<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                               DECEMBER 31, 1997


                                   CONTENTS

<TABLE> 
<CAPTION> 
                                                                                              Page
<S>                                                                                       <C> 
Stock, Dividend and Broker Information .................................................        2   
Letter to Shareholders .................................................................        3
Corporation Officers and Directors .....................................................        4
Bank Officers & Advisory Board Members .................................................        5
Business ...............................................................................   6 - 14
Financial Highlights ...................................................................       15
Management's Discussion and Analysis of Financial Condition and Results of Operations ..  16 - 29
Report of Independent Auditors .........................................................       30
Financial Statements:
     Consolidated Balance Sheets .......................................................       31
     Consolidated Statements of Income .................................................       32
     Consolidated Statements of Stockholders' Equity ...................................       33
     Consolidated Statements of Cash Flows .............................................       34
     Notes to Consolidated Financial Statements ........................................  35 - 47
</TABLE> 
<PAGE>
 
STOCK, DIVIDEND AND BROKER INFORMATION

Common stock issued by Juniata Valley Financial Corp. is quoted under the symbol
"JUVF" on the over-the-counter ("OTC") Electronic Bulletin Board, an automated
quotation service, made available through, and governed by, the NASDAQ system.

Prices presented in the table below are bid prices between broker-dealers which
do not include retail mark-ups or mark-downs or any commission to the
broker-dealer. The published bid prices do not necessarily reflect prices in
actual transactions. Cash dividends paid for 1997 and 1996 are provided in the
table below. Both the market values and cash dividends have been adjusted for a
5-for-4 stock split issued September 5, 1997.

<TABLE> 
<CAPTION> 
                               1997                                          1996
                               ----                                          ----
                                             Dividends                                   Dividends
        Quarter        High         Low      per share           High        Low         per share
        -------        ----         ---      ---------           ----        ---         ---------
        <S>           <C>          <C>       <C>                <C>         <C>          <C> 
        First         $32.80       $32.00                       $27.00      $25.60
        Second         34.00        32.80        .32             29.40       27.00          .30
        Third          35.00        34.00                        30.20       29.20
        Fourth         36.50        35.00        .34             32.00       30.20          .30
</TABLE> 

        For further information, we refer you to:

<TABLE> 
<CAPTION> 
  <S>                                  <C>                                     <C> 
  Hopper Soliday & Co., Inc.           F.J. Morrissey & Co., Inc.              Ryan, Beck & Co.
  1703 Oregon Pike                     1700 Market St., Suite 1420             150 Monument Road, Suite 106
  Lancaster, PA  17601                 Philadelphia, PA  19103-3913            Bala Cynwyd, PA  19004
  (800) 456-9234                       (800) 842-8928                          (800) 223-8969

  Janney, Montgomery, Scott, Inc.      Sandler O'Neil & Partners, L.P.         SNL Securities, L.P.
  48 E. Market St., P.O. Box 2246      Two World Trade Center 104th Floor      410 E. Main St., P.O. Box 2124
  York, PA  17405-2246                 New York, NY  10048                     Charlottesville, VA  22902
  (717) 845-5611                       (800) 635-6851                          (804) 977-1600
</TABLE> 

DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN

Information regarding the Corporation's Dividend Reinvestment and Stock Purchase
Plan may be obtained by calling (717) 436-8211 or by writing to:

                               Ms. Linda L. Engle
                         Juniata Valley Financial Corp.
                                   P.O. Box 66
                              Mifflintown, PA 17059


- 2 -
<PAGE>
 
          [LETTERHEAD OF JUNIATA VALLEY FINANCIAL CORP. APPEARS HERE]

                                                February 23, 1998

Dear Shareholders,

   On December 30, 1997, The Juniata Valley Bank signed a merger agreement with
Lewistown Trust Company. As previously announced, the offices of Lewistown Trust
Company will become offices of The Juniata Valley Bank. We are pleased with this
merger because it adds four more offices for the convenience of our customers,
and gives employees more chances for advancement. We feel that the bank will
continue to be a very strong community oriented bank.

   John E. Groninger will retire in March, 1998.  He was a Director of the Port
Royal National Bank and also Director of The Juniata Valley Bank since 1971.  We
will miss his knowledge and experience.

   Please review the Annual Report.  This is the fourteenth consecutive year of
record profits.

   I want to thank you for your loyalty and recommending your bank, and thank
the officers and employees for their excellent efforts in making this a quality
financial service company.

                                                Sincerely,

                                                /s/ A. Jerome Cook

                                                A. Jerome Cook
                                                President

AJC:rhn

                                                                           - 3 -
<PAGE>
 
                    Juniata Valley Financial Corp. Officers

 Harry B. Fairman, Jr.                                       Ronald H. Witherite
 Chairman                                               Vice Chairman, Secretary

 A. Jerome Cook                                                   Linda L. Engle
 President                                                             Treasurer

                                   Directors

Joe E. Benner                                                     Don E. Haubert
Owner, Benner Automotive                                President, Haubert Homes
                                                                 Mifflintown, PA
A. Jerome Cook
President, The Juniata Valley Bank                                  Dale G. Nace
                                           Owner, Glenn Nace Plumbing & Heating;
Harry B. Fairman, Jr.                                           GlenDale Storage
President, Hilltop Oil, Inc.
                                                               John A. Renninger
John E. Groninger                                     President, A. D. Renninger
President, John E. Groninger, Inc.                                Lumber Company
Contractor, Director of
Consumers Financial Corp.                                       Edward R. Rhodes
                                             Retired Partner, E. R. Rhodes & Son
Karl E. Guss
Funeral Director                                               Harold B. Shearer
Guss Funeral Home                                           Self-employed Farmer

                                                             Ronald H. Witherite
                                             Owner, Ron's IGA Fruit Market, Inc.

       NOTE:  Above Directors also comprise the Board of Directors for 
                            The Juniata Valley Bank

- 4 -
<PAGE>
 
                       THE JUNIATA VALLEY BANK OFFICERS

          A Wholly-Owned Subsidiary of Juniata Valley Financial Corp.

MIFFLINTOWN OFFICE
     A. Jerome Cook................................................... President
     Helen L. Sieber.................. Vice President & Community Office Manager
     Jeffrey A. Pottorff............................Auditor & Compliance Officer
     Paul M. Lipka.............................................Marketing Officer
     Ruth H. Nace............................................Executive Secretary
  ADMINISTRATION
     Donald L. Musser......................... Sr Vice President, Administration
  CONTROLLER
     Linda L. Engle.................. Sr Vice President, Chief Financial Officer
     Anna Mae Peoples...................... Vice President, Assistant Controller
  LOANS
     Edward L. Kauffman.................. Sr Vice President, Loan Administration
     Scott E. Nace..................................Vice President, Loan Officer
     David A. Pecht......................................... Senior Loan Officer
     Loretta A. Saylor..............................................Loan Officer
  OPERATIONS
     Judy R. Aumiller............................ Sr. Vice President, Operations
     Kathy D. Hutchinson....................Assistant Vice President, Operations
     Deborah A. Sheaffer......................................Operations Officer
  TRUST
     Terry S. Love............................ Sr. Vice President, Trust Officer
     Cynthia L. Williams............... Assistant Vice President & Trust Officer
BLAIRS MILLS OFFICE
     C. Roger Searer.................. Vice President & Community Office Manager
     Wanda K. Rowles................................... Customer Service Officer
GARDENVIEW OFFICE
     M. Randall French................ Vice President & Community Office Manager
LEWISTOWN OFFICE
     R. Jack Morgan....................Vice President & Community Office Manager
     Lee Ellen Foose................................... Customer Service Officer
McALISTERVILLE OFFICE
     Joseph D. Ritzman.................Vice President & Community Office Manager
     Leslie A. Miller.................................. Customer Service Officer
MILLERSTOWN OFFICE
     James A. Witmer.................. Vice President & Community Office Manager
     Barbara I. Seaman..................................Customer Service Officer
MOUNTAIN VIEW OFFICE
     Connie C. Benner................. Vice President & Community Office Manager
PORT ROYAL OFFICE
     Betty D. Ryan.................... Vice President & Community Office Manager
     Larry B. Cottrill, Jr............................. Customer Service Officer

                            ADVISORY BOARD MEMBERS

BLAIRS MILLS OFFICE           PORT ROYAL OFFICE            McALISTERVILLE OFFICE
  Wayde H. Cisney             Clinton F. Bashore             Clair Ehrenzeller
William R. Goshorn           Martin L. Dreibelbis            Clair S. Graybill
 Hays I. Lauthers              Richard J. Junk                Samuel E. Knouse
   George Love                 Dennis A. Long               Ralph E. Rickenbaugh
 C. Roger Searer               Freeburn Love                 Joseph D. Ritzman
                               Betty D. Ryan                 Richard J. Sankey
                              Earl J. Wagner

  LEWISTOWN OFFICE             MILLERSTOWN OFFICE             GARDENVIEW OFFICE
William H. Bradford           R. Franklin Campbell               David B. Esh
 William R. Carter          Lowell R. Frantz, C.L.U.          M. Randall French
 Sharon D. Havice              Gregory J. Gordon             H. Ross Harshbarger
  R. Jack Morgan                Gerald M. Lyter              Donald R. Hartzler
 Harry F. Stimely               James A. Witmer                Jerry L. Wagner
 Frank A. Zampelli              Gary G. Wright

                                                                             -5-
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                                   BUSINESS

DESCRIPTION OF BUSINESS

On April 19, 1983, the shareholders of The Juniata Valley Bank (The Bank)
approved a plan of merger and reorganization. The plan was approved by the
various regulatory agencies on June 7, 1983 and the Juniata Valley Financial
Corp., a one bank holding company, registered under the Bank Holding Company Act
of 1956, as amended, was organized. The Bank is the oldest independent
commercial bank in Juniata and Mifflin County having originated under a state
bank charter in 1867.

The Juniata Valley Bank operates eight branch banking offices and one trust
service office. At December 31, 1997, the Bank had 100 full-time equivalent
employees. The Bank is engaged in commercial banking and trust business as
authorized by the Pennsylvania Banking Code of 1965. This includes accepting
time and demand deposits, making secured and unsecured commercial and consumer
loans, financing commercial transactions, making construction and mortgage
loans, and administering corporate, pension and personal trust services. The
Bank provides its services to individuals, corporations, partnerships,
associations, municipalities and other governmental bodies. As of December 31,
1997, the Bank had four offices in Juniata County, one office in Perry County,
two offices in Mifflin County and one office in Huntingdon County.

In December 1997, The Corporation announced the signing of a definitive
agreement with Lewistown Trust Company, a commercial bank with total assets of
$112 million, headquartered in Lewistown, Pennsylvania. Under terms of the
agreement, each Lewistown Trust shareholder will receive one share of the
Corporation's common stock for each Lewistown Trust share and Lewistown Trust
will be merged into the Bank. The transaction will be accounted for under the
pooling-of-interests method of accounting and is subject to regulatory and
shareholder approvals. The merger is expected to be consummated in the second or
third quarter of 1998.

COMPETITION

The Bank's principal market area includes all of Mifflin and Juniata Counties,
and portions of Perry, Huntingdon, Franklin and Snyder Counties. There are 16
commercial banks which are headquartered or have branch offices located within
the Bank's market area which the Bank considers its primary competitors. Of the
16 commercial banks with operations in the Bank's market area, the Bank ranked
fifth in assets as of December 31, 1997.

Additionally, the Bank has been subjected to competition from non-bank firms,
such as savings and loans, credit unions, brokerage firms, insurance companies,
mutual fund companies, consumer finance and credit card firms, retail and
manufacturing conglomerates, and other firms providing financial services and
credit to customers. Although many non-bank industries now offer services
traditionally provided only by banks, banks are constrained by costly
regulations and time-worn laws to compete effectively against non-bank providers
of financial services. However, the Bank strives to remain competitive with
respect to interest rates, service fees and service quality in order to achieve
continued growth and success in its market. The Bank also continues to develop
and strengthen its strong ties to the communities it serves, relying on the
unique and strong relationship that a community bank has with its customers and
community by providing excellent, personal customer service.

The deposit base of The Juniata Valley Bank is such that the loss of one
depositor or a related group of depositors would not have a dramatically adverse
effect on the Bank's business. In addition, the loan portfolio is very well
diversified, so that one industry or group or related industries does not
comprise a material portion of total loans outstanding. The Bank's business is
not seasonal, nor does it have any risks attendant to foreign sources.

SUPERVISION AND REGULATION

Juniata Valley Financial Corp. operates in a highly regulated industry, and thus
may be affected by changes in state and federal regulations and legislation. As
a registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the Act), the Corporation is subject to supervision and examination by
the Board of Governors of the Federal Reserve System and is required to file
with the Federal Reserve Board quarterly reports and information regarding its
business operations and those of its subsidiary.

The Act requires the Corporation to obtain Federal Reserve approval before:
acquiring more than five percent ownership interest in any class of the voting
securities of any bank; acquiring all or substantially all of the assets of a
bank; or, merging or consolidating with another bank holding company. In
addition, the Act prohibits a bank holding company from acquiring the assets, or
more than five percent of the voting securities, of a bank located in another
state, unless such acquisition is specifically authorized by the statutes of the
state in which the bank is located.

A bank holding company is normally not permitted to acquire direct or indirect
ownership of more than five percent of any class of voting securities of any
company that is not a bank or not engaged in activities determined by the
Federal Reserve Board regulations, activities deemed to be closely related to
banking including such ventures as consumer finance, equipment leasing, certain
data processing services, mortgage banking and investment advisory services. The
Act does not place geographic restrictions on the activities of non-bank
subsidiaries of bank holding companies.

-6-
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                                   BUSINESS

SUPERVISION AND REGULATION (CONTINUED)

The deposits of The Juniata Valley Bank are insured by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation (FDIC). Consequently, the Bank is
subject to regulations and reviews under the provisions of the Federal Deposit
Insurance Act, but the primary regulatory body is the Pennsylvania Department of
Banking. The Pennsylvania Department of Banking conducts regular reviews which
have resulted in satisfactory evaluations to date.

In 1991, the Federal Deposit Insurance Corporation Act (FDICIA) was signed into
law. FDICIA established five different levels of capitalization of financial
institutions, with prompt corrective actions and significant operational
restrictions imposed on institutions that are capital deficient. The five
categories are: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.

To be considered well capitalized, an institution must have a total risk-based
capital ratio of at least 10%, a Tier I risk based capital ratio of at least 6%,
a leverage capital ratio of 5% and must not be subject to any order or directive
requiring the institution to improve its capital level. An institution falls
within the adequately capitalized category if it has a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4%, and a
leverage capital ratio of at least 4%. Institutions with lower capital levels
are deemed to be undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on their actual capital levels.

The following table sets forth the computation of the Bank's regulatory capital
ratios. The Bank exceeded the minimum capital levels of the well capitalized
category.

                                                          December 31,
                                                          ------------
                                               1997          1996          1995
                                               ----          ----          ----
Risk-weighted assets ratio:               
    Tier I                                    18.61%        18.56%        18.04%
    Total                                     19.82%        19.77%        19.24%
                                          
Total assets leverage ratio:              
    Tier I                                    12.82%        12.36%        12.25%

SECURITIES PORTFOLIO

The following table sets forth the carrying amount of securities at the dates 
indicated:
                                                             December 31,
                                                             ------------
                                                       1997      1996      1995
                                                       ----      ----      ----
                                                             (In Thousands)
Available for sale securities (at fair value):                           
                                                                         
U.S. Treasury and other U.S. government obligations  $ 6,469   $ 8,141   $ 9,585
States and political subdivisions                      9,942    10,420     3,683
Other corporate                                        4,665     5,118     3,168
Mortgage-backed                                        3,860     5,273     6,971
Equity                                                 1,551     1,263     1,098
                                                     -------   -------   -------

                                                      26,487    30,215    24,505
                                                     -------   -------   -------
Held to maturity securities (at amortized cost):                        
                                                                        
U.S. Treasury and other U.S. government obligations    7,160     5,217     5,751
States and political subdivisions                     15,726    19,729    20,448
Other corporate                                       17,407    15,338    16,472
                                                     -------   -------   -------

                                                      40,293    40,284    42,671
                                                     -------   -------   -------

    Total securities                                 $66,780   $70,499   $67,176
                                                     =======   =======   =======

                                                                           - 7 -
<PAGE>
 
       JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                                    BUSINESS

SECURITIES PORTFOLIO (CONTINUED)

The following table sets forth the maturities of securities at December 31, 1997
and the weighted average yields of such securities by contractual maturities or
call dates. Yields on obligations of state and political subdivisions are not
presented on a tax equivalent basis. Mortgage-backed securities with contractual
maturities after ten years from December 31, 1997, feature regular repayments of
principal and average lives of three to five years.

<TABLE> 
<CAPTION> 


                                                                               Maturing
                                                                               --------
                                                                  After One                After Five
                                                                  But Within               But Within                 After
                                      Within One Year             Five Years                Ten Years               Ten Years
                                     Amount      Yield       Amount        Yield       Amount       Yield        Amount      Yield
                                     ------      -----       ------        -----       ------       -----        ------      -----
                                                                             (In Thousands)
<S>                                  <C>         <C>        <C>            <C>         <C>          <C>          <C>         <C> 
Available for sale:

    U.S. Treasury and other U.S. 
        government agencies          $ 2,747      5.72%     $ 3,722         6.33%      $  -             -        $  -           -
    State and political
        subdivisions                     690      5.20        8,734         4.66          -             -           518        4.45%

    Other corporate                      -         -          4,665         5.96          -             -           -           -
    Mortgage-backed                      -         -          1,526         6.30           23          5.63       2,311        6.65
                                     -------                -------                    ------                    ------

                                       3,437                 18,647                        23                     2,829
                                     -------                -------                    ------                    ------

Held to maturity:

    U.S. Treasury and other U.S. 
        government agencies            1,498      6.93        5,662         6.37          -             -           -           -
    State and political
        subdivisions                   5,900      4.18        9,541         4.75          285          5.63         -           -
    Other corporate                    3,862      6.41       12,471         6.50        1,074          6.50         -           -
                                     -------                -------                    ------                    ------

                                      11,260                 27,674                     1,359                       -
                                     -------                -------                    ------                    ------

            Total                    $14,697                $46,321                    $1,382                    $2,829
                                     =======                =======                    ======                    ======
</TABLE> 


Securities classified as available for sale are those debt securities that the
Bank intends to hold for an indefinite period of time, but not necessarily to
maturity. Securities available for sale are carried at fair value. Unrealized
gains or losses are reported as increases or decreases in stockholders' equity,
net of related deferred tax effect. Securities classified as held to maturity
are those debt securities the Bank has both the intent and ability to hold to
maturity. These securities are carried at cost adjusted for amortization of
premium and accretion of discount.



- 8 -
<PAGE>
 
       JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                                    BUSINESS


LOAN PORTFOLIO

The highest loan concentration by activity type continues to be the trucking
industry. The percentage of these loans to total loans was approximately four
percent at the latest review. This industry services many other industries and
no potential significant risk is evident.

As with any lending activity, potential risk exists. Loans in the commercial,
financial and industrial category have declined as a percentage of total loans
over the past three years. The Bank prudently evaluates loans in this category
and generally secures such lending with collateral consisting of real and/or
tangible personal property.

All lending is granted on a variable rate basis except consumer loans which are
fixed rate. Consumer loans, consisting of approximately eighteen percent of
total loans, average a three year repayment period and are fixed at such a rate
that rate sensitivity is considered to be limited.

The following table shows the Bank's loan distribution at the end of each of the
last five years:

<TABLE> 
<CAPTION> 

                                                                       December 31,
                                                                       ------------
                                                  1997         1996         1995         1994         1993
                                                  ----         ----         ----         ----         ----
                                                                       (In Thousands)

     <S>                                        <C>          <C>          <C>          <C>          <C> 
     Commercial, financial and agricultural     $ 12,520     $ 11,808     $ 11,843     $ 14,472     $ 19,361
     Real estate mortgage                         98,383       91,865       88,593       86,316       75,613
     Consumer (less unearned discount)            25,288       23,061       21,019       20,917       18,792
     All other                                     1,321        1,412        1,483        1,486        1,968
                                                --------     --------     --------     --------     --------

         Total loans                            $137,512     $128,146     $122,938     $123,191     $115,734
                                                ========     ========     ========     ========     ========
</TABLE> 

This table shows the maturity of loans (excluding residential mortgages of 1-4
family residences and consumer loans) outstanding as of December 31, 1997.

<TABLE> 
<CAPTION> 
                                                             Maturing      Maturing      Maturing
                                                              During      From 1999       After
                                                               1998       Thru 2000       2000        Total
                                                               ----       ---------       ----        ----- 
                                                                              (In Thousands)
     <S>                                                     <C>          <C>          <C>          <C>    
     Commercial, agricultural and financial                  $ 12,520     $    -       $    -       $  12,520
     All other                                                  1,321          -            -           1,321
                                                             --------     -------      -------      ---------

         Total loans                                         $ 13,841     $    -       $    -       $  13,841
                                                             ========     =======      =======      =========
</TABLE> 



                                                                           - 9 -
<PAGE>
 
       JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                             THE JUNIATA VALLEY BANK
                                     BUSINESS



NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

The following table summarizes the Bank's nonaccrual, past due and restructured
loans:

<TABLE> 
<CAPTION>    
                                                                     December 31,
                                                                     ------------
                                            1997          1996          1995         1994           1993
                                            ----          ----          ----         ----           ----
                                                                    (In Thousands)

     <S>                                  <C>           <C>           <C>           <C>           <C> 
     Average loans outstanding            $131,523      $123,104      $121,193      $116,805      $114,896
                                          ========      ========      ========      ========      ========
     Nonaccrual loans                     $    113      $    296      $    390      $    433      $    105
     Accruing loans past due
         90 days or more                       259           396           462           166           177
     Restructured loans                       -             -             -             -             -
                                          --------      --------      --------      --------      --------

         Total                            $    372      $    692      $    852      $    599      $    282
                                          ========      ========      ========      ========      ========

     Ratio of non-performing loans
         to average loans outstanding          .28%          .56%          .70%          .51%          .25%
</TABLE> 

Information with respect to nonaccrual and restructured loans at December 31,

<TABLE> 
<CAPTION> 

                                                1997       1996        1995        1994        1993
                                                ----       ----        ----        ----        ----
                                                                  (In Thousands)
     <S>                                      <C>         <C>         <C>         <C>         <C>  
     Nonaccrual loans                         $   113     $   296     $   390     $   433     $   105
     Restructured loans                          -           -           -           -           -
     Interest income that would have been                                                      
         recorded under original terms             18          41          37          28          12
     Interest income recorded                                                                  
         during the period                       -           -              5           9        -
     Commitments to lend additional funds        -           -           -           -           -
</TABLE> 

All of the nonaccrual loans at December 31, 1997, are secured by real estate or
otherwise guaranteed as to repayment. The majority of the nonaccrual balance
relates to one borrower.

A loan is generally considered impaired when it is probable the Bank will be
unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. The accrual of interest is
discontinued when the contractual payment of principal and interest has become
90 days past due or management has serious doubts about further collectibility
of principal or interest, even though the loan is currently performing. A loan
may remain on accrual status if it is in process of collection and is either
guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid
interest credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's judgement as
to the collectibility of principal. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance with
the contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.


- 10 -
<PAGE>
 
       JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                             THE JUNIATA VALLEY BANK
                                     BUSINESS


SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes the Bank's loan loss experience for each of the
five years ended December 31,

<TABLE> 
<CAPTION> 

                                                  1997         1996         1995           1994          1993
                                                  ----         ----         ----           ----          ---- 
                                                                       (In Thousands)
     <S>                                       <C>           <C>           <C>           <C>           <C> 
     Average loans outstanding                 $131,523      $123,104      $121,193      $116,805      $114,896
                                               ========      ========      ========      ========      ========

     Allowance for loan loss January 1         $  1,707      $  1,616      $  1,523      $  1,458      $  1,363

     Losses charged to allowance
         Commercial                                   1            58            12           -              19
         Real estate                                 12             0            28            92            66
         Consumer                                   110            45            55            86            79
                                               --------      --------      --------      --------      --------  

                                                    123           103            95           178           164
                                               --------      --------      --------      --------      --------  
     Recoveries credited to allowance
         Commercial                                  17             2             3           -               2
         Real estate                                  0             0            42             2            10
         Consumer                                    22            12             8            21            27
                                               --------      --------      --------      --------      --------  

                                                     39            14            53            23            39
                                               --------      --------      --------      --------      --------  

     Net charge-offs                                 84            89            42           155           125

     Provision for possible loan losses             180           180           135           220           220
                                               --------      --------      --------      --------      --------  

     Allowance for loan losses December 31     $  1,803      $  1,707      $  1,616      $  1,523      $  1,458
                                               ========      ========      ========      ========      ========
     Ratio of net charge-offs to
         average loans outstanding                  .06%          .07%          .03%          .13%          .11%
</TABLE> 

Management feels the increase in losses charged to allowance from consumer loans
is not indicative of a decline in the local economy or of future results in
consumer loans.

The amount charged to operations and the related balance in the allowance for
loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience and management's estimate of future potential losses.

This table shows an allocation of the allowance for loan losses as of the end of
each of the last five years.

<TABLE> 
<CAPTION> 

                             1997                 1996                  1995                 1994                   1993
                             ----                 ----                  ----                 ----                   ----
                                                                  (In Thousands)
     <S>             <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>  
                                 % of                  % of                  % of                  % of                  % of
                      Amount     Loan       Amount     Loan       Amount     Loan      Amount      Loan       Amount     Loan
                      ------     ----       ------     ----       ------     ----      ------      ----       ------     ----
     Commercial      $  336      10.1%     $  330       9.2%     $  321       9.6%     $  303      11.7%     $  385       4.3%
     Real estate        342      71.5         326      71.7         322      72.1         298      70.1         243      77.1
     Consumer           489      18.4         458      19.1         443      18.3         468      18.2         410      18.6
     Unallocated        636       -           593       -           530       -           454       -           420       -
                     ------      ----      ------      ----      ------      ----      ------      ----      ------      ----
 
         Total       $1,803       100%     $1,707       100%     $1,616       100%     $1,523       100%     $1,458       100%
                     ======      ====      ======      ====      ======      ====      ======      ====      ======      ====
</TABLE> 



                                                                          - 11 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                                   BUSINESS

SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED)

While loans secured by real estate mortgages comprise greater than 70% of the
total loan portfolio, historically these accounts have resulted in marginal
loss. Therefore management's evaluation of the loan portfolio indicates a
relatively low allocation of the allowance for this category of loans.

In addition to management's regular reviews, the results of normal examination
of the loan portfolio by representatives of regulatory agencies and the Bank's
independent accountants are also considered in determining the level at which
the allowance should be maintained. There are no material loans classified for
regulatory purposes as loss, doubtful, substandard or special mention which
management expects to impact future operating results, liquidity or capital
resources. Additionally, management is not aware of any information that would
give serious doubt as to the ability of its borrowers to substantially comply
with loan repayment terms.

Highly leveraged transactions (HLTS) generally include loans and commitments
made in connection with recapitalizations, acquisitions and leveraged buyouts,
and result in the borrowers debt-to-total assets ratio exceeding 75%. The Bank
has no loans at December 31, 1997, that qualified as HLTS.
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                                   BUSINESS

DEPOSITS

The average daily amount of deposits and rates paid on such deposits is
summarized for December 31, indicated in the following table:
<TABLE> 
<CAPTION> 
                                         1997                    1996                    1995
                                         ----                    ----                    ----
                                  Amount       Rate       Amount       Rate       Amount       Rate
                                  ------       ----       ------       ----       ------       ----
                                                            (In Thousands)
<S>                             <C>           <C>       <C>           <C>       <C>           <C> 
Non-interest bearing demand     $ 21,727                $ 20,328                $ 19,182
Interest bearing demand           26,118       2.42%      25,930       2.45%      25,505       2.45%
Savings deposits                  21,055       2.84       22,124       2.84       22,183       2.86
Time deposits                    117,212       5.59      112,377       5.63      103,793       5.50
                                --------                --------                --------

    Total                       $186,112                $180,759                $170,663
                                ========                ========                ========
</TABLE> 
As of December 31, 1997, certificates of deposit outstanding in an individual
amount of $100,000 or more totalled $15,445,000.

The maturity of these certificates of deposits is as follows:

                            Over 3         Over 6
          3 months         through 6     through 12     Over 12
           or less          months        months        months
           -------          ------        ------        ------
                                (In Thousands)
           $3,684           $2,604        $2,661        $6,496
           ======           ======        ======        ======

                                                                          - 13 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                                   BUSINESS

QUARTERLY RESULTS OF OPERATIONS
<TABLE> 
<CAPTION> 
                                                  Three Months Ended
                                   March 31     June 30     Sept. 30      Dec. 31
                                   --------     -------     --------      -------
                                         (In Thousands, except per share data)
<S>                                <C>          <C>          <C>          <C> 
FOR THE YEAR 1997
    Interest income                $ 3,989      $ 4,089      $ 4,189      $ 4,200
    Interest expense                (1,900)      (1,931)      (1,968)      (1,986)
                                   -------      -------      -------      -------
    Net interest income              2,089        2,158        2,221        2,214
    Provision for loan losses          (45)         (45)         (45)         (45)
    Other income                       170          268          165          188
    Other expenses                  (1,314)      (1,380)      (1,361)      (1,343)
                                   -------      -------      -------      -------
    Income before income taxes         900        1,001          980        1,014
    Income taxes                      (203)        (231)        (242)        (174)
                                   -------      -------      -------      -------
    Net income                     $   697      $   770      $   738      $   840
                                   =======      =======      =======      =======
    Per-share data:
        Basic earnings                 .50          .55          .53          .60
        Cash dividends                 -            .32          -            .34

<CAPTION> 
                                                  Three Months Ended
                                   March 31     June 30     Sept. 30      Dec. 31
                                   --------     -------     --------      -------
                                         (In Thousands, except per share data)
<S>                                <C>          <C>          <C>          <C> 
FOR THE YEAR 1996
    Interest income                $ 3,916      $ 3,901      $ 3,963      $ 3,975
    Interest expense                (1,871)      (1,869)      (1,922)      (1,930)
                                   -------      -------      -------      -------
    Net interest income              2,045        2,032        2,041        2,045
    Provision for loan losses          (45)         (45)         (45)         (45)
    Other income                       133          144          157          199
    Other expenses                  (1,283)      (1,285)      (1,292)      (1,211)
                                   -------      -------      -------      -------
    Income before income taxes         850          846          861          988
    Income taxes                      (189)        (221)        (201)        (170)
                                   -------      -------      -------      -------
    Net income                     $   661      $   625      $   660      $   818
                                   =======      =======      =======      =======
    Per-share data:
        Basic earnings                 .47          .45          .47          .59
        Cash dividends                 -            .30          -            .30
</TABLE> 

- 14 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY
                            THE JUNIATA VALLEY BANK
           FIVE YEAR FINANCIAL HIGHLIGHTS . SELECTED FINANCIAL DATA
<TABLE> 
<CAPTION> 
                                           1997          1996          1995          1994          1993
                                           ----          ----          ----          ----          ----
<S>                                    <C>           <C>           <C>           <C>           <C> 
BALANCE SHEET DATA (In Thousands)                                                            
    Assets                             $  220,910    $  212,264    $  205,878    $  190,176    $  189,776
    Deposits                              189,007       182,455       178,153       165,151       166,542
    Loans receivable                      135,709       126,439       121,322       121,668       114,276
    Securities                             66,780        70,499        67,176        57,214        59,932
    Stockholders' equity                   28,712        26,763        24,723        22,434        20,803
    Average equity                         27,815        25,443        23,316        21,363        19,497
    Average assets                        217,531       209,613       197,168       192,759       187,603
                                                                                             
EARNINGS DATA (In Thousands)                                                                 
    Interest income                    $   16,467    $   15,755    $   15,070    $   13,972    $   14,090
    Interest expense                        7,785         7,592         6,970         5,813         6,073
                                       ----------    ----------    ----------    ----------    ----------
    Net interest income                     8,682         8,163         8,100         8,159         8,017
    Provision for loan losses                 180           180           135           220           220
                                       ----------    ----------    ----------    ----------    ----------
    Net interest income after                                                                
        provision for loan losses           8,502         7,983         7,965         7,939         7,797
    Other income                              791           633           581           551           518
    Other expenses                          5,398         5,071         5,106         5,146         5,237
                                       ----------    ----------    ----------    ----------    ----------
    Income before income taxes              3,895         3,545         3,440         3,344         3,078
    Federal income taxes                      850           781           780           791           697
                                       ----------    ----------    ----------    ----------    ----------
    Income before cumulative effect                                                          
        of change in accounting                                                              
        principle                           3,045         2,764         2,660         2,553         2,381
    Net income                         $    3,045    $    2,764    $    2,660    $    2,553    $    2,934
                                                                                             
RATIOS                                                                                       
    Return on average assets                 1.40%         1.32%         1.35%         1.32%         1.27%
    Return on average equity                10.95         10.86         11.41         11.94         12.21 (1)
    Equity to assets (year end)             13.00         12.61         12.01         11.80         10.27 (1)
    Loans to deposits (year end)            71.80         69.30         68.10         73.67         68.62
    Dividend payout (percentage                                                              
        of income)                          30.31         30.25         29.14         29.18         28.60
                                                                                             
*PER SHARE DATA                                                                            
    Income before cumulative                                                                 
        effect of change in accounting                                                       
        principle                      $     2.18    $     1.98    $     1.91    $     1.84    $     1.71
    Basic earnings                           2.18          1.98          1.91          1.84          2.11
    Cash dividends                            .66           .60           .56           .54           .50
    Book value                              20.72         19.21         17.77         16.13         14.95
    Average shares outstanding          1,396,401     1,393,264     1,391,251     1,391,251     1,391,251
    Approximate number                                                                       
        of stockholders                     1,195         1,098         1,066         1,089         1,021
</TABLE> 

* Outstanding and per-share information for all years presented has been
restated to give effect to the 5-for-4 stock splits in the form of 25% stock
dividends issued September 5, 1997, January 9, 1996, and on October 26, 1994,
and the 10% stock dividend issued on September 30, 1993.

(1) Excluding the cumulative effect of change in accounting principle of
$553,000 or $.50 per share.

                                                                          - 15 -

<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS

The purpose of this discussion is to focus on information about the
Corporation's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements included in this
annual report. Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an understanding of the
following discussion and analysis.

--------------------------------------------------------------------------------
                              FINANCIAL CONDITION
--------------------------------------------------------------------------------

SOURCES AND USES OF FUNDS TRENDS
<TABLE> 
<CAPTION> 
                                                                                                                          
                                          1997       Increase    (Decrease)   1996        Increase    (Decrease)   1995   
                                         Average     --------    ----------  Average      --------    ----------  Average 
                                         Balance      Amount         %       Balance       Amount         %       Balance
                                         -------      ------         -       -------       ------         -       -------
                                                                      (Thousands of Dollars)
<S>                                     <C>         <C>          <C>        <C>           <C>         <C>         <C> 
Funding uses:
  Interest earning assets:
     Loans:
        Commercial                        $  43,844    $   2,077     4.97%    $  41,767    $     524     1.27%    $  41,243
        Mortgage                             64,104        5,192     8.81        58,912        1,658     2.90        57,254
        Consumer                             23,575        1,150     5.13        22,425         (271)   (1.19)       22,696
                                          ---------    ---------              ---------    ---------              ---------

                                            131,523        8,419     6.84       123,104        1,911     1.58       121,193
        Less: Allowance for loan losses       (1774)         (97)    5.78        (1,677)        (101)    6.41        (1,576)
                                          ---------    ---------              ---------    ---------              ---------

                                            129,749        8,322     6.85       121,427        1,810     1.51       119,617

     Securities                              71,952         (713)    (.98)       72,665        9,805    15.60        62,860
     Funds sold                               3,098       (1,009)  (24.57)        4,107          114     2.85         3,993
                                          ---------    ---------              ---------    ---------              ---------

                                             75,050       (1,722)   (2.24)       76,772        9,919    14.84        66,853
     Total interest earning
        assets                              204,799        6,600     3.33       198,199       11,729     6.29       186,470
     Other assets                            12,732        1,318    11.55        11,414          716     6.69        10,698
                                          ---------    ---------              ---------    ---------              ---------

           Total uses                     $ 217,531    $   7,918     3.78     $ 209,613    $  12,445     6.31     $ 197,168
                                          =========    =========              =========    =========              =========
Funding sources:
     Deposits:
        Demand                            $  21,727    $   1,399     6.88     $  20,328    $   1,146     5.97     $  19,182
        Interest bearing demand              26,118          188      .73        25,930          425     1.67        25,505
        Savings                              21,055       (1,069)   (4.83)       22,124          (59)    (.27)       22,183
        Time under $100,000                 101,767        3,773     3.85        97,994        6,547     7.16        91,447
                                          ---------    ---------              ---------    ---------              ---------

        Total core deposits                 170,667        4,291     2.58       166,376        8,059     5.09       158,317
        Time over $100,000                   15,445        1,062     7.38        14,383        2,037    16.50        12,346
                                          ---------    ---------              ---------    ---------              ---------

        Total deposits                      186,112        5,353     2.96       180,759       10,096     5.92       170,663
     Other liabilities                        3,604          193     5.66         3,411          222     6.96         3,189
     Stockholders' equity                    27,815        2,372     9.32        25,443        2,127     9.12        23,316
                                          ---------    ---------              ---------    ---------              ---------

           Total sources                  $ 217,531    $   7,918     3.78     $ 209,613    $  12,445     6.31     $ 197,168
                                          =========    =========              =========    =========              =========
</TABLE> 

- 16 - 
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS

--------------------------------------------------------------------------------
                        FINANCIAL CONDITION (Continued)
--------------------------------------------------------------------------------

The Corporation functions as a financial intermediary and therefore its
financial condition is analyzed in terms of its sources and uses of funds. The
following comparison of daily average balances indicates how the Corporation has
managed its sources and uses of funds.

The Corporation's assets continued to grow during 1997, reaching the level of
$217,531,000 an increase of $7,918,000 or 3.78% compared to 1996. The rate of
growth for 1997 can be attributed to loan demand. This loan growth was funded
primarily through an increase in deposits.

Loans experienced growth of $8,322,000 or 6.85% from 1996 to 1997 which was more
than the $1,810,000 increase in 1996 over 1995. Mortgage loans had the greatest
increase of $5,192,000 or 8.81%. The increase in mortgage loans is due to the
refinancing of existing mortgages as well as first time home buyers. Other
consumers took this opportunity to renovate their existing homes and consolidate
other debt into existing mortgages. This compares to an increase of $1,658,000
from 1995 to 1996. Commercial loans grew $2,077,000 or 4.97% in 1997 over 1996.
The growth in commercial loans in 1996 over 1995 was $524,000. While consumer
loans experienced a decline from 1995 to 1996 of $271,000, an increase in demand
occurred of $1,150,000 or 5.13% in 1997 over 1996. This growth in loans is
reflective of the strength in the economy.

Investment securities decreased $713,000 or .98% in 1997 over 1996. This
followed an increase of $9,805,000 from 1995 to 1996. A portion of the proceeds
from maturities and sales was used to fund loan growth rather than reinvestment
in securities. Treasury securities increased $926,000 to $4,095,000, tax-free
municipals increased $440,000 to $30,554,000 and corporate securities increased
$236,000 to $22,972,000. The decrease occurred in federal agency securities
which declined $2,701,000 to $14,331,000.

The asset growth was funded by an increase in deposits of $5,353,000 from 1996
to 1997 or 2.96%. This was less than the deposit growth experienced in 1996 over
1995 of $10,096,000. The primary source of funds is core deposits. The largest
category of core deposits continues to be time deposits under $100,000. Time
deposits under $100,000 increased $3,773,000 or 3.85% in 1997 over 1996 which
was less than the $6,547,000 increase from 1995 to 1996. This category includes
certificates of deposit, which allow customers to invest their funds at selected
maturities ranging from 6 months to 5 years and individual retirement accounts.
Demand deposits increased 6.88% or $1,399,000 from 1996 to 1997 which was
similar to the growth of $1,146,000 from 1995 to 1996. A slight increase was
experienced in interest bearing demand of .73% or $188,000 in 1997 over 1996.
The increase of interest bearing demand in 1996 over 1995 was $425,000. Savings
decreased $1,069,000 or 4.83% from 1996 to 1997. The decrease from 1995 to 1996
was $59,000. On average during 1997, core deposits experienced an increase of
$4,291,000. The Corporation's ability to maintain its core deposit base despite
the intense competition and nonbank influences in the market area, reflects the
Corporation's strong customer base.

--------------------------------------------------------------------------------
                             RESULTS OF OPERATIONS
--------------------------------------------------------------------------------


[BAR GRAPH APPEARS HERE]

[PLOT POINTS TO COME]


Juniata Valley Financial Corp. reported net income for 1997 of $3,045,000, an
increase of 10.17% from the $2,764,000 net income reported in 1996 and an
increase of 14.47% over 1995 earnings of $2,660,000. Basic earnings per share
was $2.18 in 1997 an increase of $.20 from 1996 and an increase of $.27 from
1995.

                                                                          - 17 -

<PAGE>


                    MANAGEMENT'S DISCUSSION AND ANALYSIS


--------------------------------------------------------------------------------
                       RESULTS OF OPERATIONS (Continued)
--------------------------------------------------------------------------------

The two most widely recognized performance ratios within the financial services
industry are the return on average equity and return on average assets. The
return on average equity ratio presents the net income to average equity
maintained throughout the year. The return on average equity was 10.95% in 1997,
compared to 10.86% in 1996 and 11.41% in 1995.


                           RETURN ON AVERAGE EQUITY

                           [BAR GRAPH APPEARS HERE]

                             [PLOT POINTS TO COME]


Return on average assets ratio presents the income for the year compared to the
average assets maintained throughout the year. The return on average assets was
1.40% in 1997, compared to 1.32% in 1996 and 1.35% in 1995.


                           RETURN ON AVERAGE ASSETS

                           [BAR GRAPH APPEARS HERE]

                             [PLOT POINTS TO COME]


The Board of Directors continued to increase the cash dividends paid to
shareholders. On a per share basis $.66 was paid in 1997, up 10.00% from the
$.60 paid in 1996 and up 17.86% over the $.56 paid in 1995. Along with the
increase in cash dividends, a 5-for-4 stock split in the form of a 25% stock
dividend was issued on September 5, 1997, and January 9, 1996. After giving
effect to these stock splits the market price per share increased from $25.60 at
January 1, 1996, to $36.50 at December 31, 1997.


                           CASH DIVIDENDS PER SHARE

                           [BAR GRAPH APPEARS HERE]

                            [PLOT POINTS TO COME]
 

While increasing dividends, the Corporation was able to increase stockholders'
equity to total assets (the capital ratio) to 13.00% at December 31, 1997, up
from 12.61% in 1996 and 12.01% in 1995.


                               EQUITY TO ASSETS

                           [BAR GRAPH APPEARS HERE]

                             [PLOT POINTS TO COME]


The Corporation has realized steady growth over the past two years. Assets for
the year ended December 31, 1997, were $220,910,000 an increase of $8,646,000 or
4.07% compared to 1996 assets of $212,264,000. Assets for 1996 grew $6,386,000
or 3.10% compared to 1995 assets of $205,878,000.


                                    ASSETS

                           [BAR GRAPH APPEARS HERE]

                             [PLOT POINTS TO COME]


<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS


--------------------------------------------------------------------------------
                       RESULTS OF OPERATIONS (Continued)
--------------------------------------------------------------------------------

The Juniata Valley Bank's allowance for loan losses was $1,803,000 in 1997,
$1,707,000 in 1996 and $1,616,000 in 1995. The provision provided in each of
those years was $180,000 in 1997, $180,000 in 1996 and $135,000 in 1995. The
provision for loan losses exceeded net charge-offs by 114.29%, 102.25%, and
221.43% in 1997, 1996 and 1995, respectively. In 1997 net charge-offs were .06%
of average loans outstanding. In 1996 and 1995 net charge-offs were .07% and
 .03% of average loans outstanding, respectively.

Other income increased $158,000 or 24.96% over 1996. From 1995 to 1996 the
increase was $52,000 or 8.95%. The increase in trust department income was
$10,000 in 1997 over 1996. The increase in 1996 of trust department income was
$25,000 due to the settlement of three estates. Customer service fees increased
$22,000 for 1997 compared to 1996. The increase was $14,000 from 1995 to 1996
for customer service fees. The increases in 1997 and 1996 for customer service
fees can be attributed to an increase in volume and not as a result of increased
fees. There was a $65,000 gain on sales of securities during 1997, which the
Corporation did not have in 1996 or 1995. The other income category increased
$61,000 for 1997 due principally to $51,000 of life insurance proceeds. The
increase in other income for 1996 over 1995 was $13,000.

Other expenses increased $327,000 or 6.45% from 1996 to 1997. This compares to a
decrease of $35,000 from 1995 to 1996. The $72,000 increase in salaries and
wages in 1997 can be attributed to annual merit increases and promotions of
employees. This compares to an increase of $83,000 in salaries and wages for
1996 over 1995. In 1997 employee benefits increased $5,000 which followed an
increase of $25,000 in 1996 over 1995. This was due to price changes of the
benefits provided as opposed to increased benefits. Occupancy and equipment
expenses were relatively stable over the three year period. There was a $21,000
increase in federal deposit insurance premiums in 1997 due to legislation
approved in 1996 for all banks to help finance the FICO debt service assessment.
There was a decrease of $190,000 in 1996 compared to 1995 in FDIC premiums. The
$23,000 decrease in director compensation in 1997 followed a decrease of $20,000
in 1996. The decrease is due to fully funded retirement plans. The $165,000
increase in repossession and foreclosed real estate is due to costs associated
with preparing two properties for sale and legal fees. The $68,000 increase in
the other category can be attributed to increased professional fees, a $20,000
increase in stationery and supplies and $9,000 increase in advertising. The
$27,000 increase in 1996 over 1995 was due to holding company expenses related
to stockholder matters including the introduction of a dividend reinvestment
plan incurred in 1996 and not incurred in 1995.

The management of the Juniata Valley Bank seeks product and service improvements
that both strengthen existing customer relationships and help attract new ones.
During 1997, sales of mutual funds were introduced through a third party
arrangement with T.H.E. Financial. For those customers desiring this type of
investment vehicle Juniata Valley Bank can offer them. Fee income derived from
the sale of this product in 1997 was not significant.

The United States Supreme Court issued its decision in the case of Barnett Bank
versus Nelson that national banks may sell insurance to anyone in a community
with a population under 5,000. Both the Pennsylvania insurance and banking
departments have issued policy statements recognizing that state chartered banks
may become licensed insurance agents, either directly or through an operating
subsidiary. The Juniata Valley Bank will evaluate the merits of insurance sales
during 1998 to help improve the bottom line.

The Corporation has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and is
developing an implementation plan to resolve any issues. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Corporation's programs that have
time-sensitive software could recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure.
Financial institutions are in a unique situation in that time-deposits and
loans, for a number of years have had maturity dates into the future well beyond
the year 2000.

The Corporation uses two major software vendors for data processing. Letters of
certification have been obtained assuring that they will be year 2000 compliant
in 1998 and testing can be performed by the fall of 1998 and into 1999. Because
of the data processing being out sourced, the cost of the year 2000 compliance
will be shared with the two data processing vendors. Management does not feel
this cost will materially impact the results of operations of the Corporation in
1998 or 1999.

Management is not aware of any known trends, events or uncertainties that will
have or that are reasonably likely to have material adverse effects on
liquidity, capital resources or operations of the Corporation.


                                                                          - 19 -
<PAGE>
 
--------------------------------------------------------------------------------
                   TABLE 1 - ANALYSIS OF NET INTEREST INCOME
--------------------------------------------------------------------------------


Table 1 presents average balances, interest income and expense and the yields
earned or paid on these assets and liabilities. Yields on tax exempt securities
are not presented on a tax equivalent basis. Nonaccrual loans and unrealized
gains on securities are included in "Other assets" under "Noninterest earning
assets".

<TABLE> 
<CAPTION> 
                                                                                    1997
                                                                                  Interest
                                                               Average             Income                 %
                                                               Balances           (Expense)              Rate
                                                               --------           ---------              ----

                                                                               (In Thousands)
<S>                                                           <C>                 <C>                    <C> 
INTEREST EARNING ASSETS
     Interest bearing deposits in other banks                 $      45           $       2              4.44%
     Securities (taxable)                                        41,353               2,749              6.65
     Securities (tax free)                                       30,554               1,204              3.94
     Federal funds sold                                           3,098                 182              5.87
     Loans                                                      131,523              12,330              9.3
                                                              ---------           --------- 

           Total interest earning assets                        206,573              16,467              7.97
                                                                                                         ----

NON-INTEREST EARNING ASSETS
     Cash and due from banks                                      5,190
     Other assets                                                 7,542
     Less: allowance for loan losses                             (1,774)
                                                              ---------

           Total assets                                       $ 217,531
                                                              =========

INTEREST BEARING LIABILITIES
     Demand deposits bearing interest                         $  26,118                (633)             2.42
     Savings deposits                                            21,055                (597)             2.84
     Time deposits                                              117,212              (6,555)             5.59
                                                              ---------           --------- 

           Total interest bearing liabilities                   164,385              (7,785)             4.74
                                                                                  ---------              ----

NON-INTEREST BEARING LIABILITIES
     Demand deposits                                             21,727
     Other liabilities                                            3,604
STOCKHOLDERS' EQUITY                                             27,815
                                                              ---------

           Total liabilities and stockholders' equity         $ 217,531
                                                              ========= 
NET INTEREST INCOME/SPREAD                                                        $   8,682              3.23%
                                                                                  =========              ====
MARGIN ANALYSIS
     Interest income/ earning assets                                                                     7.97%
     Interest expense/earning assets                                                                     3.77
                                                                                                         ----

           Net interest margin                                                                           4.20%
                                                                                                         ====
</TABLE> 



- 20 -
<PAGE>
 
--------------------------------------------------------------------------------
                              TABLE 1 (Continued)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                            1996                                  1995
                                                                          Interest                              Interest
                                                           Average         Income       %      Average           Income         %
                                                          Balances       (Expense)     Rate    Balances         (Expense)      Rate
                                                          --------       ---------     ----    --------         ---------      ----
                                                                       (In Thousands)                         (In Thousands)
<S>                                                       <C>             <C>          <C>    <C>               <C>            <C> 
INTEREST EARNING ASSETS                                                                                      
     Interest bearing deposits in other banks              $     35       $      2      5.71%     $    153        $    10      6.54%
     Securities (taxable)                                    42,836          2,758      6.44        36,011          2,212      6.14
     Securities (tax free)                                   29,794          1,230      4.13        26,696          1,195      4.48
     Federal funds sold                                       4,107            218      5.31         3,993            236      5.91
     Loans                                                  123,104         11,547      9.38       121,193         11,417      9.42
                                                           --------       --------                --------        ------- 

           Total interest earning assets                    199,876         15,755      7.88       188,046         15,070      8.01
                                                                                        ----                                   ----

NON-INTEREST EARNING ASSETS                            
     Cash and due from banks                                  5,156                                  5,127
     Other assets                                             6,258                                  5,571
     Less: allowance for loan losses                         (1,677)                                (1,576)
                                                           --------                               --------  

           Total assets                                    $209,613                               $197,168
                                                           ========                               ========
                                                       
INTEREST BEARING LIABILITIES                           
     Demand deposits bearing interest                      $ 25,930           (634)     2.45      $ 25,505           (624)     2.45
     Savings deposits                                        22,124           (629)     2.84        22,183           (635)     2.86
     Time deposits                                          112,377         (6,329)     5.63       103,793         (5,711)     5.50
                                                           --------       --------                --------        -------
           Total interest bearing liabilities               160,431         (7,592)     4.73       151,481         (6,970)     4.60
                                                                          --------      ----                      -------      ----
NON-INTEREST BEARING LIABILITIES                       
     Demand deposits                                         20,328                                 19,182
     Other liabilities                                        3,411                                  3,189
STOCKHOLDERS' EQUITY                                         25,443                                 23,316
                                                           --------                               --------

           Total liabilities and stockholders' equity      $209,613                               $197,168
                                                           ========                               ========
NET INTEREST INCOME/SPREAD                                                $  8,163      3.15%                     $ 8,100      3.41%

                                                                          ========      ====                      =======      ====
MARGIN ANALYSIS                                        
     Interest income/ earning assets                                                    7.88%                                  8.01%

     Interest expense/earning assets                                                    3.80                                   3.71
                                                                                        ----                                   ----

           Net interest margin                                                          4.08%                                  4.31%
                                                                                        ====                                    ====
</TABLE> 



                                                                          - 21 -
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)


--------------------------------------------------------------------------------
                               NET INTEREST INCOME
--------------------------------------------------------------------------------

Net interest income is the most significant contributor to the Corporation's net
income. During 1997, net interest income increased 6.36% to $8,682,000 compared
to an increase of .78% during 1996. Table 2 shows the interest income, interest
expense and net interest income with the percentage change between the years.

Table 1 presents average balances, interest income and expense and yields earned
or paid. This table summarized the components of the net interest income growth.
Interest earning assets increased $6,697,000 or 3.35% in 1997 which was less
than the $11,830,000 in 1996. The largest contributor to interest income is
loans. The yield on loans remains fairly stable among the years presented. The
yield on taxable securities increased by 21 basis points in 1997, while the
yield on tax free securities declined 19 basis points. This same trend was
experienced in 1996 with taxable securities having an increased yield of 30
basis points and the tax free securities having a decline in the yield of 35
basis points. The overall yield on these interest earning assets for 1997 was an
increase of 9 basis points. For 1996 there was a decline of 13 basis points.

Interest bearing liabilities increased $3,954,000 for 1997 which was less then
the increase of $8,950,000 in 1996. The yield on interest bearing demand and
savings deposits remained relatively unchanged for 1997 and 1996. Time deposits
is the fastest growing component of interest bearing liabilities. Rates paid on
time deposits declined slightly by 4 basis points in 1997 which followed a 13
basis point increase in 1996. Higher paying time deposits matured throughout
1997 and were renewed at the current competitive rates.

The Corporation's net spread was 3.23% in 1997 up from 3.15% in 1996 and down
from 3.41% in 1995. Interest spread measures the absolute difference between
average rates earned and average rates paid while net interest margin reflects
the relationship of interest income to earning assets versus interest expense to
earning assets. The Corporation's net interest margin was 4.20% for 1997
compared to 4.08% in 1996 and 4.31% in 1995.

From Table 3 it can be seen that the increases in interest income and interest
expense during 1997 were due mainly to growth in interest-earning assets and
interest-bearing liabilities while average rates over the period remained fairly
stable. As previously discussed, of the $712,000 increase in interest income
$783,000 was attributed to loans, while interest income on securities and
federal funds sold declined $71,000. In 1996, of the $685,000 change in interest
income, $546,000 could be attributed to taxable investment securities
principally as a result of higher volumes of securities. Rates on interest
earning assets in 1996 displayed more volatility than in 1997.

Interest expense shows that for 1997 time deposits accounted for $226,000 of the
$193,000 change due to the growth in this portfolio mentioned above; however
there was a slight decline in rates paid. In 1996, of the $622,000 change, time
deposits accounted for $618,000 of the change. Volume of time deposits
attributed $472,000 while an increase in rates accounted for $146,000 of the
change.


--------------------------------------------------------------------------------
                       TABLE 2 ---  NET INTEREST INCOME
--------------------------------------------------------------------------------

Net interest income, defined as interest income less interest expense, is shown
in the following table:

<TABLE> 
<CAPTION> 

                                   1997       % Change          1996        % Change          1995
                                   ----       --------          ----        --------          ----
                                                         (In Thousands)
<S>                              <C>          <C>             <C>           <C>             <C> 
Interest income                  $16,467        4.52%         $ 15,755         4.55%        $ 15,070
Interest expense                   7,785        2.54             7,592         8.92            6,970
                                 -------                      --------                      --------
Net interest income              $ 8,682        6.36          $  8,163          .78         $  8,100
                                 =======                      ========                      ========
</TABLE> 



- 22 -
<PAGE>

               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

--------------------------------------------------------------------------------
             TABLE 3 - RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
--------------------------------------------------------------------------------

Table 3 attributes increases and decreases in components of net interest income
to changes in average volume and to changes in average rates for interest
earning assets and interest bearing liabilities.
<TABLE> 
<CAPTION> 

                               1997/1996 Increase (Decrease)         1996/1995 Increase (Decrease)
                                       Due to Change in                      Due to Change in
                                Volume       Rate       Net          Volume       Rate        Net
                                ------       ----       ---          ------       ----        ---
<S>                            <C>         <C>         <C>          <C>          <C>         <C> 

Interest bearing deposits
    in other banks             $   1      $  (1)     $   0      $  (8)     $   0      $  (8)
Securities (taxable)             (95)        86         (9)       419        127        546
Securities (tax free)             31        (57)       (26)       139       (104)        35
Federal funds sold               (54)        18        (36)         7        (25)       (18)
Loans                            790         (7)       783        180        (50)       130
                               -----      -----      -----      -----      -----      -----  
        Interest income          673         39        712        737        (52)       685
                               -----      -----      -----      -----      -----      -----  
Demand deposits
        bearing interest           5         (6)        (1)        10          0         10
Savings deposits                 (30)        (2)       (32)        (2)        (4)        (6)
Time deposits                    272        (46)       226        472        146        618
                               -----      -----      -----      -----      -----      -----  
        Interest expense         247        (54)       193        480        142        622
                               -----      -----      -----      -----      -----      -----  
Increase (decrease)
    in net interest income     $ 426      $  93      $ 519      $ 257      $(194)     $  63
                               =====      =====      =====      =====      =====      =====  
</TABLE> 

--------------------------------------------------------------------------------
                                LOAN PORTFOLIO
--------------------------------------------------------------------------------

[BAR GRAPH APPEARS HERE]

[PLOT POINTS TO COME]


At December 31, 1997 the net loan increase was $9,270,000 or 7.33% over 1996.
This follows a year with an increase in net loans of $5,117,000 or 4.22% over
1995. The loan to deposit ratio fluctuated slightly throughout 1997; monthly
averages were at a high in December of 71.91% and a low in March of 69.24%.
Mortgage loans increased $6,518,000 or 7.10% over 1996. The growth for 1995 over
1994 was $3,272,000. Real estate loans still remain a very attractive option due
to the tax deductibility of mortgage interest. Consumer loans increased
$2,227,000 or 9.66% in 1996 to 1997. The increase for 1996 over 1995 was
$2,042,000. Commercial loans increased $712,000 in 1997 while the same type of
loan decreased $35,000 from 1995 to 1996.

In spite of the slow economy and increasing credit problems nationwide, the
Corporation continued its excellent net charge-off record (charge-offs, net of
recoveries) during 1997. For the year, the net charge-offs were $84,000 or .06%
of average loans outstanding. This compares with $89,000 or .07% for 1996 and
$42,000 or .03% for 1995. Management feels the increase in losses charged to
allowance from consumer loans is not indicative of a decline in the local
economy or of future results in consumer loans.

The allowance for loan losses is based upon quarterly loan portfolio reviews by
management. The purpose of the review is to assess loan quality, analyze
delinquencies, ascertain loan growth, evaluate potential charge-offs and
recoveries and assess general economic conditions in the market served. It is
Management's judgement that the allowance for 1997 of $1,803,000 or 1.33% of
outstanding loans is adequate to meet any foreseeable loan loss contingency.
This is lower than the 1.35% for 1996 and the same 1.33% for 1995. At December
31, 1997 and l996, total non-performing loans were $372,000 and $692,000,
respectively; non-performing loans as a percentage of the allowance for loan
losses were 20.63% and 40.54%, respectively. Increased collection efforts
continue to be made so that the level of nonperforming loans remains at
historical levels in the future.

                                                                          - 23 -

<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

--------------------------------------------------------------------------------
               LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
--------------------------------------------------------------------------------

The goals of the Corporation's asset/liability management function are to ensure
adequate liquidity and to maintain an appropriate balance between the relative
rate sensitivity of interest earning assets and interest bearing liabilities.
Liquidity management encompasses the ability to meet ongoing cash flow
requirements of customers, who, as depositors, may want to withdraw funds or
who, as borrowers, need credit availability. Interest rate sensitivity
management attempts to prove stable net interest margins through changing
interest rate environments and thereby achieve consistent growth in net interest
income.

Liquidity management is influenced by several key elements, including asset
quality and the maturity structure of assets and liabilities. The single most
important source of liquidity for the Corporation is a string, stable core
deposit base. This funding source has exhibited steady growth over the years and
consists of deposits from customers with long-standing relationships. In 1997
the Corporation funded approximately 80% of its assets with core deposits
acquired in local communities. This core deposit base, combined with
stockholders' equity, funded 90% of average assets in 1997 and provides a
substantial and highly stable source of liquidity.

Principal sources of asset liquidity are provided by held to maturity securities
maturing in one year or less, available for sale securities, and other
short-term investments such as federal funds sold and cash and due from banks.
At December 31, 1997, these liquid assets amounted to $48,460,000 compared to
liquid assets at December 31, 1996, of $51,764,000. Liquidity is also provided
by scheduled and unscheduled principal repayments of loans.

The Corporation joined the Federal Home Loan Bank of Pittsburgh in August of
1993 for the purpose of providing short term liquidity when other sources are
unable to fill these needs. The Corporation has an unused line of credit of
$6,470,000 at December 31, 1997, from the Federal Home Loan Bank which it can
draw upon for additional liquidity.

Liability liquidity, which is more difficult to measure, can be met by
attracting deposits and maintaining the core deposit base. The Corporation's
ability to attract deposits depends primarily on several factors including sales
effort, competitive interest rates, and other conditions which help maintain
consumer confidence in the stability of the financial institution. This
confidence is evaluated by such factors as profitability, capitalization and
overall financial condition.

The Corporation's primary funding requirement is loan demand. From the statement
of cash flows it is demonstrated that loan demand is primarily funded through
deposit growth. Loan growth of $9,450,000 was more than deposit growth of
$6,552,000. Security proceeds of $18,661,000 were used to purchase securities of
$14,614,000. The funding short fall in loans from deposits of $2,898,000 was
offset by the net proceeds from security transactions of $4,047,000. The
additional proceeds from securities not used for loans were used toward the
increase of cash and cash equivalents of $1,691,000.


--------------------------------------------------------------------------------
                              REGULATORY MATTERS
--------------------------------------------------------------------------------

The Juniata Valley Bank is subject to periodic examinations by one or more of
the various regulatory agencies. During 1997 no examinations were conducted.

On January 1, 1997 the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share". Since the Corporation has a simple
capital structure, previously reported earnings per share for 1996 and 1995
equals basic earnings per share for those periods as reflected in the statement
of income. The weighted average number of common shares outstanding was adjusted
for stock dividends for all periods presented.

- 24 -
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

--------------------------------------------------------------------------------
                                MARKET RATE RISK
--------------------------------------------------------------------------------

The operations of the Bank are subject to risk resulting from interest rate
fluctuations to the extent that there is a difference between the amount of the
Bank's interest earning assets and the amount of interest bearing liabilities
that are prepaid/ withdrawn, mature or reprice in specified periods. The
principal objective of the Bank's asset/liability management activities is to
provide consistently higher levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk and facilitating the
funding needs of the Bank. The Bank utilizes an interest rate sensitivity model
as the primary quantitative tool in measuring the amount of interest rate risk
that is present.

The operations of the Bank do not subject it to foreign currency exchange or
commodity price risk. Also the Bank and Corporation do not utilize interest rate
swaps, caps or other hedging transactions.

Table 4 provides information about the Corporation's financial instruments that
are sensitive to changes in interest rates. For securities, loans and deposits,
the table presents principal cash flows and related weighted average interest
rates by maturity dates. The Corporation has no market risk sensitive
instruments entered into for trading purposes.

                                                                          - 25 -
<PAGE>
 
--------------------------------------------------------------------------------
                       TABLE 4 - INTEREST RATE SENSITIVITY
                    PRINCIPAL AMOUNT BY EXPECTED MATURITY
                              AVERAGE INTEREST RATE
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                   1998             1999                 2000
                                                   ----             ----                 ----
                                                             (Dollars in Thousands)
<S>                                          <C>                 <C>                 <C> 
ASSETS

    Interest bearing deposits                $       17          $     --            $     --
        Average interest rate                      4.44%

    Federal funds sold                            4,180                --                  --
        Average interest rate                      5.87%

    Available for sale securities                 3,439               5,336               7,935
        Average interest rate                      5.62%               5.97%               5.68%

    Held to maturity securities                  11,260              13,294               6,468
        Average interest rate                      5.31%               5.70%               6.08%

    Loans
        Commercial                               12,520                --                  --
            Average interest rate                  9.58%

        Consumer                                  6,248               4,993               3,392
            Average interest rate                 10.84%              10.52%              10.18%

        Real estate mortgage                     95,051                 283                 307
            Average interest rate                  8.34%               8.82%               8.84%

LIABILITIES

    Interest bearing demand deposits             26,120                --                  --
        Average interest rate                      2.48%

    Savings deposit                              20,833                --                  --
        Average interest rate                      2.80%

    Certificates of deposit                      70,960              26,345              12,493
        Average interest rate                      5.37%               5.74%               6.17%
</TABLE> 

- 26 -
<PAGE>
 
--------------------------------------------------------------------------------
                              TABLE 4 (Continued)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                                                      Fair Value
                                              2001                2002           Thereafter            Total       December 31, 1997
                                              ----                ----           ----------            -----       -----------------

                                                                             (Dollars in Thousands)
<S>                                         <C>                <C>               <C>                <C>            <C> 
ASSETS                                      
                                            
    Interest bearing deposits               $    --            $    --            $   --            $     17         $     17
        Average interest rate               
                                            
    Federal funds sold                           --                 --                --               4,180            4,180
        Average interest rate               
                                            
    Available for sale securities               3,212              1,925             3,891            25,738           26,487
        Average interest rate                    5.06%              4.62%             4.76%
                                            
    Held to maturity securities                 5,105              2,807             1,359            40,293           40,535
        Average interest rate                    5.73%              6.46%             6.31%
                                            
    Loans                                   
        Commercial                               --                 --                --              12,520           12,520
            Average interest rate           
                                            
        Consumer                                2,029              1,221             8,726            26,609           26,670
            Average interest rate                9.94%              9.98%
                                            
        Real estate mortgage                      311                326             2,105            98,383           98,204
            Average interest rate                8.78%              8.78%             8.77%
                                            
LIABILITIES                                 
                                            
    Interest bearing demand deposits             --                 --                --              26,120           26,120
        Average interest rate               
                                            
    Savings deposit                              --                 --                --              20,833           20,833
        Average interest rate               
                                            
    Certificates of deposit                     6,445              3,287                62           119,592          120,236
        Average interest rate                    5.92%              5.96%             5.80%
</TABLE> 
                                            

                                                                          - 27 -
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)


--------------------------------------------------------------------------------
                                     CAPITAL
--------------------------------------------------------------------------------

The Corporation maintains a strong capital base to take advantage of business
opportunities while ensuring that it has resources to absorb the risks inherent
in the business. The federal banking regulators have established capital
adequacy requirements for banks and bank holding companies by using a risk-based
capital framework and by monitoring compliance with minimum leverage guidelines.
These guidelines are based on "risk adjusted" factors, which means assets with
potentially higher credit risk will require more capital backing than assets
with lower risk.

The FDIC classified capital into two tiers, referred to as Tier I and Tier II.
Tier I capital consists of common stockholders' equity (excluding the net
unrealized appreciation on securities available for sale), noncumulative and
cumulative (bank holding companies only) perpetual preferred stock, and minority
interests less goodwill. Tier II capital consists of allowance for loan and
lease losses, perpetual preferred stock (not included in Tier I), hybrid capital
instruments, term subordinated debt, and intermediate-term preferred stock.
Since December 31, 1992, all banks have been required to meet a minimum ratio of
8.00% of qualifying total capital to risk adjusted total assets with at least 4%
Tier I capital and 8% of risk-adjusted assets in total capital. As indicated on
the schedule following this discussion, the Tier I risk-based capital ratio was
18.61% and Tier II risk-based capital ratio was 19.82% at December 31, 1997. The
Bank's capital ratios are well above the current minimum ratio requirements set
forth by federal banking regulators.


                             STOCKHOLDERS' EQUITY 

                           [BAR GRAPH APPEARS HERE]

                             [PLOT POINTS TO COME]


In addition to risk-based requirements, the Federal Reserve Board has
established minimum leverage guidelines for bank holding companies. For most
banks, the minimum leverage rate is 3% plus an additional cushion of 100 to 200
basis points depending on risk profiles and other factors. As of December 31,
1997, the Bank's leverage ratio was 12.82%.

CAPITAL ANALYSIS

<TABLE> 
<CAPTION> 

                                                                             December 31,
                                                                             ------------
                                                                   1997          1996          1995
                                                                   ----          ----          ----
                                                                        (Thousands of Dollars)
<S>                                                              <C>           <C>           <C>      
Tier I
    Common stockholders' equity (excluding unrealized
        appreciation/depreciation on securities)                 $ 27,836      $ 26,281      $ 24,161

Tier II
    Allowable portion of allowance for loan losses                  1,803         1,707         1,616
                                                                 --------      --------      --------

    Risk-based capital                                           $ 29,639      $ 27,988      $ 25,777
                                                                 ========      ========      ========

Risk adjusted assets (including off-balance-sheet exposures)     $149,543      $141,592      $133,897
                                                                 ========      ========      ========

Tier I risk-based capital ratio                                     18.61%        18.56%        18.04%
Total risk-based capital ratio                                      19.82%        19.77%        19.24%
Leverage ratio                                                      12.82%        12.36%        12.25%
</TABLE> 


- 28 -
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)


--------------------------------------------------------------------------------
                              EFFECTS OF INFLATION
--------------------------------------------------------------------------------


The performance of a bank is affected more by changes in interest rates than by
inflation; therefore, the effect of inflation is normally not as significant as
it is on other businesses and industries. During periods of high inflation, the
money supply usually increases and banks normally experience above average
growth in assets, loans, and deposits. A bank's operating expenses will usually
increase during inflationary times as the price of goods and services increase.

A bank's performance is also affected during recessionary periods. In times of
recession, a bank usually experiences a tightening on its earning assets and on
its profits. A recession is usually an indicator of higher unemployment rates,
which could mean an increase in the number of nonperforming loans because of
continued layoffs and other deterioration of consumers' financial conditions.

It is difficult to predict what will happen in 1998 because of the many
uncertainties surrounding the economy. However, The Juniata Valley Bank's
management and Board of Directors are looking forward to meeting the challenges
a changing economy can present. The Juniata Valley Bank's commitment to
providing quality banking services for the communities it serves will continue
through 1998. This community-based strategy gives management the opportunity to
recognize steady growth in our consumer, mortgage and commercial loans as well
as in our core deposit base. The Bank's strong capital and earnings potential
provide the solid foundation needed to excel in the ever-changing banking
industry. Management feels it is positioned to handle changes in the economic
environment in 1998 through effective asset/liability management. Juniata Valley
Financial Corp. is committed to providing stockholders with an attractive return
on their investment.



--------------------------------------------------------------------------------
                               FEDERAL INCOME TAX
--------------------------------------------------------------------------------


The provision for income taxes for 1997 was $850,000 compared to $781,000 in
1996 and $780,000 in 1995. The effective tax rate, which is the ratio of income
tax expense to income-before-income-taxes, was 21.82% in 1997, a decrease from
the 22.03% in 1996 and 22.67% in 1995. The tax rate for all periods was less
than the statutory rate of 34% due to tax exempt securities and loan income.
Please refer to the Notes to the Consolidated Financial Statements "Income
Taxes" for further analysis of federal income tax expense.



--------------------------------------------------------------------------------
                                    MERGER
--------------------------------------------------------------------------------


On December 30, 1997, Juniata Valley Financial Corp. and Lewistown Trust Company
entered into a definitive agreement and plan of merger providing for the merger
of Lewistown Trust Company with and into the Juniata Valley Bank, a wholly owned
subsidiary of Juniata Valley Financial Corp. (Juniata).

Under the terms of the definitive merger agreement, Lewistown Trust Company will
be merged into the Juniata Valley Bank and Juniata will exchange one share of
Juniata common stock for each share of Lewistown Trust Company common stock
outstanding in a tax-free exchange. Based upon Juniata's closing price on
December 31, 1997, the shares of Juniata to be received by Lewistown Trust
Company shareholders would have a value of $34.2 million or $36.50 per share.
The transaction consideration is approximately 2.42 times Lewistown Trust
Company's book value. The transaction will be accounted for as a pooling of
interests and, pending regulatory and shareholder approvals, is expected to be
completed in the second or third quarter of 1998.

Based on December 31, 1997 financial data, the combined organization will have
approximately $333 million in total assets, $191 million in loans, $285 million
in deposits and $43 million in total equity. At consummation, it is expected
that the combined banking subsidiary will have 12 full service banking offices.



                                                                          - 29 -
<PAGE>
 
                                          [LOGO OF BEARD & COMPANY APPEARS HERE]



                        INDEPENDENT AUDITOR'S REPORT



To the Board of Directors and Stockholders
Juniata Valley Financial Corp.
Mifflintown, Pennsylvania


       We have audited the accompanying consolidated balance sheets of Juniata
Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank,
as of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

       In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Juniata
Valley Financial Corp. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.



                                                       /s/ Beard & Company, Inc.




Reading, Pennsylvania
January 16, 1998


- 30 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                          CONSOLIDATED BALANCE SHEETS

                                    ASSETS
                                    ------
<TABLE> 
<CAPTION> 
                                                                                      December 31,
                                                                                      ------------
                                                                                  1997            1996
                                                                                  ----            ----
                                                                                     (In Thousands)

<S>                                                                            <C>             <C> 
Cash and due from banks                                                        $   6,516       $   5,857
Interest-bearing deposits with banks                                                  17              65
Federal funds sold                                                                 4,180           3,100
                                                                               ---------       --------- 

            Total cash and cash equivalents                                       10,713           9,022
                                                                               
Securities available for sale                                                     26,487          30,215
Securities held to maturity, fair value 1997 $40,535; 1996 $40,309                40,293          40,284
Loans receivable, net of allowance for loan losses 1997 $1,803; 1996 $1,707      135,709         126,439
Bank premises and equipment, net                                                   1,733           1,766
Accrued interest receivable and other assets                                       5,975           4,538
                                                                               ---------       --------- 

            Total assets                                                       $ 220,910       $ 212,264
                                                                               =========       =========
                      LIABILITIES AND STOCKHOLDERS' EQUITY                     
                      ------------------------------------
                                                                               
Liabilities:                                                                   
    Deposits:                                                                  
        Non-interest bearing                                                   $  22,462       $  21,873
        Interest bearing                                                         166,545         160,582
                                                                               ---------       --------- 

            Total deposits                                                       189,007         182,455
                                                                               
    Accrued interest payable and other liabilities                                 3,191           3,046
                                                                               ---------       --------- 

            Total liabilities                                                    192,198         185,501
                                                                               ---------       --------- 
Stockholders' equity:                                                          
    Preferred stock; no par value; 500,000 shares authorized; no shares        
        issued or outstanding                                                        -               -
    Common stock, par value $1.00 per share; authorized 5,000,000 shares;      
        issued 1997 1,400,389 shares; 1996 1,117,088 shares                        1,400           1,117
    Surplus                                                                       14,709          14,879
    Retained earnings                                                             12,651          10,549
    Treasury stock, at cost 1997 14,898 shares                                      (543)            -
    Net unrealized appreciation on securities available for sale, net of taxes       495             218
                                                                               ---------       --------- 

            Total stockholders' equity                                            28,712          26,763
                                                                               ---------       --------- 

            Total liabilities and stockholders' equity                         $ 220,910       $ 212,264
                                                                               =========       =========
</TABLE> 

                See Notes to Consolidated Financial Statements.

                                                                          - 31 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                       CONSOLIDATED STATEMENTS OF INCOME
<TABLE> 
<CAPTION> 

                                                                           Years Ended December 31,
                                                                           ------------------------
                                                                    1997            1996            1995
                                                                    ----            ----            ----
                                                                  (In Thousands, Except Per Share Amounts)
<S>                                                             <C>            <C>              <C> 
Interest income:
    Loans receivable, including fees                             $   12,330      $   11,547      $   11,417
    Taxable securities                                                2,749           2,758           2,212
    Tax-exempt securities                                             1,204           1,230           1,195
    Other                                                               184             220             246
                                                                 ----------      ----------      ----------

        Total interest income                                        16,467          15,755          15,070

Interest expense on deposits                                          7,785           7,592           6,970
                                                                 ----------      ----------      ----------

        Net interest income                                           8,682           8,163           8,100

Provision for loan losses                                               180             180             135
                                                                 ----------      ----------      ----------

        Net interest income after provision for loan losses           8,502           7,983           7,965
                                                                 ----------      ----------      ----------

Other income:
    Trust department                                                    208             198             173
    Customer service fees                                               259             237             223
    Net realized gains on sales of securities                            65             -               -
    Other                                                               259             198             185
                                                                 ----------      ----------      ----------

        Total other income                                              791             633             581
                                                                 ----------      ----------      ----------

Other expenses:
    Salaries and wages                                                2,268           2,196           2,113
    Employee benefits                                                   597             592             567
    Occupancy                                                           315             310             309
    Equipment                                                           325             330             302
    Federal deposit insurance premiums                                   23               2             192
    Director compensation                                               246             269             289
    Taxes, other than income                                            254             235             215
    Repossession and foreclosed real estate                             207              42              51
    Other                                                             1,163           1,095           1,068
                                                                 ----------      ----------      ----------

        Total other expenses                                          5,398           5,071           5,106
                                                                 ----------      ----------      ----------

        Income before income taxes                                    3,895           3,545           3,440

Federal income taxes                                                    850             781             780
                                                                 ----------      ----------      ----------

        Net income                                               $    3,045      $    2,764      $    2,660
                                                                 ==========      ==========      ==========

Basic earnings per share                                         $     2.18      $     1.98      $     1.91
                                                                 ==========      ==========      ==========

Weighted average number of shares outstanding                     1,396,401       1,393,264       1,391,251
                                                                 ==========      ==========      ==========
</TABLE> 

                See Notes to Consolidated Financial Statements.

- 32 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE> 
<CAPTION> 

                                                                           Years Ended December 31, 1997, 1996 and 1995
                                                                           --------------------------------------------
                                                                                                         Net Unrealized
                                                                                                          Appreciation
                                                                                                         (Depreciation)
                                                                                                         On Securities
                                                    Common                    Retained         Treasury    Available
                                                     Stock       Surplus      Earnings          Stock      For Sale       Total
                                                     -----       -------      --------          -----      --------       -----
<S>                                               <C>           <C>         <C>               <C>         <C>          <C> 
                                                                                   (In Thousands)
Balance, December 31, 1994                         $    891     $ 14,956      $  6,749      $    -        $   (162)     $ 22,434
    Net income                                          -            -           2,660           -             -           2,660
    Cash dividend, $.56 per share                       -            -            (775)          -             -            (775)
    5-for-4 stock split in the form of a
        25% stock dividend                              222         (222)          (13)          -             -             (13)
    Net change in unrealized appreciation
        (depreciation) on securities available
        for sale, net of taxes                          -            -             -             -             417           417
                                                   --------     --------      --------      --------      --------      --------

Balance, December 31, 1995                            1,113       14,734         8,621           -             255        24,723
    Net income                                          -            -           2,764           -             -           2,764
    Cash dividend, $.60 per share                       -            -            (836)          -             -            (836)
    Stock issued under dividend
        reinvestment plan                                 4          145           -             -             -             149
    Net change in unrealized appreciation
        (depreciation) on securities available
        for sale, net of taxes                          -            -             -             -             (37)          (37)
                                                   --------     --------      --------      --------      --------      --------

Balance, December 31, 1996                            1,117       14,879        10,549           -             218        26,763
    Net income                                          -            -           3,045           -             -           3,045
    Cash dividend, $.66 per share                       -            -            (923)          -             -            (923)
    Stock issued under employee stock
        purchase plan                                     3          110           -             -             -             113
    5-for-4 stock split in the form of a
        25% stock dividend                              280         (280)          (20)          -             -             (20)
    Treasury stock acquired                             -            -             -            (543)          -            (543)
    Net change in unrealized appreciation
        (depreciation) on securities available
        for sale, net of taxes                          -            -             -             -             277           277
                                                   --------     --------      --------      --------      --------      --------

Balance, December 31, 1997                         $  1,400     $ 14,709      $ 12,651      $   (543)     $    495      $ 28,712
                                                   ========     ========      ========      ========      ========      ========
</TABLE> 

                See Notes to Consolidated Financial Statements.


                                                                          - 33 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 

                                                                                         Years Ended December 31,
                                                                                         ------------------------
                                                                                    1997          1996           1995
                                                                                    ----          ----           ----
                                                                                              (In Thousands)
<S>                                                                                <C>           <C>           <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                     $  3,045      $  2,764      $  2,660
    Adjustments to reconcile net income to net cash
        provided by operating activities:
        Provision for loan losses                                                       180           180           135
        Provision for depreciation                                                      191           192           174
        Net amortization on securities premium                                          155           195           192
        Net realized gains on sales of securities                                       (65)          -             -
        Deferred directors' fees and supplemental retirement plan expense               170           242           303
        Payment of deferred compensation                                               (145)         (150)         (135)
        Deferred income taxes                                                           (53)          (56)          (74)
        Increase in accrued interest receivable and other assets                       (155)         (488)         (356)
        Increase (decrease) in accrued  interest payable and other liabilities          -            (123)          108
                                                                                   --------      --------      --------
              
            Net cash provided by operating activities                                 3,323         2,756         3,007
                                                                                   --------      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of available for sale securities                                       (1,258)      (12,105)      (13,935)
    Proceeds from sales of available for sale securities                                 93         -             -
    Proceeds from maturities of and principal repayments
        on available for sale securities                                              5,345         6,275         6,118
    Purchases of held to maturity securities                                        (13,356)       (8,531)       (8,753)
    Proceeds from maturities of and principal repayments
        on held to maturity securities                                               13,223        10,788         7,048
    Net (increase) decrease in loans receivable                                      (9,450)       (5,219)          211
    Net purchases of bank premises and equipment                                       (158)         (230)         (222)
    Purchase of life insurance                                                       (1,250)        -             -
                                                                                   --------      --------      --------

            Net cash used in investing activities                                    (6,811)       (9,022)       (9,533)
                                                                                   --------      --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase in deposits                                                          6,552         4,302        13,002
    Cash dividends and cash paid for fractional shares                                 (943)         (836)         (788)
    Stock issued under dividend reinvestment plan                                       -             149         -
    Stock issued under employee stock purchase plan                                     113         -             -
    Purchase of treasury stock                                                         (543)        -             -
                                                                                   --------      --------      --------

            Net cash provided by financing activities                                 5,179         3,615        12,214
                                                                                   --------      --------      --------

            Increase (decrease) in cash and cash equivalents                          1,691        (2,651)        5,688

Cash and cash equivalents:
    Beginning                                                                         9,022        11,673         5,985
                                                                                   --------      --------      --------
    Ending                                                                         $ 10,713      $  9,022      $ 11,673
                                                                                   ========      ========      ========
Cash payments for:
    Interest                                                                       $  7,787      $  7,566      $  6,798
                                                                                   ========      ========      ========
    Income taxes                                                                   $    933      $    879      $    833
                                                                                   ========      ========      ========

</TABLE> 



                See Notes to Consolidated Financial Statements.

- 34 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation:
    The accompanying consolidated financial statements include the accounts of
    Juniata Valley Financial Corp. (the Corporation), a bank holding company,
    and its wholly-owned subsidiary, The Juniata Valley Bank (the Bank). All
    significant intercompany accounts and transactions have been eliminated.

Nature of operations:
    The Bank operates under a state bank charter and provides full banking
    services, including trust services. As a state bank, the Bank is subject to
    regulation of the Pennsylvania Department of Banking and the Federal Deposit
    Insurance Corporation. The bank holding company (parent company) is subject
    to regulation of the Federal Reserve Bank. The area served by the Bank is
    principally the counties of Juniata, Mifflin, Perry, Huntingdon, Franklin
    and Snyder, Pennsylvania.

Estimates:
    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the financial
    statements and the reported amounts of revenues and expenses during the
    reporting period. Actual results could differ from those estimates.

Presentation of cash flows:
    For purposes of reporting cash flows, cash and cash equivalents include cash
    on hand, amounts due from banks, interest-bearing demand deposits with banks
    and federal funds sold.

Securities:
    Securities classified as available for sale are those debt securities that
    the Bank intends to hold for an indefinite period of time, but not
    necessarily to maturity. Any decision to sell a security classified as
    available for sale would be based on various factors, including significant
    movements in interest rates, changes in the maturity mix of the Bank's
    assets and liabilities, liquidity needs, regulatory capital considerations,
    and other similar factors. Securities available for sale are carried at fair
    value. Unrealized appreciation and depreciation is reported as increases or
    decreases in stockholders' equity, net of the related deferred tax effect.
    Realized gains or losses, determined on the basis of the cost of specific
    securities sold, are included in earnings.

    Securities classified as held to maturity are those debt securities the Bank
    has both the intent and ability to hold to maturity regardless of changes in
    market conditions, liquidity needs or changes in general economic
    conditions. These securities are carried at cost adjusted for amortization
    of premium and accretion of discount, computed by the interest method over
    their contractual lives.

    Management determines the appropriate classification of debt securities at
    the time of purchase and re-evaluates such designation as of each balance
    sheet date.

Loans receivable:
    Loans that management has the intent and ability to hold for the foreseeable
    future or until maturity or payoff are stated at their outstanding unpaid
    principal balances, net of unearned discount and an allowance for loan
    losses. Interest income is accrued on the unpaid principal balance. Unearned
    discount on discounted loans is amortized to income over the life of the
    loans, using the interest method.

    A loan is generally considered impaired when it is probable the Bank will be
    unable to collect all contractual principal and interest payments due in
    accordance with the terms of the loan agreement. The accrual of interest is
    discontinued when the contractual payment of principal or interest has
    become 90 days past due or management has serious doubts about further
    collectibility of principal or interest, even though the loan is currently
    performing. A loan may remain on accrual status if it is in the process of
    collection and is either guaranteed or well secured. When a loan is placed
    on nonaccrual status, unpaid interest credited to income in the current year
    is reversed and unpaid interest accrued in prior years is charged against
    the allowance for loan losses. Interest received on nonaccrual loans
    generally is either applied against principal or reported as interest
    income, according to management's judgment as to the collectibility of
    principal. Generally, loans are restored to accrual status when the
    obligation is brought current, has performed in accordance with the
    contractual terms for a reasonable period of time and the ultimate
    collectibility of the total contractual principal and interest is no longer
    in doubt.


                                                                          - 35 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Allowance for loan losses:
    The allowance for loan losses is established through provisions for loan
    losses charged against income. Loans deemed to be uncollectible are charged
    against the allowance for loan losses, and subsequent recoveries, if any,
    are credited to the allowance.

    The allowance for loan losses related to impaired loans that are identified
    for evaluation is based on discounted cash flows using the loan's initial
    effective interest rate or the fair value, less selling costs, of the
    collateral for certain collateral dependent loans. By the time a loan
    becomes probable of foreclosure it has been charged down to fair value, less
    estimated costs to sell.

    The allowance for loan losses is maintained at a level considered adequate
    to provide for losses that can be reasonably anticipated. Management's
    periodic evaluation of the adequacy of the allowance is based on the Bank's
    past loan loss experience, known and inherent risks in the portfolio,
    adverse situations that may affect the borrower's ability to repay, the
    estimated value of any underlying collateral, composition of the loan
    portfolio, current economic conditions, and other relevant factors. This
    evaluation is inherently subjective as it requires material estimates that
    may be susceptible to significant change, including the amounts and timing
    of future cash flows expected to be received on impaired loans.

Bank premises and equipment:
    Bank premises and equipment are stated at cost less accumulated
    depreciation. Depreciation is computed principally on the straight-line
    method over the estimated useful lives of the related assets.

Foreclosed real estate:
    Foreclosed assets, which are recorded in other assets, include properties
    acquired through foreclosure or in full or partial satisfaction of the
    related loan.

    Foreclosed assets are initially recorded at fair value, net of estimated
    selling costs, at the date of foreclosure. After foreclosure, valuations are
    periodically performed by management and the real estate is carried at the
    lower of carrying amount or fair value, less estimated costs to sell.
    Revenue and expenses from operations and changes in the valuation allowance
    are included in foreclosed real estate expenses.

Income taxes:
    Deferred taxes are provided on the liability method whereby deferred tax
    assets are recognized for deductible temporary differences and deferred tax
    liabilities are recognized for taxable temporary differences. Temporary
    differences are the differences between the reported amounts of assets and
    liabilities in the financial statements and their tax basis. Deferred tax
    assets are reduced by a valuation allowance when, in the opinion of
    management, it is more likely than not that some portion or all of the
    deferred tax assets will not be realized. Deferred tax assets and
    liabilities are adjusted through the provision for income taxes for the
    effects of changes in tax laws and rates on the date of enactment.

    The Corporation and its subsidiary file a consolidated federal income tax
    return.

Off-balance sheet financial instruments:
    In the ordinary course of business, the Bank has entered into off-balance
    sheet financial instruments consisting of commitments to extend credit and
    letters of credit. Such financial instruments are recorded in the balance
    sheet when they are funded.

Earnings per share:
    The Corporation adopted FASB Statement No. 128, "Earnings Per Share" in
    1997. Since the Corporation has a simple capital structure, previously
    reported earnings per share for 1996 and 1995 equals basic earnings per
    share for those periods as reflected in the statements of income. The
    weighted average number of common shares outstanding was adjusted for stock
    dividends for all periods presented.

Reclassifications:
    Certain items in the 1996 and 1995 consolidated financial statements have
    been reclassified to conform with the 1997 consolidated financial statement
    presentation format. Such reclassifications had no impact on net income.



- 36 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES

The Bank is required to maintain reserve balances with the Federal Reserve Bank.
The average reserve balances for 1997 and 1996 approximated $1,377,000 and
$1,311,000 respectively.

SECURITIES

The amortized cost and fair value of securities at December 31 were as follows:

<TABLE> 
<CAPTION> 

                                                                          Gross           Gross
                                                           Amortized    Unrealized      Unrealized     Fair
                                                             Cost      Appreciation    Depreciation    Value
                                                             ----      ------------    ------------    -----
                                                                            (In Thousands)
<S>                                                        <C>         <C>            <C>            <C> 
Available for sale securities:
   December 31, 1997:
      U.S. Treasury securities                             $  2,093         $ 11         $ -        $  2,104
      U.S. Government and agency obligations                  4,360            9            (4)        4,365
      Obligations of states and political subdivisions        9,794          148           -           9,942
      Corporate and other debt securities                     4,670           13           (18)        4,665
      Mortgage-backed securities                              3,830           43           (13)        3,860
      Equity securities                                         991          560           -           1,551
                                                            -------         ----         -----       -------
                                                           $ 25,738         $784         $ (35)     $ 26,487
                                                            =======         ====         =====       =======

   December 31, 1996:
      U.S. Treasury securities                             $    994         $ -          $  (3)     $    991
      U.S. Government and agency obligations                  7,155           12           (17)        7,150
      Obligations of states and political subdivisions       10,331           95            (6)       10,420
      Corporate and other debt securities                     5,187            5           (74)        5,118
      Mortgage-backed securities                              5,265           43           (35)        5,273
      Equity securities                                         953          312            (2)        1,263
                                                            -------         ----         -----       -------
                                                           $ 29,885         $467         $(137)     $ 30,215
                                                            =======         ====         =====       =======

Held to maturity securities:
   December 31, 1997:
      U.S. Treasury securities                             $  1,748         $  9         $ -        $  1,757
      U.S. Government and agency obligations                  5,412           32            (4)        5,440
      Obligations of states and political subdivisions       15,726          100            (5)       15,821
      Corporate and other debt securities                    17,407          121           (11)       17,517
                                                            -------         ----         -----       -------
                                                           $ 40,293         $262         $ (20)     $ 40,535
                                                            =======         ====         =====       =======

   December 31, 1996:
      U.S. Treasury securities                             $  2,250         $  1         $  (3)     $  2,248
      U.S. Government and agency obligations                  2,967            1           (12)        2,956
      Obligations of states and political subdivisions       19,729           90           (38)       19,781
      Corporate and other debt securities                    15,338           55           (69)       15,324
                                                            -------         ----         -----       -------
                                                           $ 40,284         $147         $(122)     $ 40,309
                                                            =======         ====         =====       =======
</TABLE> 


                                                                          - 37 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SECURITIES (CONTINUED)

The amortized cost and fair value of securities as of December 31, 1997, by
contractual maturity or call date, are shown below. Expected maturities may
differ from contractual maturities or call dates because the securities may be
called or prepaid with or without call or prepayment penalties.

<TABLE> 
<CAPTION> 

                                                          Available For Sale       Held To Maturity
                                                          ------------------       ----------------
                                                        Amortized     Fair      Amortized       Fair
                                                          Cost       Value        Cost         Value
                                                          ----       -----        ----         -----
                                                                         (In Thousands)
<S>                                                     <C>         <C>          <C>          <C> 
Due in one year or less                                 $ 3,439     $ 3,437      $11,260      $11,290
Due after one year through five years                    16,983      17,121       27,674       27,872
Due after five years through ten years                     -           -           1,359        1,373
Due after ten years                                         495         518         -            -
Mortgage-backed securities                                3,830       3,860         -            -
Equity securities                                           991       1,551         -            -
                                                        -------     -------      -------      -------

                                                        $25,738     $26,487      $40,293      $40,535
                                                        =======     =======      =======      =======
</TABLE> 

Equity securities include Federal Home Loan Bank stock with an aggregate cost
and fair value of $704,000 at December 31, 1997 and $702,000 at December 31,
1996.

Gross gains of $65,000 were realized on sales of securities available for sale
in 1997. There were no sales of securities in 1996 and 1995.

Securities with an amortized cost of $5,139,000 and $6,403,000 at December 31,
1976 and 1996 respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:

                                                          December 31,
                                                          -----------
                                                       1997         1996
                                                       ----         ----
                                                         (In Thousands)
Commercial, agricultural and financial               $ 12,520     $ 11,808
Real estate mortgages                                  98,383       91,865
Consumer                                               29,805       27,340
Other                                                   1,321        1,412
                                                     --------     --------

                                                      142,029      132,425
Unearned discount on loans                              4,517        4,279
Allowance for loan losses                               1,803        1,707
                                                     --------     --------
                                                     $135,709     $126,439
                                                     ========     ========


- 38 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following table presents changes in the allowance for loan losses:

                                                  Years Ended December 31,
                                                  ------------------------
                                            1997           1996           1995
                                            ----           ----           ----
                                                      (In Thousands)
Balance, beginning                        $ 1,707        $ 1,616        $ 1,523
    Provision for loan losses                 180            180            135
    Recoveries                                 39             14             53
    Loans charged off                        (123)          (103)           (95)
                                        ---------      ---------      ---------
Balance, ending                           $ 1,803        $ 1,707        $ 1,616
                                        =========      =========      =========

The recorded investment in impaired loans not requiring an allowance for loan
losses was $113,000 and $-0- at December 31, 1997 and 1996 respectively. At
December 31, 1997 and 1996, the recorded investment in impaired loans requiring
an allowance for loan losses was $-0- and $229,000 respectively. The related
allowance for loan losses associated with these loans was $25,000 at December
31, 1996. For the years ended December 31, 1997, 1996 and 1995, the average
recorded investment in these impaired loans was $177,000, $350,000 and $406,000
respectively, and no interest income was recognized on impaired loans in 1997
and 1996 while $5,000 was recognized on impaired loans in 1995.

BANK PREMISES AND EQUIPMENT

The major components of bank premises and equipment were as follows:
                                                               December 31,
                                                               ------------
                                                          1997             1996
                                                          ----             ----
                                                              (In Thousands)
     Land and land improvements                        $    438         $    438
     Buildings and improvements                           1,894            1,863
     Furniture and equipment                              1,672            1,583
                                                       --------         --------
                                                          4,004            3,884
     Less accumulated depreciation                        2,271            2,118
                                                       --------         --------
                                                       $  1,733         $  1,766
                                                       ========         ========

DEPOSITS

The composition of deposits is as follows:
                                                              December 31,
                                                              ------------
                                                         1997             1996
                                                         ----             ----
                                                             (In Thousands)
     Demand, non-interest bearing                      $ 22,462         $ 21,873
     Now and Money Market                                26,120           26,053
     Savings                                             20,833           20,665
     Time Certificates $100,000 or more                  15,445           13,530
     Other Time Certificates                            104,147          100,334
                                                       --------         --------
                                                       $189,007         $182,455
                                                       ========         ========
At December 31, 1997, the scheduled maturities of time deposits are as follows
(in thousands):

     1998                                                               $ 70,960
     1999                                                                 26,345
     2000                                                                 12,493
     2001                                                                  6,445
     2002                                                                  3,287
     Thereafter                                                               62
                                                                        --------
                                                                        $119,592
                                                                        ========

                                                                          - 39 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


BORROWINGS

The Bank has entered into an agreement whereby it can borrow up to approximately
$6,470,000 from the Federal Home Loan Bank. There were no outstanding balances
under this agreement as of December 31, 1997 and 1996.

REGULATORY MATTERS AND STOCKHOLDERS' EQUITY

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet the minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.

As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank's
category.

The Bank's actual capital ratios at December 31, 1997 and the minimum ratios
required for capital adequacy purposes and to be well capitalized under the
prompt corrective action provisions are presented below. The Corporation's
ratios were not materially different from those of the Bank.
<TABLE> 
<CAPTION> 
                                                                                
                                                                                           For Capital       
                                                                                             Adequacy          
                                                     Actual                                  Purposes         
                                                     ------                                  --------
                                                Amount    Ratio                Amount                          Ratio 
                                                ------    -----                ------                          -----
                                                                                   (Dollar Amounts In Thousands)
<S>                                            <C>        <C>    <C>                                <C> 
As of December 31, 1997:
    Total capital (to risk weighted assets)    $29,639    19.82% $greater than or equal to 11,963   greater than or equal to 8.00%
    Tier 1 capital (to risk weighted assets)    27,836    18.61   greater than or equal to  5,982   greater than or equal to 4.00 
    Tier 1 capital (to average assets)          27,836    12.82   greater than or equal to  8,684   greater than or equal to 4.00 

As of December 31, 1996:
    Total capital (to risk weighted assets)    $27,988    19.77% $greater than or equal to 11,327   greater than or equal to 8.00%
    Tier I capital (to risk weighted assets)    26,281    18.56   greater than or equal to  5,664   greater than or equal to 4.00 
    Tier I capital (to average assets)          26,281    12.36   greater than or equal to  8,503   greater than or equal to 4.00 
</TABLE> 
<TABLE> 
<CAPTION> 
                                                               To Be Well
                                                            Capitalized Under
                                                            Prompt Corrective
                                                            Action Provisions
                                                            -----------------
                                                     Amount                  Ratio
                                                     ------                  -----
                                                      (Dollar Amounts In Thousands)
<S>                                                  <C>         <C> 
As of December 31, 1997:
    Total capital (to risk weighted assets)          $14,954     greater than or equal to 10.00%
    Tier 1 capital (to risk weighted assets)           8,973     greater than or equal to  6.00
    Tier 1 capital (to average assets)                10,855     greater than or equal to  5.00
As of December 31, 1996:
    Total capital (to risk weighted assets)          $14,159     greater than or equal to 10.00%
    Tier I capital (to risk weighted assets)           8,496     greater than or equal to  6.00
    Tier I capital (to average assets)                10,629     greater than or equal to  5.00
</TABLE> 

Certain restrictions exist regarding the ability of the Bank to transfer funds
to the Corporation in the form of cash dividends, loans or advances. At December
31, 1997, $22,754,000 of undistributed earnings of the Bank, included in the
consolidated stockholders' equity, was available for distribution to the
Corporation as dividends without prior regulatory approval.

In August 1990, the Board of Directors adopted a Shareholder Rights Plan and
declared a dividend distribution of one right to purchase a share of the
Corporation's common stock at $12.24 for each share issued and outstanding, upon
the occurrence of certain events, as defined in the Plan. These rights are fully
transferrable and expire on August 31, 2000. The rights are not considered
potential common shares for earnings per share purposes because there is no
indication that any event will occur which would cause them to become
exercisable.

In 1995, the Corporation established a dividend reinvestment and stock purchase
plan, effective January 1, 1996. Under the Plan, additional shares of Juniata
Valley Financial Corp. may be purchased at the prevailing market prices with
reinvested dividends and voluntary cash payments. To the extent that shares are
not available in the open market, the Corporation has reserved 100,000 shares of
common stock to be issued under the Dividend Reinvestment Plan. During the year
ended December 31, 1997, shares were purchased on the open market to satisfy the
Dividend Reinvestment Plan, while 4,087 shares were issued under the Plan in
1996. The Corporation reserved 100,000 shares of common stock for the employee
stock purchase plan. In 1997, 3,600 shares were issued under the Plan (see
"Employee Benefits").

In 1997, the Board of Directors approved a plan to repurchase up to
approximately 10% of the Corporation's common stock. As of December 31, 1997,
14,898 shares were purchased under the plan.


- 40 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


EMPLOYEE BENEFITS

Defined benefit retirement plan:
    The Corporation has a defined benefit retirement plan covering substantially
    all of its employees. The benefits are based on years of service and the
    employees' compensation. The Corporation's funding policy is to contribute
    annually the maximum amount that can be deducted for federal income tax
    purposes. Contributions are intended to provide not only for benefits
    attributed to service but also for those expected to be earned in the
    future.

    The following table sets forth the Plan's funded status and amounts
    recognized in the balance sheets at December 31:
<TABLE> 
<CAPTION> 
                                                                                1997        1996
                                                                                ----        ----
                                                                                 (In Thousands)
          <S>                                                                 <C>          <C> 
          Actuarial present value of:
             Accumulated benefit obligation, including vested benefits
                of $1,694,000 and $1,714,000                                  $(1,702)     $(1,726)
                                                                              =======      =======
             Projected benefit obligation for service rendered to date        $(2,583)     $(2,336)
          Plan assets at fair value                                             2,401        2,187
                                                                              -------      -------

          Plan assets less than projected benefit obligation                     (182)        (149)
          Unrecognized net gain from experience different from that assumed      (130)        (145)
          Unrecognized net transition asset                                       (28)         (29)
                                                                              -------      -------

          Accrued pension cost                                                $  (340)     $  (323)
                                                                              =======      =======
</TABLE> 
    Pension expense included the following components for the years ended
    December 31:
<TABLE> 
<CAPTION> 
                                                                                1997        1996        1995
                                                                                ----        ----        ----
                                                                                       (In Thousands)
          <S>                                                                  <C>         <C>         <C> 
          Service cost, benefits earned during the year                        $  98       $ 110       $ 101  
          Interest cost on projected benefit obligation                          166         157         143  
          Actual return on plan assets                                          (212)       (164)       (204) 
          Net amortization                                                        51          15          73  
                                                                               -----       -----       -----  
                                                                               $ 103       $ 118       $ 113
                                                                               =====       =====       =====
<CAPTION>                                                                                                     
    Assumptions used in the accounting were:                                                                  
                                                                                1997        1996        1995  
                                                                                ----        ----        ----
    <S>                                                                         <C>         <C>         <C> 
          Discount rates                                                         7.5%        7.5%        7.5% 
          Rates of increase in compensation levels                               4.0         4.0         4.0  
          Expected long-term rate of return on assets                            7.5         7.5         7.5   
</TABLE> 
    Assets in the Plan consist primarily of U.S. Government securities, U.S.
    Government security mutual funds and certificates of deposit.



                                                                          - 41 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


EMPLOYEE BENEFITS (CONTINUED)

Supplemental retirement plan:
    The Corporation has a non-qualified supplemental retirement plan for
    directors and key employees. At December 31, 1997 and 1996, the present
    value of the future liability was $815,000 and $751,000 respectively. The
    Corporation has funded these plans through the purchase of annuities and
    life insurance policies, which have an aggregate cash surrender value of
    $899,000 and $803,000 at December 31, 1997 and 1996 respectively. For the
    years ended December 31, 1997, 1996 and 1995, $76,000, $58,000 and $47,000
    was charged to expense in connection with this plan.

Deferred compensation:
    The Corporation has entered into deferred compensation agreements with
    certain directors to provide each director an additional retirement benefit,
    or to provide their beneficiary a benefit in the event of pre-retirement
    death. At December 31, 1997 and 1996, the present value of the future
    liability was $1,162,000 and $1,092,000 respectively. To fund the benefits
    under these agreements, the Corporation is the owner and beneficiary of life
    insurance policies on the lives of the directors. The policies had an
    aggregate cash surrender value of $909,000 and $797,000 at December 31, 1997
    and 1996, respectively. For the years ended December 31, 1997, 1996 and
    1995, $178,000, $183,000 and $223,000 respectively, was charged to expense
    in connection with this plan.

Employee Stock Purchase Plan:
    In 1996, the Corporation established an Employee Stock Purchase Plan. Under
    the Plan, employees, through payroll deductions, are able to purchase shares
    of stock annually. The option price of the stock purchases shall be between
    85% and 100% of the fair market value of the stock on the commencement date
    as determined annually by the Board of Directors. The maximum number of
    shares which employees may purchase under the Plan is 100,000; however, the
    annual issuance of shares shall not exceed 5,000 shares plus any unissued
    shares from prior offerings. In 1997, 3,600 shares were issued under the
    Plan and $-0- was charged to expense in connection with this Plan.

Salary continuation plan:
    In 1997, the Corporation established a non-qualified Salary Continuation
    Plan for key employees. At December 31, 1997, the present value of the
    future liability was $10,000. The Corporation has funded the Plan through
    the purchase of life insurance policies which have an aggregate cash
    surrender value of $1,261,000 at December 31, 1997. For the year ended
    December 31, 1997, $10,000 was charged to expenses in connection with the
    Plan.



- 42 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES

The provision for federal income taxes consisted of the following:

                                                    Years Ended December 31,
                                                    ------------------------
                                                 1997         1996         1995
                                                 ----         ----         ----
                                                        (In Thousands)
    Current                                   $   903      $   837      $   854
    Deferred                                      (53)         (56)         (74)
                                              -------      -------      -------

                                              $   850      $   781      $   780
                                              =======      =======      =======

A reconciliation of the statutory income tax expense computed at 34% to the
income tax expense included in the statements of income is as follows:

                                                    Years Ended December 31,
                                                    ------------------------
                                                 1997         1996         1995
                                                 ----         ----         ----
                                                        (In Thousands)
    Federal income tax at statutory rate      $ 1,324      $ 1,205      $ 1,170
    Tax-exempt interest                          (436)        (446)        (434)
    Disallowance of interest expense               69           70           62
    Other                                        (107)         (48)         (18)
                                              -------      -------      -------

                                              $   850      $   781      $   780
                                              =======      =======      =======

The income tax provision includes $22,000 in 1997, $-0- in 1996 and 1995
respectively, of income tax related to investment security gains.

The net deferred tax asset in the accompanying balance sheets includes the
following amounts of deferred tax assets and liabilities:

                                                                 December 31,
                                                               1997       1996
                                                               ----       ----
                                                                (In Thousands)
    Deferred tax assets:                                         
        Allowance for loan losses                            $   619    $   586
        Deferred directors' fees                                 391        367
        Pension liabilities                                      306        306
                                                             -------    ------- 

            Total deferred tax assets                          1,316      1,259
                                                             -------    -------
                                                                      
    Deferred tax liabilities:                                            
        Bank premises and equipment                              (54)       (54)
        Unrealized appreciation on securities 
         available for sale                                     (255)      (112)
        Other                                                     (4)       -
                                                             -------    ------- 

            Total deferred tax liabilities                      (313)      (166)
                                                             -------    ------- 

            Net deferred tax asset                           $ 1,003    $ 1,093
                                                             =======    =======

 
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

The Bank has had banking transactions in the ordinary course of business with
its executive officers, directors, and their related interests on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. At December 31, 1997 and 1996, these
persons were indebted to the Bank for loans totaling $1,744,000 and $1,996,000
respectively. During 1997, loans totaling $4,488,000 were disbursed and loan
repayments totaled $4,740,000.

                                                                          - 43 -
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS

The Bank rents equipment under operating leases that expire through 2002.
Equipment and servicing fees were $385,000, $378,000 and $368,000 for the years
ended December 31, 1997, 1996 and 1995 respectively. Additionally the Bank
leases a branch office building for which rent expense was $27,000 in 1997 and
1996 respectively and $26,000 in 1995.

Minimum future payments under all noncancellable lease agreements as of December
31, 1997 are (in thousands):

1998                                                                        $269
1999                                                                         232
2000                                                                         244
2001                                                                         234
2002                                                                         166
                                                                          ------

                                                                          $1,145
                                                                          ======

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet.

The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.

A summary of the Bank's financial instrument commitments is as follows:

                                                              December 31,
                                                          1997            1996
                                                          ----            ----
                                                             (In Thousands)
    Commitments to extend credit                        $17,206         $14,715
    Outstanding letters of credit                           250             293


Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal or commercial real
estate, accounts receivable, inventory and equipment.

Outstanding letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.

CONCENTRATION OF CREDIT RISK

The Bank grants commercial, residential and consumer loans to customers
primarily located in the counties of Juniata, Mifflin, Perry, Huntingdon,
Franklin and Snyder, Pennsylvania. The concentrations of credit by type of loan
are set forth in the note "Loans Receivable and Allowance for Loan Losses".
Although the Bank has a diversified loan portfolio, its debtors' ability to
honor their contracts is influenced by the region's economy.

- 44 - 
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Management uses its best judgement in estimating the fair value of the
Corporation's financial instruments; however, there are inherent weaknesses in
any estimation technique. Therefore, the fair value estimates herein are not
necessarily indicative of the amounts the Corporation could have realized in a
sales transaction on the dates indicated. The estimated fair value amounts have
been measured as of their respective year ends and have not been re-evaluated or
updated for purposes of these consolidated financial statements subsequent to
those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year end.

The following information should not be interpreted as an estimate of the fair
value of the entire corporation since a fair value calculation is only provided
for a limited portion of the Corporation's assets. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Corporation's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Bank's financial instruments at December 31,
1997 and 1996:

 . For cash, cash equivalents, interest-bearing demand deposits in other banks
  and federal funds sold, the carrying amount is a reasonable estimate of fair
  value.

 . For securities, fair values are based on quoted market prices, where
  available. If quoted market prices are not available, fair values are based on
  quoted market prices of comparable securities.

 . For variable-rate loans that reprice frequently and which entail no
  significant changes in credit risk, fair values are based on carrying values.
  All commercial loans and substantially all real estate mortgages are variable
  rate loans. The fair value of other loans (i.e., consumer loans and fixed-rate
  real estate mortgages) are estimated using discounted cash flow analyses, at
  interest rates currently offered for loans with similar terms to borrowers of
  similar credit quality.

 . Fair values for demand deposits, savings accounts and certain money market
  deposits are, by definition, equal to the amount payable on demand at the
  reporting date (i.e., their carrying amounts). Fair values of fixed-maturity
  certificates of deposit are estimated using a discounted cash flow calculation
  that applies interest rates currently being offered on certificates to a
  schedule of aggregated expected monthly maturity of deposits.

 . For accrued interest receivable and accrued interest payable, the carrying
  amount is a reasonable estimate of fair value.

 . Fair value of commitments to extend credit is estimated using the fees
  currently charged to enter into similar agreements, taking into account market
  interest rates, the remaining terms and present credit worthiness of the
  counterparties. The fair value of guarantees and letters of credit is based on
  fees currently charged for similar agreements.

The estimated fair values of the Corporation's financial instruments were as
follows:
<TABLE> 
<CAPTION> 
                                                                  December 31,
                                                         1997                    1996
                                                         ----                    ----
                                                 Carrying     Fair       Carrying      Fair
                                                  Amount      Value       Amount       Value
                                                  ------      -----       ------       -----
                                                             (In Thousands)
<S>                                              <C>         <C>         <C>          <C> 
Financial assets:                            
    Cash and due from banks                      $  6,516    $  6,516    $  5,857     $  5,857
    Interest-bearing deposits in other banks           17          17          65           65
    Federal funds sold                              4,180       4,180       3,100        3,100
    Securities                                     66,780      67,022      70,499       70,524
    Loans receivable, net of allowance            135,709     135,591     126,439      126,197
    Accrued interest receivable                     1,573       1,573       1,525        1,525
                                                                    
Financial liabilities:                                              
    Deposits                                      189,007     189,651     182,455      183,199
    Accrued interest payable                          694         694         696          696
                                                                    
Off-balance sheet financial instruments:                            
    Commitments to extend credit                      -           -           -            -
    Standby letters of credit                         -           -           -            -
</TABLE> 


                                                                          - 45 -
<PAGE>
 
       JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARENT COMPANY ONLY FINANCIAL INFORMATION

<TABLE> 
<CAPTION> 

                                BALANCE SHEETS

                                                             December 31,
                                                             ------------
                                                         1997           1996
                                                         ----           ----
                                                            (In Thousands)
<S>                                                      <C>             <C>  
        ASSETS

Cash                                                     $    12         $   103
Investment in Bank subsidiary                             28,189          26,441
Securities available for sale                                558             235
Due from Bank subsidiary                                      22              15
Other                                                          4            -
                                                         -------         -------
                                                         $28,785         $26,794
                                                         =======         =======

    LIABILITY AND STOCKHOLDERS' EQUITY

LIABILITY, other                                         $    73         $    31

STOCKHOLDERS' EQUITY                                      28,712          26,763
                                                         -------         -------

                                                         $28,785         $26,794
                                                         =======         =======

<CAPTION> 

                             STATEMENTS OF INCOME

                                                                                Years Ended December 31,
                                                                                ------------------------
                                                                             1997         1996         1995
                                                                             ----         ----         ----
                                                                                     (In Thousands)
                                                                   
<S>                                                                        <C>          <C>          <C> 
Dividends from Bank subsidiary                                             $ 1,504      $   856      $   807
Other dividend income                                                           16            5            4
Other expenses                                                                 (28)         (42)         (15)
                                                                           -------      -------      -------

        Income before equity in undistributed net income of subsidiary       1,492          819          796

Equity in undistributed net income of Bank subsidiary                        1,553        1,945        1,864
                                                                           -------      -------      -------

        Net income                                                         $ 3,045      $ 2,764      $ 2,660
                                                                           =======      =======      =======  
</TABLE> 



- 46 -
<PAGE>
 
       JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                            THE JUNIATA VALLEY BANK
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)

                           STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 

                                                                      Years Ended December 31,
                                                                      ------------------------
                                                                   1997          1996         1995
                                                                   ----          ----         ----
                                                                            (In Thousands)

<S>                                                               <C>          <C>          <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                    $ 3,045      $ 2,764      $ 2,660
    Adjustments to reconcile net income to net cash
        provided by operating activities:
        Undistributed net income of Bank subsidiary                (1,553)      (1,945)      (1,864)
        Increase in other assets                                       (4)         -            -
        (Increase) decrease in due from subsidiary                     (7)          18           (8)
                                                                  -------      -------      -------    

            Net cash provided by operating activities               1,481          837          788
                                                                  -------      -------      -------

CASH FLOWS USED IN INVESTING ACTIVITIES
    Purchases of available for sale securities                       (199)         (47)         -
                                                                  -------      -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES
    Dividends paid and cash paid in lieu of fractional shares        (943)        (836)        (788)
    Stock issued under dividend reinvestment plan                     -            149          -
    Stock issued under employee stock purchase plan                   113          -            -
    Purchase of treasury stock                                       (543)         -            -
                                                                  -------      -------      -------

            Net cash used in financing activities                  (1,373)        (687)        (788)
                                                                  -------      -------      -------

            Increase (decrease) in cash                               (91)         103          -

Cash:
    Beginning                                                         103          -            -
                                                                  -------      -------      -------

    Ending                                                        $    12      $   103      $   -
                                                                  =======      =======      =======
</TABLE> 


MERGER

In December 1997, the Corporation announced the signing of a definitive
agreement to merge with Lewistown Trust Company, a commercial bank with total
assets of $112 million, headquartered in Lewistown, Pennsylvania. Under terms of
the agreement, each Lewistown Trust shareholder will receive one share of the
Corporation's common stock for each Lewistown Trust share and Lewistown trust
will be merged into the bank. The transaction will be accounted for under the
pooling-of-interests method of accounting and is subject to regulatory and
shareholder approvals. The merger is expected to be consummated in the second or
third quarter of 1998.

The following table provides a summary of the consolidated operating results and
financial condition on a pro forma basis as of and for the year ended December
31, 1997:

<TABLE> 
<CAPTION> 

                                            Corporation        Lewistown       Corporation
                                           (As Reported)         Trust          Pro forma
                                                            (In Thousands)
<S>                                        <C>                 <C>             <C>  
Net interest income                         $  8,682           $  3,773          $ 12,455
Net income                                     3,045              1,527             4,572
Total assets                                 220,910            111,667           332,577
Total stockholders' equity                    28,712             14,119            42,831
</TABLE> 



                                                                          - 47 -
<PAGE>
 
                         AVAILABILITY OF FORM 10-K

       A copy of the Corporation's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission will be available without charge upon written
request. This request should be addressed to:

                                Ms. Linda Engle
                        Juniata Valley Financial Corp.
                                  P.O. Box 66
                             Mifflintown, PA 17059

       Pursuant to Part 350 to FDIC's Annual Disclosure Regulation, Juniata
Valley Financial Corp. will make available to you upon request, financial
information about this Bank. The purpose of this regulation is to facilitate
more informed decision making by you, our shareholders, by providing statements
containing financial information for the last two years.

       Please contact:

                                 Ms. Ruth Nace
                            The Juniata Valley Bank
                                  P.O. Box 66
                             Mifflintown, PA 17059




- 48 -