 584,494 35,823 Retirement Plan Life Insurance Proceeds 302,000 ---

SERP benefit under death would be paid to the beneficiary in monthly payments of $4,167 for 240 months commencing the month following the executive's death. The SERP benefit under disability shall be paid in a lump sum 60 days after the executive's termination of employment. TERMINATION UPON OR AFTER A CHANGE IN CONTROL. If a "Change of Control" as defined in the Supplemental Executive Retirement Agreement occurs, Mr. Prosseda shall be entitled to the following payments.

Change of Control ($) ___________ Supplemental Employee Retirement Plan 584,494

The SERP benefit under a change of control would be paid in monthly payments of $4,167 for 240 months commencing the month following the executive's termination of service. DIANE C. ROSLER The following tables and narratives set forth the potential post termination benefits payable to Ms. Rosler under the 1998 Stock Incentive Plan. TERMINATION FOR CAUSE AND VOLUNTARY TERMINATION. If Ms. Rosler's employment is terminated for "Cause" or she voluntarily terminates her employment, First Keystone Corporation shall be obligated to make the following payments.

Termination Voluntary for Cause Termination ($) ($) _____ __________ 1998 Stock Incentive Plan 1,739 1,739

TERMINATION WITHOUT CAUSE OR FOR GOOD REASON- BEFORE A CHANGE OF CONTROL. If Ms. Rosler's employment is terminated "Without Cause" or "Good Reason," she would be entitled to receive the following payments. Proxy Statement Page 29

Termination Without Cause ($) ___________ 1998 Stock Incentive Plan 1,739

DEATH OR DISABILITY. In the event of a termination of employment as a result of Ms. Rosler's death or disability, her dependents, beneficiaries or estate, as the case may be, will receive benefits as they may be entitled under the terms of First Keystone Corporation's benefit programs, which includes Life Insurance proceeds of twice base salary under the Death Benefit Agreement and as follows.

Death Disability ($) ($) _____ __________ 1998 Stock Incentive Plan 1,739 1,739 Life Insurance Proceeds 139,116 ---

TERMINATION UPON OR AFTER A CHANGE IN CONTROL. If a "Change of Control" occurs, Ms. Rosler shall be entitled to the following payments.

Change of Control ($) ___________ 1998 Stock Incentive Plan 1,739

RELATED PERSON TRANSACTIONS ___________________________ In deciding whether to approve a related person transaction the following factors may be considered: * information about the goods or services proposed to be or being provided by or to the related party or the nature of the transactions; * the nature of the transactions and the costs to be incurred by the Corporation or payments to the Corporation; * an analysis of the costs and benefits associated with the transaction and a comparison of comparable or alternative goods or services that are available to the Corporation from unrelated partes; and * the business advantage the Corporation would gain by engaging in the transaction. To receive approval, the related person transaction must be on terms that are fair and reasonable to the Corporation, and that are as favorable to the Corporation as would be available from non related entities in comparable transactions. Page 30 First Keystone Corporation Other than described below, there have been no material transactions between the corporation or the bank, nor any material transactions proposed, with any director or executive officer of the corporation or the bank, or any associate of these persons. The law firm Bull, Bull & Knecht, LLP, of which Directors Robert E. Bull and Robert A. Bull, are partners, provided routine legal services to the bank according to the firm's normal fee schedule and billing rates, and the bank intends to continue to engage the firm's services in the future. The bank paid total fees of $71,229.51 to the law firm during 2008. In addition, the corporation and the bank have engaged in and intend to continue to engage in banking and financial transactions in the ordinary course of business with directors and officers of the corporation and the bank and their associates on comparable terms and with similar interest rates as those prevailing from time to time for other customers of the corporation and the bank. Total loans outstanding and commitments from the corporation and the bank at December 31, 2008, to the corporation's and the bank's executive officers and directors as a group and members of their immediate families and companies in which they had an ownership interest of 10% or more was $5,530,783, or approximately 8.0% the total equity capital. Loans to such persons were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features. All loans are current and being paid as agreed. The largest aggregate amount of indebtedness outstanding at any time during fiscal year 2008 to officers and directors of the corporation and the bank, and their affiliates as a group was $5,721,237. The aggregate amount of outstanding indebtedness as of the latest practicable date, March 1, 2009, to the above described group was $5,366,191.

Age as of March 6, Office and Position Name 2009 with the Bank ____ _______ ___________________ Robert E. Bull 86 Chairman of the Board J. Gerald Bazewicz 60 President and CEO John E. Arndt 47 Secretary Matthew P. Prosseda 47 Executive Vice President and Assistant Secretary Diane C. Rosler 44 Chief Financial Officer

Age as of March 6, Office and Position Name 2009 with the Corporation ____ ____ ___________________ Robert E. Bull 86 Chairman of the Board J. Gerald Bazewicz 60 President and CEO John E. Arndt 47 Secretary Matthew P. Prosseda 47 Treasurer and Assistant Secretary Diane C. Rosler 44 Chief Financial Officer ____________________ Mr. Prosseda is the Director of Lending. Prior to his employment with the Bank in March 2005, Mr. Prosseda served as Executive Vice President and Director of Lending at Citizens & Northern Bank.

Proxy Statement Page 31 LEGAL PROCEEDINGS In the opinion of the management of First Keystone Corporation and its banking subsidiary, there are no proceedings pending to which the corporation or its banking subsidiary is a party to, or which their property is subject, which, if determined adversely to the corporation or the bank, would have a material effect on their undivided profits or financial condition. There are no proceedings pending other than routine litigation incident to the business of the corporation and its banking subsidiary. In addition, to the Board's knowledge, no government authorities have initiated, threatened to initiate, or contemplated any material proceedings against First Keystone Corporation or its banking subsidiary. PROPOSAL NO. 2: RATIFICATION OF INDEPENDENT AUDITORS The Board of Directors has appointed J. H. Williams & Co., LLP, Certified Public Accountants, located at 270 Pierce Street, Kingston, Pennsylvania 18704, as the corporation's independent auditors for its 2009 fiscal year. The Board proposes that shareholders ratify this selection. J. H. Williams & Co., LLP, has advised the corporation that none of its members has any financial interest in the corporation. Ratification of J. H. Williams & Co., LLP, will require the affirmative vote of a majority of the votes cast in person or by proxy at the Annual Meeting by shareholders entitled to vote. J. H. Williams & Co., LLP served as the corporation's independent auditors for the 2008 fiscal year, assisted the corporation and the bank with preparation of their federal and state tax returns, and provided assistance in connection with regulatory matters, charging the bank for services at its customary hourly billing rates. The corporation's and the bank's Board of Directors approved these non-audit services after due consideration of the accountants' objectivity and after finding them to be wholly independent. Representatives of J. H. Williams & Co., LLP, will attend the Annual Meeting of Shareholders, will have the opportunity to make a statement and are expected to be available to respond to any questions. In the event that the shareholders do not ratify the selection of J. H. Williams & Co, LLP, as the corporation's independent auditors for the 2009 fiscal year, another accounting firm may be chosen to provide independent audit services for the 2009 fiscal year. The Board of Directors recommends that the shareholders vote FOR the ratification of the selection of J. H. Williams & Co., LLP, as the independent auditors for the corporation for the year ending December 31, 2009. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors, executive officers and shareholders who own more than 10% of the Corporation's outstanding equity stock to file initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Corporation with the Securities and Exchange Commission. Based solely on its review of copies of Section 16(a) forms received by it, or written representations from reporting persons that no Forms 5 were required for those persons, the corporation believes that during the period January 1, 2008 through December 31, 2008, its officers, directors and reporting shareholders were in compliance with all filing requirements applicable to them. Page 32 First Keystone Corporation AVAILABILITY OF FORM 10-K The Company will file with the SEC an Annual Report on Form 10K for 2008. The Company will provide a copy of that report on written request without charge to any person. Please address your request to Cheryl Wynings, Investor Relations, First Keystone Corporation, 111 West Front Street, Berwick, Pennsylvania 18603, telephone: (570) 752-3671. OTHER MATTERS The Board of Directors does not know of any matters to be presented for consideration other than the matters described in the accompanying Notice of Annual Meeting of Shareholders, but if any matters are properly presented, the persons named in the accompanying proxy intend to vote on the matters as they determine to be in the best interest of the corporation. Proxy Statement Page 33 [ THIS PAGE INTENTIONALLY LEFT BLANK ] REVOCABLE PROXY FIRST KEYSTONE CORPORATION ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 5, 2009 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints William Selden, Jr. and Francis J. Radice, and each or any of them, as proxies, with full power of substitution to represent and vote, all of the shares of Common Stock of First Keystone Corporation held of record by the undersigned on March 10, 2009, at the Annual Meeting of the Shareholders to be held at McBride Memorial Library, Community Room, 500 Market Street, Berwick, Pennsylvania, on Tuesday, May 5, 2009, at 10:00 a.m., Eastern Daylight time, and at any adjournment or postponement thereof. Please be sure to sign and date this Proxy in the box below ________________________________ ________________________________ Date: __________________________ PROPOSAL 1: Election of Class A Directors to serve until the Annual Meeting of Shareholders in 2012 (except as marked to the contrary below): [ ] For [ ] Withhold [ ] For All Except Jerome F. Fabian John G. Gerlach David R. Saracino INSTRUCTION: To withhold authority to vote for any individual nominee, mark "For All Except" and write that nominee's name in the space provided below. _________________________________________________________ PROPOSAL 2: To Ratify the selection of J. H. Williams & Co., LLP as the Independent Auditors for the Corporation for the year ending December 31, 2009. [ ] For [ ] Against [ ] Abstain THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS. THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL NOMINEES LISTED ABOVE AND "FOR" PROPOSAL 2. This proxy also confers authority as to other business as may properly come before the meeting and any adjournment or postponement thereof. The Board of Directors at present knows of no other business to be brought before this meeting. However, if any other business is properly brought before the meeting, the shares represented by this proxy in absence of instructions to the contrary will be voted in accordance with the recommendations of the management of the Corporation. It is important that your shares be represented at the meeting. Please sign, date and return this proxy as promptly as possible, whether or not you plan to attend this meeting. ___________________________________________________________ Detach above card, sign, date and mail in postage paid envelope provided. FIRST KEYSTONE CORPORATION 111 WEST FRONT STREET BERWICK, PENNSYLVANIA 18603 The undersigned acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy Statement dated March 25, 2009, and hereby revoke(s) all other proxies heretofore given by the undersigned in connection with this meeting. This proxy must be dated, signed by the shareholder(s) and returned promptly in the enclosed envelope. When shares are held by joint tenants, all should sign. When singing as attorney, executor, administrator, trustee or guardian, please give full title as such. If more than one trustee, all should sign. If a corporation, please sign in full corporate name by president or authorized officer. If a partnership, please sign in partnership name by authorized person. IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED. __________________________ PROXY MATERIALS ARE AVAILABLE ON LINE AT __________________________ HTTP://WWW.FKYSCORP.COM __________________________