<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                             THE JUNIATA VALLEY BANK
                                DECEMBER 31, 1998

                                    CONTENTS
<TABLE> 
<CAPTION> 
                                                                                             Page
<S>                                                                                      <C> 
Stock, Dividend and Broker Information ..................................................      2
Letter to Shareholders ..................................................................      3
Corporation Officers and Directors ......................................................      4
Advisory Board Members ..................................................................      5
Bank Officers ...........................................................................      6
Business ................................................................................ 7 - 15
Financial Highlights ....................................................................     16
Management's Discussion and Analysis of Financial Condition and Results of Operations ...17 - 31
Report of Independent Auditors ..........................................................     32
Financial Statements:
     Consolidated Balance Sheets ........................................................     33
     Consolidated Statements of Income ..................................................     34
     Consolidated Statements of Stockholders' Equity ....................................     35
     Consolidated Statements of Cash Flows ..............................................     36
     Notes to Consolidated Financial Statements .........................................37 - 52
</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 1998 and 1997 are provided in the
table below.

<TABLE> 
<CAPTION> 
                             1998                                      1997                          
                             ----                                      ----                          
                                                Dividends                                 Dividends  
     Quarter         High           Low         per share         High        Low         per share  
     -------         ----           ---         ---------         ----        ---         ---------  
     <S>           <C>             <C>          <C>             <C>          <C>          <C>        
     First         $38.00          $36.50                       $32.80       $32.00                  
     Second         39.50           38.00          .36           34.00        32.80          .32     
     Third          39.75           39.50                        35.00        34.00                  
     Fourth         39.50           37.50          .38           36.50        35.00          .34     
                                            
</TABLE> 
                                                         
   For further information, we refer you to:

Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA  17601
(800) 456-9234

Janney, Montgomery, Scott, Inc.
48 E. Market St., P.O. Box 2246
York, PA  17405-2246
(717) 845-5611

F.J. Morrissey & Co., Inc.
1700 Market St., Suite 1420
Philadelphia, PA  19103-3913
(800) 842-8928

Sandler O'Neil & Partners, L.P.
Two World Trade Center 104th Floor
New York, NY  10048
(800) 635-6851

Ryan, Beck & Co.
150 Monument Road, Suite 106
Bala Cynwyd, PA  19004
(800) 223-8969


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>
 
             [LOGO OF JUNIATA VALLEY FINANCIAL CORP APPEARS HERE]


                               POST OFFICE BOX 66
                            TELEPHONE (717) 436-8211

Dear Shareholder,

     It is hard to imagine it is over a year since the merger with the Lewistown
Trust Company was announced. As was anticipated, consolidating the operations
area of the two banks was indeed a difficult task. However, with that aspect of
the merger behind us, we can now devote more time and attention to offering more
products and services to our shareholders and customers. As a result of the
merger we now have twelve offices located conveniently throughout the Juniata
Valley to serve our customers.

     Excluding the expense incurred related to the merger, this is the fifteenth
consecutive year of increased earnings.

     We would like to take this opportunity to thank Harry B. Fairman, Jr. for
his years of dedication, loyalty and support. Mr. Fairman has been a director
since 1983 and will retire in May, 1999. He is the past Chairman of the Board
and led the bank during its most profitable years in its 131 year history.

     As always, we would like to thank you for your continued loyalty and
support. Further, we want to assure you that the Officers, Directors and
employees will continue to work diligently to ensure that the Juniata Valley
Financial Corp. continues to be a quality financial institution.

                                         Sincerely,

                                         /s/ A. Jerome Cook
                                         Chairman and CEO

                                         /s/ Francis J. Evanitsky
                                         President and COO

AJC:FJE:rhn

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

A. Jerome Cook
Chairman

Francis J. Evanitsky
President

Ronald H. Witherite
Vice Chairman, Secretary

Linda L. Engle
Treasurer

                                   Directors

Joe E. Benner
Owner, Benner Automotive

A. Jerome Cook
Chairman & CEO, The Juniata Valley Bank

Martin L. Dreibelbis
Self-Employed, Petroleum Consultant

Francis J. Evanitsky
President & COO, The Juniata Valley Bank

Harry B. Fairman, Jr.
President, Hilltop Oil, Inc.

Philip E. Gingerich, Jr.
President, Central Insurers Group, Inc.

Karl E. Guss
Funeral Director, Guss Funeral Home

Marshall L. Hartman
Retired President, Lewistown Trust Co.

Don E. Haubert
President, Haubert Homes

Timothy I. Havice
Restaurant Operator

Charles L. Hershberger
President, Hoenstine Funeral Homes, Inc.

Robert K. Metz, Jr.
President, Metz Poultry Farms, Inc.

Dale G. Nace
Owner, Glenn Nace Plumbing & Heating;
GlenDale Storage

John A. Renninger
President, A. D. Renninger
Lumber Company

Edward R. Rhodes
Retired Partner, E. R. Rhodes & Son

Richard M. Scanlon, DMD
Self-Employed Dentist

Harold B. Shearer
Self-employed Farmer

Jan G. Snedeker
President, Snedeker Oil Co., Inc.

John M. Wilson
Retired President, Wilson Oil, Co.

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>
 
                             ADVISORY BOARD MEMBERS

MILLERSTOWN OFFICE                     MONUMENT SQUARE /WAL-MART OFFICES 
R. Franklin Campbell                   William H. Bradford               
Lowell R. Frantz, C.L.U.               William R. Carter                 
Gregory J. Gordon                      Sharon Havice                     
Gerald M. Lyter                        Harry F. Stimely                  
James A. Witmer                        Frank A. Zampelli                 
Gary G. Wright                                                           
                                       
PORT ROYAL OFFICE                      GARDENVIEW OFFICE                      
Clinton F. Bashore                     David B. Esh                           
Richard J. Junk                        M. Randall French                      
Dennis A. Long                         H. Ross Harshbarger                    
Freeburn Love                          Donald R. Hartzler                     
Betty D. Ryan                          Jerry L. Wagner                        
Earl J. Wagner                                                                
                                           
McALISTERVILLE OFFICE                  MARKET STREET/WATER STREET OFFICES     
Clair Ehrenzeller                      George W. Anderson                     
Clair S. Graybill                      Susan M. McCartney                     
Samuel E. Knouse                       R. Jack Morgan                         
Ralph E. Rickenbaugh                   Steve R. Watson                        
Joseph D. Ritzman                                                             
Richard J. Sankey                                            
                                                             
BLAIRS MILLS OFFICE                    BURNHAM OFFICE                          
Wayde H. Cisney                        Mark S. Elsesser                   
William R. Goshorn                     Daniel B. Firth  
George Love                            David E. Walker  
C. Roger Searer

                                                                             -5-
<PAGE>
 
                        THE JUNIATA VALLEY BANK OFFICERS 
          A Wholly-Owned Subsidiary of Juniata Valley Financial Corp.

MIFFLINTOWN OFFICE
     A. Jerome Cook ......................................... Chairman & C.E.O.
     Francis J. Evanitsky .................................. President & C.O.O.
     Helen L. Sieber ................ Vice President & Community Office Manager
     Jeffrey A. Pottorff .............................................. Auditor
     Lou Ann Wilson ........................................ Compliance Officer
     Paul M. Lipka .......................................... Marketing Officer
     Ruth H. Nace ......................................... Executive Secretary
  ADMINISTRATION             
     Donald L. Musser ............... Sr. Vice President, Branch Administration
     Pamela S. Eberman ................................. Human Resource Manager
  CONTROLLER                 
     Linda L. Engle .......................... Executive Vice President, C.F.O.
     Susan B. Cherry ............................................... Controller
     Anna Mae Peoples .................... Vice President, Assistant Controller
  LOANS                      
     Edward L. Kauffman ............... Sr. Vice President, Loan Administration
     Robert G. Dillon ............................ Vice President, Loan Officer
     Scott E. Nace ................................Vice President, Loan Officer
     David A. Pecht ......................... Vice President, Mortgage Division
     Kurt L. McKinney, Jr .................................... Sr. Loan Officer
     Loretta A. Saylor ........................................... Loan Officer
     John B. Zavacky .............................. Loan Administration Officer
  OPERATIONS                 
     Judy R. Aumiller .......................... Sr. Vice President, Operations
     Kathy D. Hutchinson ........................... Vice President, Operations
     Sherise Pelizzari ..................................... Operations Manager
     Deborah A. Sheaffer ................................... Operations Officer
  TRUST                      
     Terry S. Love .......................... Sr. Vice President, Trust Officer
     James C. Dillman ........................... Vice President, Trust Officer
     Cynthia L. Williams ........................ Vice President, Trust Officer
BLAIRS MILLS OFFICE          
     C. Roger Searer ................. Vice President, Community Office Manager
     Wanda K. Rowles ................................. Customer Service Officer
BURNHAM OFFICE               
     Leann M. Fisher ................................. Community Office Manager
GARDENVIEW OFFICE            
     M. Randall French ............... Vice President, Community Office Manager
MARKET STREET OFFICE         
     R. Jack Morgan .................. Vice President, Community Office Manager
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
MONUMENT SQUARE OFFICE       
     Lee Ellen Foose ................................. Community Office Manager
     Suzanne Booher .................................. 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
WAL-MART SUPERCENTER OFFICE  
     J. Neal Shawver ................................. Community Office Manager
WATER STREET OFFICE          
     Catherine J. Laub ............................... Community Office Manager

-6-
<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 twelve branch banking offices and two trust
service offices. At December 31, 1998, the Bank had 140 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,
1998, the Bank had four offices in Juniata County, one office in Perry County,
six offices in Mifflin County and one office in Huntingdon County.

On July 1, 1998, the Corporation completed the merger of Lewistown Trust Company
(Lewistown), a commercial bank located in Lewistown, Pennsylvania, by issuing
931,700 shares of common stock for all of the outstanding common stock of
Lewistown, except for the 5,324 shares of Lewistown held by the Corporation
which were cancelled. The merger was accounted for under the
pooling-of-interests method of accounting and, as such, all prior period
information has been restated.

COMPETITION

The Bank's principal market area includes all of Mifflin and Juniata Counties,
and portions of Perry, Huntingdon, Centre, Franklin and Snyder Counties. There
are 15 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 15 commercial banks with operations in the Bank's market area, the Bank
ranked second in assets as of December 31, 1998.

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, 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.

                                                                             -7-
<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. The Corporation's ratios were not materially different from those of
the Bank.

                                                    December 31,
                                                    ------------
                                          1998          1997          1996
                                          ----          ----          ----
Risk-weighted assets ratio:
    Tier I                               21.16%        20.33%        20.28%
    Total                                22.36%        21.50%        21.45%

Total assets leverage ratio:
    Tier I                               13.12%        12.50%        12.04%

SECURITIES PORTFOLIO

The following table sets forth the carrying amount of securities at the dates
indicated:


<TABLE>
<CAPTION>  
                                                                                    December 31, 
                                                                                    ------------ 
                                                                     1998               1997               1996
                                                                     ----               ----               ----
                                                                                   (In Thousands)
<S>                                                                <C>                <C>                <C> 
Available for sale securities (at fair value):

    U.S. Treasury and other U.S. government obligations            $  8,873           $ 23,216           $ 22,787
    States and political subdivisions                                28,123             26,960             28,368
    Other corporate                                                   4,872              5,082              6,953
    Mortgage-backed                                                  11,046             16,501             17,124
    Equity                                                            1,806              1,705              1,440
                                                                   --------           --------           --------
                                                                     54,720             73,464             76,672
                                                                   --------           --------           --------
Held to maturity securities (at amortized cost):

    U.S. Treasury and other U.S. government obligations              16,042              7,160              5,217
    States and political subdivisions                                30,297             15,726             19,729
    Other corporate                                                  22,446             17,407             15,338
                                                                   --------           --------           --------
                                                                     68,785             40,293             40,284
                                                                   --------           --------           --------
        Total securities                                           $123,505           $113,757           $116,956
                                                                   ========           ========           ========
</TABLE> 

-8-
<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, 1998
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, 1998, 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            $ 6,120      6.32%    $ 2,602        6.01%     $    -           -       $   151       4.96%
    State and political
        subdivisions                     9,339      5.36      17,946        5.10         565        6.05%          273       6.50
    Other corporate                      1,134      5.81       3,682        6.02          56        6.65             -          -
    Mortgage-backed                        685      6.37          73        6.29         409        7.63         9,879       6.81
                                       -------               -------                  ------                   -------
                                        17,278                24,303                   1,030                    10,303
                                       -------               -------                  ------                   -------
Held to maturity:

    U.S. Treasury and other U.S. 
        government agencies              5,999      6.41      10,043        5.97           -           -             -          -
    State and political
        subdivisions                     6,366      4.53      16,956        4.24       6,975        3.95             -          -
    Other corporate                      2,707      6.72      19,739        6.19           -           -             -          -
                                       -------               -------                  ------                   -------
                                        15,072                46,738                   6,975           -             -
                                       -------               -------                  ------                   -------
            Total                      $32,350               $71,041                  $8,005                   $10,303
                                       =======               =======                  ======                   =======
</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 in other comprehensive income, net of the 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.

                                                                             -9-
<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 three
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 twenty-one percent of
total loans, average a three to four 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,
                                                                         ------------
                                               1998           1997           1996           1995           1994
                                               ----           ----           ----           ----           ----
                                                                        (In Thousands)
<S>                                          <C>            <C>            <C>            <C>            <C> 
Commercial, financial and agricultural       $ 15,047       $ 16,110       $ 15,531       $ 15,132       $ 16,433
Real estate mortgage                          133,047        142,216        130,865        125,987        122,591
Consumer (less unearned discount)              41,049         32,428         30,822         30,116         31,231
All other                                       2,819          2,945          3,674          4,184          4,392
                                             --------       --------       --------       --------       --------
    Total loans                              $191,962       $193,699       $180,892       $175,419       $174,647
                                             ========       ========       ========       ========       ========
</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 2000         After
                                               1999         Thru 2003          2004          Total
                                               ----         ---------          ----          -----
                                                                  (In Thousands)
<S>                                          <C>           <C>              <C>             <C> 
Commercial, agricultural and financial       $15,047       $        -       $       -       $15,047
All other                                      2,819                -               -         2,819
                                             -------       ----------       ---------       -------
    Total loans                              $17,866       $        -       $       -       $17,866
                                             =======       ==========       =========       =======
</TABLE> 

-10-
<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,
                                                                                  ------------
                                                      1998            1997            1996            1995            1994
                                                      ----            ----            ----            ----            ----
                                                                                 (In Thousands)
<S>                                                 <C>             <C>             <C>             <C>             <C> 
Average loans outstanding                           $189,778        $186,510        $174,575        $171,388        $168,041
                                                    ========        ========        ========        ========        ========
Nonaccrual loans                                    $      -        $    239        $    482        $    512        $    433
Accruing loans past due
    90 days or more                                      386             395             408             511             520
Restructured loans                                         -             173               -               -               -
                                                    --------        --------        --------        --------        --------
    Total                                           $    386        $    807        $    890        $  1,023        $    953
                                                    ========        ========        ========        ========        ========
Ratio of non-performing loans
    to average loans outstanding                         .20%            .43%            .51%            .60%            .57%

</TABLE> 

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

<TABLE> 
<CAPTION> 
                                                      1998            1997            1996            1995            1994
                                                      ----            ----            ----            ----            ----
                                                                                 (In Thousands)
<S>                                                 <C>             <C>             <C>             <C>             <C> 
Nonaccrual loans                                    $      -        $    239        $    482        $    512        $    433
Restructured loans                                         -             173               -               -               -
Interest income that would have been
    recorded under original terms                          -              20              56              48              28
Interest income recorded
    during the period                                      -              24               4               5               9
Commitments to lend additional funds                       -               -               -               -               -
</TABLE> 

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.

                                                                            -11-
<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> 
                                             1998           1997           1996           1995           1994
                                             ----           ----           ----           ----           ----
                                                                      (In Thousands)
<S>                                        <C>            <C>            <C>            <C>            <C> 
Average loans outstanding                  $189,778       $186,510       $174,575       $171,388       $168,041
                                           ========       ========       ========       ========       ========
Allowance for loan loss January 1          $  2,390       $  2,350       $  2,228       $  2,115       $  2,034

Losses charged to allowance
    Commercial                                   37             60             58             12          -
    Real estate                                  13             12          -                 28             92
    Consumer                                     93            161             98             97            103
                                           --------       --------       --------       ---------      ---------

                                                143            233            156            137            195
                                           --------       --------       --------       ---------      ---------
Recoveries credited to allowance
    Commercial                                    1             17              2              3          -
    Real estate                               -              -              -                 42              2
    Consumer                                     19             36             46             15             29
                                           --------       -------        --------       ---------      ---------

                                                 20             53             48             60             31

Net charge-offs                                 123            180            108             77            164

Provision for possible loan losses              210            220            230            190            245
                                           --------       --------       --------       ---------      ---------

Allowance for loan losses December 31      $  2,477       $  2,390       $  2,350       $  2,228       $  2,115
                                           ========       ========       ========       =========      =========
Ratio of net charge-offs to
    average loans outstanding                   .06%           .10%           .06%           .04%           .10%

</TABLE> 

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> 

                         1998                    1997                 1996                  1995                   1994
                         ----                    ----                 ----                  ----                   ----
                                                                 (In Thousands)
                                % of                  % of                 % of                    % of                  % of
                 Amount         Loan     Amount       Loan     Amount      Loan     Amount         Loan     Amount       Loan
                 ------         ----     ------       ----     ------      ----     ------         ----     ------       ----

<S>             <C>            <C>       <C>          <C>      <C>         <C>      <C>            <C>      <C>          <C> 
Commercial       $  537          9.3%    $  482        9.9%    $  569      10.6%    $  510         11.0%    $  471       11.9%
Real estate         483         69.3        483       73.4        436      72.3        432         71.8        416       70.2
Consumer            741         21.4        694       16.7        617      17.1        597         17.2        651       17.9
Unallocated         716          -          731        -          728       -          689          -          577        -
                 ------        ----      ------       ----     ------      ----     ------         ----     ------       ----

    Total        $2,477        100%      $2,390      100%      $2,350       100%     $2,228        100%    $2,115        100%
                 ======        ====      ======      ====      ======       ====     ======        ====    ======        ====

</TABLE> 
-12-
<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 69% 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, 1998, that qualified as HLTS.

                                                                            -13-
<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, in the following table:

<TABLE> 
<CAPTION> 
                                                     1998                           1997                             1996
                                                     ----                           ----                             ----
                                           Amount            Rate         Amount            Rate          Amount               Rate
                                           ------            ----         ------            ----          ------               ----
                                                                                (In Thousands)
<S>                                       <C>               <C>          <C>               <C>         <C>                    <C> 
Non-interest bearing demand               $ 30,719                       $ 29,844                      $    28,129
Interest bearing demand                     49,199           2.87%         46,688           2.85%           46,270             2.91%

Savings deposits                            32,796           2.92          25,860           2.78            27,114             2.81
Time deposits                              176,905           5.52         178,835           5.49           173,661             5.52
                                         ---------                        --------                     -----------

    Total                                 $289,619                       $281,227                      $   275,174
                                         =========                       ========                      ===========

</TABLE> 

As of December 31, 1998, certificates of deposit outstanding in an individual
amount of $100,000 or more totalled $24,350,000.

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)
               $8,328          $2,618         $4,161        $9,243
               ======          ======         ======        ======

-14-
<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 1998
    Interest income                                 $ 6,164              $ 6,304              $ 6,263              $ 6,133
    Interest expense                                 (2,977)              (3,042)              (3,082)              (3,035)
                                                    -------              -------              -------              -------
    Net interest income                               3,187                3,262                3,181                3,098
    Provision for loan losses                           (45)                 (45)                 (55)                 (65)
    Other income                                        228                  262                  430                  262
    Other expenses                                   (1,862)              (1,843)              (2,284)              (1,997)
                                                    -------              -------              -------              -------
    Income before income taxes                        1,508                1,636                1,272                1,298
    Income taxes                                       (377)                (428)                (297)                (211)
                                                    -------              -------              -------              -------
    Net income                                      $ 1,131              $ 1,208              $   975              $ 1,087
                                                    =======              =======              =======              =======
    Per-share data:
        Basic earnings                              $   .49              $   .52              $   .42              $   .47
        Cash dividends                                 -                     .36                 -                     .38

<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                                 $ 5,875              $ 6,050              $ 6,195              $ 6,197
    Interest expense                                 (2,883)              (2,936)              (3,015)              (3,028)
                                                    -------              -------              -------              -------
    Net interest income                               2,992                3,114                3,180                3,169
    Provision for loan losses                           (50)                 (80)                 (45)                 (45)
    Other income                                        290                  385                  214                  384
    Other expenses                                   (1,828)              (1,847)              (1,801)              (2,055)
                                                    -------              -------              -------              -------
    Income before income taxes                        1,404                1,572                1,548                1,453
    Income taxes                                       (335)                (406)                (376)                (288)
                                                    -------              -------              -------              -------
    Net income                                      $ 1,069              $ 1,166              $ 1,172              $ 1,165
                                                    =======              =======              =======              =======
    Per-share data:
        Basic earnings                              $   .46              $   .50              $   .50              $   .50
        Cash dividends                                 -                     .32                 -                     .34

</TABLE> 
                                                                            -15-
<PAGE>
 
        JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY
                            THE JUNIATA VALLEY BANK
           FIVE YEAR FINANCIAL HIGHLIGHTS . SELECTED FINANCIAL DATA

<TABLE> 
<CAPTION> 
                                                1998              1997              1996              1995              1994
                                                ----              ----              ----              ----              ----

<S>                                          <C>               <C>               <C>               <C>               <C> 
BALANCE SHEET DATA (In Thousands)
    Assets                                   $  343,857        $  332,440        $  318,708        $  310,580        $  287,490
    Deposits                                    293,890           285,138           274,670           269,499           250,895
    Loans receivable, net                       189,485           191,309           178,542           173,191           172,532
    Securities                                  123,505           113,757           116,956           112,297           162,469
    Stockholders' equity                         45,980            42,695            39,862            36,920            33,150
    Average equity                               44,448            41,449            38,072            34,671            31,690
    Average assets                              338,295           327,068           317,384           300,185           289,660

EARNINGS DATA (In Thousands)
    Interest income                          $   24,864        $   24,317        $   23,613        $   22,688        $   20,554
    Interest expense                             12,136            11,862            11,697            10,952             9,063
                                             ----------        ----------        ----------        ----------        ----------
    Net interest income                          12,728            12,455            11,916            11,736            11,491
    Provision for loan losses                       210               220               230               190               245
                                             ----------        ----------        ----------        -----------       ----------
    Net interest income after
        provision for loan losses                12,518            12,235            11,686            11,546            11,246
    Other income                                  1,182             1,273             1,025               869               856
    Other expenses                                7,986             7,531             7,026             6,907             6,905
                                             ----------        ----------        ----------        -----------       ----------
    Income before income taxes                    5,714             5,977             5,685             5,508             5,197
    Federal income taxes                          1,313             1,405             1,356             1,350             1,276
                                             ----------        ----------        ----------        -----------       ----------

    Net income                               $    4,401        $    4,572        $    4,329        $    4,158        $    3,921

RATIOS
    Return on average assets                       1.30%             1.40%             1.36%             1.39%             1.35%
    Return on average equity                       9.90             11.03             11.37             11.99             12.37
    Equity to assets (year end)                   13.37             12.84             12.51             11.89             11.53
    Loans to deposits (year end)                  64.47             67.09             65.00             64.26             68.77
    Dividend payout (percentage
        of income)                                37.99             32.68             31.21             30.86             30.40

PER SHARE DATA
    Basic earnings                                 1.90              1.96              1.86              1.79              1.69
    Cash dividends                                  .74               .66               .60               .55               .51
    Book value                                    19.73             18.43             17.09             15.83             14.21
    Average shares outstanding                2,321,739         2,328,101         2,324,964         2,322,951         2,322,951
    Approximate number
        of stockholders                           1,607             1,603             1,417             1,381             1,428
</TABLE> 

-16-
<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> 
                                            1998                                    1997                                    1996
                                           Average       Increase    (Decrease)    Average       Increase    (Decrease)    Average
                                           Balance        Amount          %        Balance        Amount          %        Balance
                                           -------        ------          -        -------        ------          -        -------
                                                                             (Thousands of Dollars)
<S>                                      <C>           <C>             <C>       <C>           <C>             <C>        <C> 
Funding uses:
  Interest earning assets:
     Loans:
        Commercial                        $  59,804     $  (4,263)      (6.65)%   $  64,067     $   1,658       2.66%    $  62,409
        Mortgage                             91,533         4,918        5.68        86,615         6,542       8.17        80,073
        Consumer                             38,441         2,613        7.29        35,828         3,735      11.64        32,093
                                          ---------     ---------                 ---------     ---------                ---------
                                            189,778         3,268        1.75       186,510        11,935       6.84       174,575
        Less: Allowance for loan losses      (2,446)          (67)      (2.82)       (2,379)          (66)     (2.85)       (2,313)
                                          ---------     ---------                 ---------     ---------                ---------
                                            187,332         3,201        1.74       184,131        11,869       6.89       172,262
     Interest bearing deposits
        with banks                              514           369      254.48           145            10       7.41           135
     Securities                             121,725         3,314        2.80       118,411        (1,608)     (1.34)      120,019
     Funds sold                              10,719         3,526       49.02         7,193        (1,647)    (18.63)        8,840
                                          ---------     ---------                 ---------     ---------                ---------
                                            132,958         7,209        5.73       125,749        (3,245)     (2.52)      128,994
     Total interest earning
        assets                              320,290        10,410        3.36       309,880         8,624       2.86       301,256
     Other assets                            18,005           817        4.75        17,188         1,060       6.57        16,128
                                          ---------     ---------                 ---------     ---------                ---------
           Total uses                     $ 338,295     $  11,227        3.43     $ 327,068     $   9,684       3.05     $ 317,384
                                          =========     =========                 =========     =========                =========
Funding sources:
     Deposits:
        Demand                            $  30,719     $     875        2.93     $  29,844     $   1,715       6.10     $  28,129
        Interest bearing demand              49,199         2,511        5.38        46,688           418        .90        46,270
        Savings                              32,796         6,936       26.82        25,860        (1,254)     (4.62)       27,114
        Time under $100,000                 153,928        (4,935)      (3.11)      158,863         4,332       2.80       154,531
                                          ---------     ---------                 ---------     ---------                ---------
        Total core deposits                 266,642         5,387        2.06       261,255         5,211       2.04       256,044
        Time over $100,000                   22,977         3,005       15.05        19,972           842       4.40        19,130
                                          ---------     ---------                 ---------     ---------                ---------
        Total deposits                      289,619         8,392        2.98       281,227         6,053       2.20       275,174
     Other liabilities                        4,228          (164)      (3.73)        4,392           254       6.14         4,138
     Stockholders' equity                    44,448         2,999        7.24        41,449         3,377       8.87        38,072
                                          ---------     ---------                 ---------     ---------                ---------
           Total sources                  $ 338,295     $  11,227        3.43     $ 327,068     $   9,684       3.05     $ 317,384
                                          =========     =========                 =========     =========                =========
</TABLE> 
                                                                            -17-
<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 1998, reaching the level of
$338,295,000 an increase of $11,227,000 or 3.43% compared to 1997. The funding
source was an increase in deposits. The funding use was an increase in
securities, loans and federal funds sold.

Securities increased $3,314,000 or 2.80% in 1998 over 1997. This followed a
decrease of $1,608,000 from 1996 to 1997. Securities maturing and being called
and finding securities to meet the Corporation's asset/liability objectives,
lead to an increase of funds sold in 1998 over 1997 of $3,526,000 or 49.02%.
This followed a decline of $1,647,000 in 1997 over 1996.

Loans experienced a modest increase of $3,201,000 or 1.74% from 1997 to 1998
which was less than the $11,869,000 increase in 1997 over 1996. Mortgage loans
increased $4,918,000 from 1997 to 1998 which was less than the $6,542,000
increase from 1996 to 1997. 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. Consumer loans increased $2,613,000 or 7.29%
in 1998 over 1997 which was less than the $3,735,000 increase in 1997 over 1996.
While commercial loans grew $1,658,000 in 1997 over 1996 they experienced a
decline of $4,263,000 during 1998. This overall loan growth is reflective of the
strength in the economy.

The asset growth was funded by an increase in deposits of $8,392,000 or 2.98%
from 1997 to 1998. This was more than the deposit growth experienced in 1997
over 1996 of $6,053,000. The primary source of funds is core deposits. The
largest category of core deposits is time deposits under $100,000; however this
category suffered a decline of $4,935,000 or 3.11% from 1997 to 1998. Time
deposits 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. Savings accounts had the largest increase of $6,936,000
from 1997 to 1998. This category decreased $1,254,000 from 1996 to 1997.
Interest bearing demand increased $2,511,000 in 1998 over 1997 which was more
than the $418,000 increase in 1997 over 1996. On average during 1998, core
deposits experienced an increase of $5,387,000. 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
--------------------------------------------------------------------------------

                             Juniata Valley Financial Corp. reported net income
                             for 1998 of $4,401,000 which was $171,000 or 3.74%
                             less than the $4,572,000 reported in 1997 and an
                             increase of 1.66% over the 1996 earnings of
                             $4,329,000. However, if it had not been for the one
                             time merger expense, net of related tax effect, net
                             income for 1998 would have been $4,661,000. Basic
                             earnings per share was $1.90 in 1998. This was a
                             decrease of $.06 from 1997 and an increase of $.04
                             over 1996.

-18-
<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 9.90% in 1998,compared to 
11.03% in 1997 and 11.37% in 1996.



                             Return on average assets presents the income for
                             the year compared to the average assets maintained
                             throughout the year. The return on average assets
                             was 1.30% in 1998, compared to 1.40% in 1997 and
                             1.36% in 1996.



The Board of Directors continued to increase the 
cash dividends paid to shareholders. On a per share 
basis $.74 was paid in 1998, up 12.12% from the 
$.66 paid in 1997 and up 23.33% from the $.60 paid 
in 1996. On February 16, 1999, The Board of 
Directors declared an extra $.50 dividend payable 
on April 9, 1999.



                             While increasing dividends, the Corporation was
                             able to increase stockholders' equity to total
                             assets (the capital ratio) to 13.37% at December
                             31, 1998, up from 12.84% in 1997 and 12.51% in
                             1996.



The Corporation has realized steady growth over the 
past two years.  Assets for the year ended December 
31, 1998, were $343,857,000 an increase of
$11,417,000 or 3.43% compared to assets of $332,440,000 
at December 31, 1997.

                                                                            -19-
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS


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

The Juniata Valley Bank's allowance for loan losses was $2,477,000 in 1998,
$2,390,000 in 1997 and $2,350,000 in 1996. The provision provided in each of
those years was $210,000 in 1998, $220,000 in 1997 and $230,000 in 1996. The
provision for loan losses exceeded net charge-offs by 70.73%, 22.22%, and
112.96% in 1998, 1997 and 1996, respectively. In 1998 net charge-offs were .06%
of average loans outstanding. In 1997 and 1996 net charge-offs were .10% and
 .06% of average loans outstanding, respectively.

Other income decreased $91,000 or 7.14% over 1997. From 1996 to 1997 the
increase was $248,000 or 24.20%. The trust department income decreased $48,000
from 1997 to 1998 due to the settling of estates in 1997 that did not occur in
1998 or 1996. Customer service fees increased $9,000 for 1998 compared to 1997
and $50,000 in 1997 compared to 1996. The increases in customer service fees can
be attributed to an increase in volume and not as a result of increased fees.
There was an increase of $68,000 in net realized gains on sales of securities in
1998 over 1997. The increase from 1996 to 1997 in net realized gains on sales of
securities was $49,000. The other income decreased in 1998 compared to 1997 by
$120,000. This decrease can be attributed to $51,000 of life insurance proceeds
and $41,000 commissions on the sale of life and disability insurance in 1997
which did not ocur in 1998 or 1996. The management of the Juniata Valley Bank
seeks products 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 alternative investment. Fee income derived from
the sale of this product in 1998 was $33,000.

Other expenses increased $455,000 or 6.04% over 1997, compared to an increase of
$505,000 or 7.19% from 1996 to 1997. If it had not been for the merger expense,
the increase would have been $61,000 in 1998 over 1997. Salaries and wages
increased $43,000 from 1997 to 1998. This compares to an increase of $153,000
from 1996 to 1997. The increases in salaries and wages can be attributed to
annual merit increases, promotions of employees and the addition of a new
branch. Employee benefits increased $182,000 from 1997 to 1998. From 1996 to
1997 this increase was $31,000. This was due primarily to a keyman pension plan
in place for 10 years that required additional funding as employees age.
Occupancy expense declined $46,000 in 1998 compared to 1997 due mainly to a
reassessment in real estate taxes. The increase in 1997 over 1996 of $37,000 is
due to a new branch opening in the fall of 1996. The expense recorded in 1997
reflected one full year of branch operations. Equipment expense increased
$101,000 from 1997 to 1998 due to the purchase of equipment for software
compatibility of the four former Lewistown Trust branches. The increase in
equipment expense of $31,000 from 1996 to 1997 was due to the new branch which
opened in the fourth quarter of 1996. Director's compensation remained
relatively stable during the years presented. The increase in taxes, other than
income is the result of an increase in the Pennsylvania shares tax of $29,000
from 1997 to 1998 and $28,000 from 1996 to 1997. The $254,000 decrease in other
expenses from 1997 to 1998 is due to $98,000 of expense recognized in 1997
assoicated with preparing two foreclosed properties for sale. Professional fees
increased $68,000 in 1997 due to the audit and consulting fees of Lewistown
Trust Company. Other expenses also declined in 1998 compared to 1997 as a result
of additional expenses associated with the opening of the new branch which were
incurred in 1997. For these same reasons, other expenses increased $243,000 from
1996 to 1997.

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 1999 to help improve the bottom line.

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

-20-
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS


--------------------------------------------------------------------------------
                               YEAR 2000 ISSUES
--------------------------------------------------------------------------------

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 commenced in the fall of 1998 and will be completed by March
31, 1999. The vendors are still on target with these dates. The Federal
Financial Institutions Examination Council has conducted special examinations to
make sure that the software vendors are doing everything necessary to be in
compliance with the year 2000 guidelines. The results of these examinations have
been released to the Corporation for review.

Because of the data processing being outsourced to two data processing vendors,
the cost of year 2000 compliance will be shared with other subscribers. With the
merger in July, it is very difficult to separate equipment costs for the merger
and the cost of what was necessary for the year 2000 project. To date
approximately $30,000 has been expended that can be attributed to the year 2000
project. This does not include personnel cost for the ongoing testing.
Approximately $70,000 may be needed for future remediation costs. Management
does not feel this cost will materially impact the results of operations of the
Corporation in 1999.

Another important area is the Corporation's PC network. Testing has been
performed on all PC's and the software to ensure that they are year 2000
compliant. The PC and software was tested by a third party to make
recommendations for upgrading or replacing. This process was completed in June
of 1998 and all additional purchases of equipment and software are validated for
year 2000.

The Corporation has many customers and through the use of questionnaires the
larger loan customers are being assessed for their potential year 2000 risk. No
individual customer could materially impact the financial position of the
Corporation, however, the credit risk could be increased if these customers are
not addressing their year 2000 problems. As a result, problem loans and losses
could increase in the following year of operation for the Corporation. Due to
uncertainties involved, it is not possible to quantify potential losses due to
year 2000 at this time.

A contingency plan to provide financial services to customers will be provided
to the Corporation through the software vendors currently used. A switch to
other systems could be accomplished with little to no impact to customers.
Management believes they would continue to operate in the year 2000 manually if
necessary for a short period of time until the new systems would be in place.
The manual operation would be accomplished through hiring of temporary staff
until normal operations could resume. The hiring of additional staff would
impact the financial results but cannot be quantified at this time. The cost of
switching to the new system also cannot be quantified at this time.

Management believes that adequate resources are available to fund and address
the year 2000 issue. Management also believes that the costs associated with
bringing the Corporation into compliance will not have a material impact on the
Corporation's financial results. However, with all remediation, testing and
contingency plans there is no guarantee that these steps will fully expose all
failures and problems. In addition, the Corporation relies on various third
party providers, such as telecommunication and utility companies, where
alternative sources or arrangements are limited or unavailable. While the
Corporation continues to address year 2000 issues, potential uncertainties
remain.

                                                                            -21-
<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> 
                                                                                     1998
                                                                                   Interest
                                                             Average                Income                    %
                                                             Balances              (Expense)                 Rate
                                                             --------              ---------                 ----

                                                                                 (In Thousands)
<S>                                                         <C>                   <C>                       <C> 
INTEREST EARNING ASSETS                               
     Interest bearing deposits in other banks               $     514              $      28                 5.45%
     Securities (taxable)                                      85,572                  5,159                 6.03
     Securities (tax exempt)                                   36,153                  1,603                 4.43
     Federal funds sold                                        10,719                    664                 6.19
     Loans                                                    189,778                 17,410                 9.17
                                                            ---------              ---------
           Total interest earning assets                      322,736                 24,864                 7.70
                                                                                                             ----
NON-INTEREST EARNING ASSETS                           
     Cash and due from banks                                    8,663
     Other assets                                               9,342
     Less: allowance for loan losses                           (2,446)
                                                            ---------
           Total assets                                     $ 338,295
                                                            =========
INTEREST BEARING LIABILITIES                          
     Demand deposits bearing interest                       $  49,199                 (1,411)                2.87
     Savings deposits                                          32,796                   (958)                2.92
     Time deposits                                            176,905                 (9,767)                5.52
                                                            ---------              ---------
           Total interest bearing liabilities                 258,900                (12,136)                4.69
                                                                                   ---------                 ----
NON-INTEREST BEARING LIABILITIES                      
     Demand deposits                                           30,719
     Other liabilities                                          4,228
STOCKHOLDERS' EQUITY                                           44,448
                                                            ---------
                                                      
           Total liabilities and stockholders' equity       $ 338,295
                                                            =========
NET INTEREST INCOME/SPREAD                                                         $  12,728                 3.01%
                                                                                   =========                 ====
MARGIN ANALYSIS                                       
     Interest income/ earning assets                                                                         7.70%
     Interest expense/earning assets                                                                         3.76
                                                                                                             ----
           Net interest margin                                                                               3.94%
                                                                                                             ====
</TABLE> 

-22-
<PAGE>
 
--------------------------------------------------------------------------------
                              TABLE 1 (Continued)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                           1997                                   1996     
                                                                         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          $      145        $      8     5.52%     $    135        $      7     5.19% 
     Securities (taxable)                                  78,531           5,163     6.57        80,630           5,221     6.48  
     Securities (tax exempt)                               39,880           1,625     4.07        39,389           1,683     4.27  
     Federal funds sold                                     7,193             406     5.64         8,840             484     5.48  
     Loans                                                186,510          17,115     9.18       174,575          16,218     9.29  
                                                        ---------        --------               --------        --------           
           Total interest earning assets                  312,259          24,317     7.79       303,569          23,613     7.78  
                                                                                      ----                                   ----  
NON-INTEREST EARNING ASSETS                                                                                                  
     Cash and due from banks                                8,599                                  7,893                     
     Other assets                                           8,589                                  8,235                     
     Less: allowance for loan losses                       (2,379)                                (2,313)                    
                                                        ---------                               --------                     
           Total assets                                 $ 327,068                               $317,384                    
                                                        =========                               ========                          
INTEREST BEARING LIABILITIES                                                                                                      
     Demand deposits bearing interest                   $  46,688          (1,331)    2.85      $ 46,270          (1,345)    2.91 
     Savings deposits                                      25,860            (718)    2.78        27,114            (767)    2.83 
     Time deposits                                        178,835          (9,813)    5.49       173,661          (9,585)    5.52
                                                        ---------        --------               --------        --------          
           Total interest bearing liabilities             251,383         (11,862)    4.72       247,045         (11,697)    4.73 
                                                                         --------     ----                      --------     ---- 
NON-INTEREST BEARING LIABILITIES                                                                                            
     Demand deposits                                      29,844                                 28,129                     
     Other liabilities                                     4,392                                  4,138                     
STOCKHOLDERS' EQUITY                                      41,449                                 38,072                     
                                                       ---------                               --------                     
                                                                                                                            
           Total liabilities and stockholders' equity  $ 327,068                               $317,384                    
                                                       =========                               ========                    
                                                                         
NET INTEREST INCOME/SPREAD                                               $ 12,455     3.07%                     $ 11,916     3.05%
                                                                         ========     ====                      ========     ====
MARGIN ANALYSIS                                                                       
     Interest income/ earning assets                                                  7.79%                                  7.78%
     Interest expense/earning assets                                                  3.80                                   3.85
                                                                                      ----                                   ----

           Net interest margin                                                        3.99%                                  3.93%
                                                                                      ====                                   ====
</TABLE> 

                                                                            -23-
<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 1998, net interest income increased 2.19% to $12,728,000 compared
to an increase of 4.52% during 1997. Table 1 shows the interest income, interest
expense and net interest income with the percentage change between the years.

Table 2 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 $10,477,000 or 3.36% in 1998 which was more
than the $8,690,000 increase in 1997. The largest contributor to interest income
is loans. The yield on loans remained fairly stable among the years presented.
The yield on taxable securities decreased 54 basis points in 1998, while the
yield on tax exempt securities increased 36 basis points. In 1997 the opposite
effect is presented with taxable securities increasing 9 basis points and tax
exempt securities declining 20 basis points. The overall yield on interest
earning assets for 1998 was a decline of 9 basis points. For the preceding two
years the overall yield held steady.

Interest bearing liabilities increased $7,517,000 or 2.99% for 1998 which was
less then the $4,338,000 increase in 1997. From 1997 to 1998 savings deposits
increased by $6,936,000 and demand deposits bearing interest increased
$2,511,000; time deposits decreased by $1,930,000. Rates paid declined slightly
by 3 basis points in 1998 which followed two stable years.

The Corporation's net spread was 3.01% in 1998 down slightly from the 3.07% in
1997 and 3.05% in 1996. 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 asset versus interest expense to
earning assets. The Corporation's net interest margin was 3.94% for 1998
compared to 3.99% in 1997 and 3.93% in 1996.

From Table 3 it can be seen that the increase in net interest income during 1998
was influenced by increases in volume. The increase in interest income in 1998
and 1997 was due to an overall increase in volume, offset by lower rates offered
on interest earning assets which reduced interest income. Increases in volume
and rates offered on interest bearing liabilities caused the change in interest
expense during 1998. In 1997, the increase in interest expense was due to an
increase in volume which was offset by the reduction in rates offered on
interest-bearing liabilities. In 1998 interest income increased $547,000;
$463,000 of the increase attributed to the volume of taxable securities and
$300,000 of the increase in volume of loans. In 1997 loan volume was the primary
reason for the increase in interest income. Interest expense had relatively
little change. Volume of time deposits declined in 1998 by $106,000 and
increased in 1997 by $286,000. Rates on interest earning assets displayed more
volatility in 1998 and 1997 than interest bearing liabilities, though both
fluctuated less than 10 basis points over the three year period.



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

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

<TABLE> 
<CAPTION> 
                                         1998              % Change          1997              % Change          1996
                                         ----              --------          ----              --------          ----
                                                                        (In Thousands)
<S>                                    <C>                 <C>             <C>                 <C>             <C> 
Interest income                        $24,864               2.25%         $24,317               2.98%         $23,613
Interest expense                        12,136               2.31           11,862               1.41           11,697
                                       -------                             -------                             -------
Net interest income                    $12,728               2.19          $12,455               4.52          $11,916
                                       =======                             =======                             =======
</TABLE> 

-24-
<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> 
                                            1998/1997 Increase (Decrease)                  1997/1996 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                     $    20         $     0         $    20         $     1         $     0         $     1
Securities (taxable)                       463            (467)             (4)           (136)             78             (58)
Securities (tax exempt)                   (152)            130             (22)             21             (79)            (58)
Federal funds sold                         199              59             258             (90)             12             (78)
Loans                                      300              (5)            295           1,109            (212)            897
                                       -------         -------         -------         -------         -------         -------
        Interest income                    830            (283)            547             905            (201)            704
                                       -------         -------         -------         -------         -------         -------

Demand deposits
        bearing interest                    72               8              80              12             (26)            (14)
Savings deposits                           193              47             240             (35)            (14)            (49)
Time deposits                             (106)             60             (46)            286             (58)            228
                                       -------         -------         -------         -------         -------         -------
        Interest expense                   159             115             274             263             (98)            165
                                       -------         -------         -------         -------         -------         -------

Increase (decrease)
    in net interest income             $   671         $  (398)        $   273         $   642         $  (103)        $   539
                                       =======         =======         =======         =======         =======         =======
</TABLE> 

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

At December 31, 1998, net loans decreased $1,824,000 or .95% over 1997. This
follows an increase in1997 over 1996 in net loans of $12,767,000 or 7.15%. The
loan to deposit ratio fluctuated slightly throughout 1998; monthly averages were
at a high in January of 66.5% and a low in August of 64.3%. Residential
mortgages decreased by $10,118,000 or 8.60% from 1997 to 1998. Real estate loans
still remain a very attractive option due to the tax deductibility of mortgage
interest by the borrower. Consumer loans increased $8,621,000 or 26.59% in 1998
over 1997. This follows a year with an increase of $1,606,000 from 1996 to 1997.

In spite of the slow economy and increasing credit problems nationwide, the
Corporation continued its excellent charge-off record (charge-offs, net of
recoveries) during 1998. For the year, the net charge-offs were $123,000 or .06%
of average loans outstanding. This compares with $180,000 or .10% for 1997 and
$108,000 or .06% for 1996.

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 judgment that the allowance for 1998 of $2,477,000 or 1.31% of net
outstanding loans is adequate to meet any foreseeable loan loss contingency.
This is higher than the 1.25% for 1997 and lower than the 1.32% for 1996. At
December 31, 1998 and 1997, total non-performing loans were $386,000 and
$807,000, respectively; non-performing loans as a percentage of the allowance
for loan losses were 15.58% and 33.77%, respectively. Increased collection
efforts continue to be made so that the level of non-performing loans remains at
historical levels in the future.

                                                                            -25-
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)


--------------------------------------------------------------------------------
                  LIQUIDITY AND INTEREST RATE RISK 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 strong, 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 1998
the Corporation funded approximately 80% of its assets with core deposits
acquired in local communities. This core deposit base, combined with
stockholders' equity, funded 93% of average assets in 1998 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, 1998, these liquid assets amounted to $90,520,000 compared to
liquid assets at December 31, 1997, of $102,390,000. 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
$7,163,000 at December 31, 1998, 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
efforts, 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; however, from the
statement of cash flows it is demonstrated that in 1998 loan demand declined by
$1,595,000. Deposit growth of $8,752,000 was used to purchase securities.
Securities purchased exceeded maturities and repayments by $9,544,000.

-26-
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)


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

The Juniata Valley Bank is subject to periodic examinations by one or more of
the various regulatory agencies. During 1998 an examination was conducted by the
Federal Deposit Insurance Corporation. This examination included but was not
limited to, procedures designed to review lending practices, credit quality,
liquidity, operations and capital adequacy. No comments were received from this
regulatory body which would have a material effect on the Corporation's
liquidity, capital resources or operations.

The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no effect on the
Corporation's net income or stockholders' equity.

The Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Adoption of this
Statement was to take place on January 1, 1998. The Bank acts as an independent
community financial service provider and offers traditional banking related
financial services to individual, business and government customers. Through its
branch and automated teller machine network, the Bank offers a full array of
commercial and retail financial services, including the taking of time, savings
and demand deposits; the making of commercial, consumer and mortgage loans;
trust services and the providing of other financial services.

Management does not separately allocate expenses, including the cost of funding
loan demand, between the commercial and retail trust operations of the Bank. As
such, discrete financial information is not available and segment reporting
would not be meaningful.

The Financial Accounting Standards Board issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities", in June 1998. The
Corporation is required to adopt the Statement on January 1, 2000. The adoption
of the Statement is not expected to have a significant impact on the financial
condition or results of operations of the Corporation.



--------------------------------------------------------------------------------
                                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.

                                                                            -27-
<PAGE>
 
--------------------------------------------------------------------------------
                       TABLE 4 - INTEREST RATE SENSITIVITY
                      PRINCIPAL AMOUNT BY EXPECTED MATURITY
                              AVERAGE INTEREST RATE
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                 1999                     2000                     2001
                                                 ----                     ----                     ----
                                           
                                                                  (Dollars in Thousands)
<S>                                          <C>                       <C>                      <C> 
ASSETS                                     
                                           
    Interest bearing deposits                $       619                        -                        -
        Average interest rate                       5.45%
                                           
    Federal funds sold                             7,825                        -                        -
        Average interest rate                       6.19
                                           
    Available for sale securities                 17,054               $   11,992               $    7,252
        Average interest rate                       5.54                     5.27%                    5.10%
                                           
    Held to maturity securities                   15,072                   14,047                    6,972
        Average interest rate                       5.75                     5.77                     5.97
                                           
    Loans                                  
        Commercial                                15,047                        -                        -
            Average interest rate                   9.26
                                           
        Consumer                                   6,021                    4,871                    3,897
            Average interest rate                   9.81                    10.38                     9.88
                                           
        Real estate mortgage                     121,304                    1,443                    1,514
            Average interest rate                   8.27                     8.17                     8.14
                                           
LIABILITIES                                
                                           
    Interest bearing demand deposits              47,506                        -                        -
        Average interest rate                       2.87
                                           
    Savings deposit                               34,111                        -                        -
        Average interest rate                       2.92
                                           
    Certificates of deposit                      105,225                   36,205                   13,017
        Average interest rate                       5.20                     5.71                     5.69
</TABLE> 

-28-
<PAGE>
 
--------------------------------------------------------------------------------

                               TABLE 4 (Continued)

--------------------------------------------------------------------------------

                                                                   Fair Value
   2002        2003         Thereafter            Total        December 31, 1998
   ----        ----         ----------            -----        -----------------

                       (Dollars in Thousands)

       -            -              -           $      619         $       619

       -            -              -                7,825               7,825

$  3,882     $  2,084        $11,219               53,483              54,720
    5.04%        5.36%          6.77%

  10,159       15,560          6,975               68,785              69,444
    4.93         4.74           3.95

       -            -              -               15,047              15,047

   2,801        2,036         24,242               43,868              44,259
    9.46         9.57          10.00

   1,570        1,570          5,646              133,047             133,089
    8.14         8.14           8.14

       -            -              -               47,506              47,506

       -            -              -               34,111              34,111

   8,153       13,514             45              176,159             177,885
    6.01         5.82           6.79

                                                                            -29-
<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 credit 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 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% and
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
21.16% and Tier II risk-based capital ratio was 22.36% at December 31, 1998.
The Bank's capital ratios are well above the current minimum ratio requirement
set forth by federal banking regulators.

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,
1998, the leverage ratio was 13.12%.

<TABLE> 
<CAPTION> 

CAPITAL ANALYSIS
                                                                                       December 31,
                                                                                       ------------
                                                                       1998               1997               1996
                                                                       ----               ----               ----
                                                                                 (Thousands of Dollars)
<S>                                                                  <C>                <C>                <C> 
Tier I
    Common stockholders' equity (excluding unrealized
        appreciation/depreciation on securities)                     $ 44,337           $ 41,614           $ 39,104

Tier II
    Allowable portion of allowance for loan losses                      2,477              2,390              2,350
                                                                     --------           --------           --------
    Risk-based capital                                               $ 46,814           $ 44,004           $ 41,454
                                                                     ========           ========           ========
Risk adjusted assets (including off-balance-sheet exposures)         $209,346           $204,700           $193,007
                                                                     ========           ========           ========

Tier I risk-based capital ratio                                         21.16%             20.33%             20.28%
Total risk-based capital ratio                                          22.36%             21.50%             21.45%
Leverage ratio                                                          13.12%             12.50%             12.04%
</TABLE> 

-30-
<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 1999 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 1999. 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 1999 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 1998 was $1,313,000 compared to $1,405,000 in
1997 and $1,356,000 in 1996. The effective tax rate, which is the ratio of
income tax expense to income-before-income-taxes, was 22.98% in 1998, a decrease
from the 23.51% in 1997 and 23.85% in 1996. 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 Note to the Consolidated Financial Statements
"Income Taxes" for further analysis of federal income tax expense.

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

On July 1, 1998, the Corporation completed the merger of Lewistown Trust Company
(Lewistown), a commercial bank located in Lewistown, Pennsylvania, by issuing
931,700 shares of its common stock for all of the outstanding common stock of
Lewistown, except for the 5,324 shares of Lewistown held by the Corporation
which were cancelled. The merger was accounted for under the pooling-of-interest
method of accounting and, as such, all prior period information has been
restated. Please refer to the Note to the Consolidated Financial Statements
"Merger" for further analysis of the merger.

--------------------------------------------------------------------------------
                          SIGNIFICANT FINANCIAL EVENTS
--------------------------------------------------------------------------------

On February 16,1999, the Board of Directors of the Juniata Valley Financial
Corp. declared an extra fifty cent ($.50) per share dividend which cannot be
used in the dividend reinvestment program. This dividend is above the normal
dividends declared by Juniata Valley Financial Corp. Shareholders of record on
March 15, 1999, will receive the extra dividend, payable on April 9, 1999.

The Board of Directors of the Juniata Valley Financial Corp. authorized the
repurchase of up to 5% of its shares outstanding of common stock (116,500
shares). Pursuant to the authorization, appropriate senior officers of the
Corporation may direct the repurchase at times and in amounts determined by them
to be prudent.

The Corporation expects to use available cash to fund the repurchases and does
not anticipate borrowing for this purpose. Repurchases will be made from time to
time on the open market or in privately negotiated transactions. The shares
purchased are to be held as treasury stock for various corporate programs,
including the funding of existing employee benefit plans and such other benefit
plans as may hereinafter be adopted by the Corporation.

                                                                            -31-
<PAGE>
 
                               [LETTERHEAD OF BEARD & COMPANY INC. 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, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. 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 amounts 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 its wholly-owned subsidiary, The Juniata Valley Bank,
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.

Reading, Pennsylvania
January 22, 1999

-32-
<PAGE>
 
         JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                             THE JUNIATA VALLEY BANK
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                     ------
<TABLE> 
<CAPTION> 
                                                                                                   December 31,
                                                                                                   ------------
                                                                                            1998                 1997
                                                                                            ----                 ----
                                                                                                 (In Thousands)
<S>                                                                                      <C>                  <C> 
Cash and due from banks                                                                  $  12,284            $  11,469
Interest-bearing deposits with banks                                                           619                  117
Federal funds sold                                                                           7,825                6,080
                                                                                         ---------            ---------
            Total cash and cash equivalents                                                 20,728               17,666

Securities available for sale                                                               54,720               73,464
Securities held to maturity, fair value 1998 $69,444; 1997 $40,535                          68,785               40,293
Loans receivable, net of allowance for loan losses 1998 $2,477; 1997 $2,390                189,485              191,309
Bank premises and equipment, net                                                             2,876                2,602
Accrued interest receivable and other assets                                                 7,263                7,106
                                                                                         ---------            ---------
            Total assets                                                                 $ 343,857            $ 332,440
                                                                                         =========            =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

Liabilities:
    Deposits:
        Non-interest bearing                                                             $  36,114            $  29,795
        Interest bearing                                                                   257,776              255,343
                                                                                         ---------            ---------
            Total deposits                                                                 293,890              285,138

    Accrued interest payable and other liabilities                                           3,987                4,607
                                                                                         ---------            ---------
            Total liabilities                                                              297,877              289,745
                                                                                         ---------            ---------
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 20,000,000 shares;
        issued 2,332,086 shares in 1998 and 1997                                             2,332                2,332
    Surplus                                                                                 20,580               20,569
    Retained earnings                                                                       22,322               19,593
    Accumulated other comprehensive income                                                     816                  744
    Treasury stock, at cost 1998 1,938 shares; 1997 14,898 shares                              (70)                (543)
                                                                                         ---------            ---------
            Total stockholders' equity                                                      45,980               42,695
                                                                                         ---------            ---------
            Total liabilities and stockholders' equity                                   $ 343,857            $ 332,440
                                                                                         =========            =========
</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 INCOME

<TABLE> 
<CAPTION> 
                                                                                   Years Ended December 31,
                                                                                   ------------------------
                                                                          1998              1997                1996
                                                                          ----              ----                ----
                                                                           (In Thousands, Except Per Share Amounts)
<S>                                                                     <C>                <C>                <C> 
Interest income:
    Loans receivable, including fees                                    $17,410            $17,115            $16,218
    Taxable securities                                                    5,159              5,163              5,221
    Tax-exempt securities                                                 1,603              1,625              1,683
    Other                                                                   692                414                491
                                                                        -------            -------            -------
        Total interest income                                            24,864             24,317             23,613

Interest expense on deposits                                             12,136             11,862             11,697
                                                                        -------            -------            -------
        Net interest income                                              12,728             12,455             11,916

Provision for loan losses                                                   210                220                230
                                                                        -------            -------            -------
        Net interest income after provision for loan losses              12,518             12,235             11,686
                                                                        -------            -------            -------
Other income:
    Trust department                                                        299                347                295
    Customer service fees                                                   414                405                355
    Net realized gains on sales of securities                               212                144                 95
    Other                                                                   257                377                280
                                                                        -------            -------            -------
        Total other income                                                1,182              1,273              1,025
                                                                        -------            -------            -------
Other expenses:
    Salaries and wages                                                    3,370              3,327              3,174
    Employee benefits                                                       995                813                782
    Occupancy                                                               499                545                508
    Equipment                                                               922                821                790
    Director compensation                                                   302                296                314
    Taxes, other than income                                                399                370                342
    Merger                                                                  394               -                  -
    Other                                                                 1,105              1,359              1,116
                                                                        -------            -------            -------
        Total other expenses                                              7,986              7,531              7,026
                                                                        -------            -------            -------
        Income before income taxes                                        5,714              5,977              5,685

Federal income taxes                                                      1,313              1,405              1,356
                                                                        -------            -------            -------
        Net income                                                      $ 4,401            $ 4,572            $ 4,329
                                                                        =======            =======            =======
Per share data:
    Basic earnings                                                      $  1.90            $  1.96            $  1.86
                                                                        =======            =======            =======

    Cash dividends                                                      $  0.74            $  0.66            $  0.60
                                                                        =======            =======            =======
</TABLE> 

                See Notes to Consolidated Financial Statements.

34
<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, 1998, 1997 and 1996
                                                                         --------------------------------------------
                                                                                            Accumulated
                                                                                              Other
                                                      Common                   Retained    Comprehensive     Treasury
                                                      Stock      Surplus       Earnings       Income           Stock         Total
                                                      -----      -------       --------       ------           -----         -----
                                                                                    (In Thousands)
<S>                                                 <C>          <C>           <C>           <C>             <C>           <C> 
Balance, December 31, 1995                          $  1,858     $ 20,781      $ 13,557      $    725              -       $ 36,921
                                                                                                                           --------
    Comprehensive income:
        Net income                                         -            -         4,329             -              -          4,329
        Change in unrealized gains (losses)
            on securities available for sale,
            net of reclassification adjustment
            and tax effects                                -            -             -          (186)             -           (186)
                                                                                                                           --------

            Total comprehensive income                                                                                        4,143
                                                                                                                           --------
    Cash dividends                                         -            -        (1,351)            -              -         (1,351)

    Stock issued under dividend reinvestment
        plan                                               4          145             -             -              -            149
                                                    --------     --------      --------      --------       --------       --------

Balance, December 31, 1996                             1,862       20,926        16,535           539              -         39,862
                                                                                                                           --------
    Comprehensive income:
        Net income                                         -            -         4,572             -              -          4,572
        Change in unrealized gains (losses)
            on securities available for sale,
            net of reclassification adjustment
            and tax effects                                -            -             -           205              -            205
                                                                                                                           --------

            Total comprehensive income                                                                                        4,777
                                                                                                                           --------
    Cash dividends                                         -            -        (1,494)            -              -         (1,494)

    Stock issued under employee stock
        purchase plan                                      3          110             -             -              -            113
    5-for-4 stock split in the form of a 25%
        stock dividend                                   467         (467)          (20)            -              -            (20)

    Treasury stock acquired                                -            -             -             -           (543)          (543)

                                                    --------     --------      --------      --------       --------       --------

Balance, December 31, 1997                             2,332       20,569        19,593           744           (543)        42,695
                                                                                                                           --------
    Comprehensive income:
        Net income                                         -            -         4,401             -              -          4,401
        Change in unrealized gains (losses)
            on securities available for sale,
            net of reclassification adjustment
            and tax effects                                -            -             -            72              -             72
                                                                                                                           --------

            Total comprehensive income                                                                                        4,473
                                                                                                                           --------
    Cash dividends                                         -            -        (1,672)            -              -         (1,672)

    Treasury stock issued under dividend
        reinvestment plan                                  -           25             -             -            381            406
    Treasury stock issued under employee
        stock purchase plan`                               -          (14)            -             -             92             78
                                                    --------     --------      --------      --------       --------       --------

Balance, December 31, 1998                          $  2,332     $ 20,580      $ 22,322      $    816       $    (70)      $ 45,980
                                                    ========     ========      ========      ========       ========       ========
</TABLE> 

                 See Notes to Consolidated Financial Statements.

                                                                            -35-
<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,
                                                                                           ------------------------
                                                                                     1998           1997           1996
                                                                                     ----           ----           ----
                                                                                               (In Thousands)
<S>                                                                                <C>            <C>            <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                     $  4,401       $  4,572       $  4,329
    Adjustments to reconcile net income to net cash
        provided by operating activities:
        Provision for loan losses                                                       210            220            230
        Provision for depreciation                                                      273            278            266
        Net amortization on securities' premium                                         118            141            181
        Net realized gains on sales of securities                                      (212)          (144)           (95)
        Deferred directors' fees and supplemental retirement plan expense               395            170            242
        Payment of deferred compensation                                               (158)          (145)          (150)
        Deferred income taxes                                                          (172)           (51)           (50)
        Increase in accrued interest receivable and other assets                         (3)          (328)          (591)
        Increase (decrease) in accrued interest payable and other liabilities          (568)           294           (114)
                                                                                   --------       --------       --------

            Net cash provided by operating activities                                 4,284          5,007          4,248
                                                                                   --------       --------       --------
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of available for sale securities                                      (12,303)       (23,268)       (31,162)
    Proceeds from sales of available for sale securities                                252            192          1,690
    Proceeds from maturities of and principal repayments
        on available for sale securities                                             31,133         26,721         22,190
    Purchases of held to maturity securities                                        (42,077)       (13,356)        (8,531)
    Proceeds from maturities of and principal repayments
        on held to maturity securities                                               13,451         13,223         10,788
    Net (increase) decrease in loans receivable                                       1,595        (12,987)        (5,503)
    Net purchases of bank premises and equipment                                       (547)          (289)          (532)
    Purchase of life insurance                                                            -         (1,250)             -
                                                                                   --------       --------       --------

            Net cash used in investing activities                                    (8,496)       (11,014)       (11,060)
                                                                                   --------       --------       --------
CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase in deposits                                                          8,752         10,467          5,170
    Cash dividends and cash paid for fractional shares                               (1,962)        (1,506)        (1,303)
    Stock issued under dividend reinvestment plan                                         -              -            149
    Stock issued under employee stock purchase plan                                       -            113              -
    Purchase of treasury stock                                                            -           (543)             -
    Treasury stock issued                                                               484              -              -
                                                                                   --------       --------       --------

            Net cash provided by financing activities                                 7,274          8,531          4,016
                                                                                   --------       --------       --------
            Increase (decrease) in cash and cash equivalents                          3,062          2,524         (2,796)

Cash and cash equivalents:
    Beginning                                                                        17,666         15,142         17,938
                                                                                   --------       --------       --------
    Ending                                                                         $ 20,728       $ 17,666       $ 15,142
                                                                                   ========       ========       ========
Cash payments for:
    Interest                                                                       $ 12,147       $ 11,871       $ 11,701
                                                                                   ========       ========       ========
    Income taxes                                                                   $  1,459       $  1,497       $  1,443
                                                                                   ========       ========       ========
</TABLE> 

                 See Notes to Consolidated Financial Statements.

-36-
<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 Corporation 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 gains and losses are reported in other comprehensive
    income, 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. Premiums and discounts are recognized in interest
    income using the interest method over the period to maturity.

    Securities classified as held to maturity are those debt securities the
    Corporation 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.

                                                                            -37-
<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 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.

Advertising:
    Advertising costs are expensed as incurred.

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 and dividends per share:
    Basic earnings per share represents income available to common stockholders
    divided by the weighted average number of common shares outstanding during
    the period, adjusted for stock dividends for all periods presented. The
    weighted average number of common shares outstanding was 2,321,739,
    2,328,101 and 2,324,964 in 1998, 1997 and 1996 respectively. Dividends per
    share represent the historical dividends of the Corporation which excludes
    the dividends of Lewistown Trust Company. Total dividends paid by Lewistown
    in 1998, 1997 and 1996 were $290,000, $572,000 and $515,000 respectively.

38
<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)

Comprehensive income:
    The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
    of January 1, 1998. Accounting principles generally require that recognized
    revenue, expenses, gains and losses be included in net income. Although
    certain changes in assets and liabilities, such as unrealized gains and
    losses on available for sale securities, are reported as a separate
    component of the equity section of the balance sheet, such items, along with
    net income, are components of comprehensive income. The adoption of SFAS No.
    130 had no effect on the Corporation's net income or stockholders' equity.

    The components of other comprehensive income and related tax effects are a
follows:

<TABLE> 
<CAPTION> 
                                                                            Years Ended December 31,
                                                                            ------------------------
                                                                         1998        1997        1996
                                                                         ----        ----        ----
                                                                                (In Thousands)
<S>                                                                     <C>         <C>         <C> 
Unrealized holding gains (losses) on available for sale securities      $ 322       $ 455       $(187)
Less reclassification adjustment for gains realized in income            (212)       (144)        (95)
                                                                        -----       -----       -----

Net unrealized gains (losses)                                             110         311        (282)

Tax effect                                                                 38         106         (96)
                                                                        -----       -----       -----

    Net of tax amount                                                   $  72       $ 205       $(186)
                                                                        =====       =====       =====
</TABLE> 

Segment reporting:
    The Bank acts as an independent community financial services provider, and
    offers traditional banking and related financial services to individual,
    business and government customers. Through its branch and automated teller
    machine network, the Bank offers a full array of commercial and retail
    financial services, including the taking of time, savings and demand
    deposits; the making of commercial, consumer and mortgage loans; trust
    services and the providing of other financial services.

    Management does not separately allocate expenses, including the cost of
    funding loan demand, between the commercial and retail trust operations of
    the bank. As such, discrete financial information is not available and
    segment reporting would not be meaningful.

New accounting standard:
    The Financial Accounting Standards Board issued Statement No. 133,
    "Accounting for Derivative Instruments and Hedging Activities", in June
    1998. The Corporation is required to adopt the Statement on January 1, 2000.
    The adoption of the Statement is not expected to have a significant impact
    on the financial condition or results of operations of the Corporation.

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

MERGER

On July 1, 1998, the Corporation completed the merger of Lewistown Trust Company
(Lewistown), a commercial bank located in Lewistown, Pennsylvania, by issuing
931,700 shares of its common stock for all of the outstanding common stock of
Lewistown, except for the 5,324 shares of Lewistown held by the Corporation
which were canceled. The merger was accounted for under the pooling-of-interests
method of accounting and, as such, all prior period information has been
restated.

The results of operations for periods prior to the merger are summarized as
follows:
<TABLE> 
<CAPTION> 
                                                 Net Interest           Net
                                                    Income            Income
                                                    ------            ------
                                                        (In Thousands)
<S>                                              <C>                 <C> 
Six months ended June 30, 1998:
    Corporation                                    $ 4,525           $ 1,519
    Lewistown                                        1,925               820
                                                   -------           -------

                                                   $ 6,450           $ 2,339
                                                   =======           =======
Year ended December 31, 1997:
    Corporation                                    $ 8,682           $ 3,045
    Lewistown                                        3,773             1,527
                                                   -------           -------

                                                   $12,455           $ 4,572
                                                   =======           =======
Year ended December 31, 1996:
    Corporation                                    $ 8,163           $ 2,764
    Lewistown                                        3,753             1,565
                                                   -------           -------

                                                   $11,916           $ 4,329
                                                   =======           =======
</TABLE> 

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 1998 and 1997 approximated $2,101,000 and
$2,157,000 respectively.

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

SECURITIES

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

<TABLE> 
<CAPTION> 
                                                                                     Gross            Gross
                                                                   Amortized      Unrealized        Unrealized          Fair
                                                                      Cost           Gains            Losses            Value
                                                                      ----           -----            ------            -----
                                                                                           (In Thousands)
<S>                                                                 <C>             <C>              <C>              <C> 
Available for sale securities:
   December 31, 1998:
        U.S. Treasury securities                                    $  3,044        $     46         $      -         $  3,090
        U.S. Government and agency obligations                         5,755              28                -            5,783
        Obligations of states and political subdivisions              27,566             557                -           28,123
        Corporate and other debt securities                            4,807              68               (3)           4,872
        Mortgage-backed securities                                    10,995              80              (29)          11,046
        Equity securities                                              1,316             510              (20)           1,806
                                                                    --------        --------         ---------        --------

                                                                    $ 53,483        $  1,289         $    (52)        $ 54,720
                                                                    ========        ========         =========        ========
   December 31, 1997:
        U.S. Treasury securities                                    $  6,690        $     37         $      -         $  6,727
        U.S. Government and agency obligations                        16,483              24              (18)          16,489
        Obligations of states and political subdivisions              26,608             383              (31)          26,960
        Corporate and other debt securities                            5,086              14              (18)           5,082
        Mortgage-backed securities                                    16,422              98              (19)          16,501
        Equity securities                                              1,048             657                -            1,705
                                                                    --------        --------         ---------        --------

                                                                    $ 72,337        $  1,213         $    (86)        $ 73,464
                                                                    ========        ========         =========        ========
Held to maturity securities:
   December 31, 1998:
        U.S. Treasury securities                                    $  1,750        $     16         $      -         $  1,766
        U.S. Government and agency obligations                        14,292              91               (3)          14,380
        Obligations of states and political subdivisions              30,297             329              (30)          30,596
        Corporate and other debt securities                           22,446             275              (19)          22,702
                                                                    --------        --------         ---------        --------
                                                                    $ 68,785        $    711         $    (52)        $ 69,444
                                                                    ========        ========         =========        ========
   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
                                                                    ========        ========         =========        ========
</TABLE> 

                                                                            -41-
<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, 1998, 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                                $16,473            $16,593            $15,072            $15,153
Due after one year through five years                   23,721             24,230             46,738             47,279
Due after five years through ten years                     577                621              6,975              7,012
Due after ten years                                        401                424                  -                  -
Mortgage-backed securities                              10,995             11,046                  -                  -
Equity securities                                        1,316              1,806                  -                  -
                                                       -------            -------            -------            -------
                                                       $53,483            $54,720            $68,785            $69,444
                                                       =======            =======            =======            =======
</TABLE> 

Equity securities include Federal Home Loan Bank stock with an aggregate cost
and fair value of $760,000 and $704,000 at December 31, 1998 and 1997
respectively.

Gross gains of $212,000, $144,000 and $142,000 were realized on sales of
securities available for sale in 1998, 1997 and 1996 respectively. Gross losses
of $47,000 were realized on sales of securities available for sale in 1996.

Securities with a fair value of $21,774,000 and $16,526,000 at December 31, 1998
and 1997 respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.

-42-
<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

Loans are comprised of the following:

                                                      December 31,
                                                      ------------
                                              1998                  1997
                                              ----                  ----
                                                    (In Thousands)
Commercial, agricultural and financial      $ 15,047              $ 16,110
Real estate mortgages:
    Residential                              107,596               117,714
    Commercial                                25,451                24,502
Consumer                                      46,643                37,207
Other                                          2,819                 2,945
                                            --------              --------

                                             197,556               198,478
Unearned discount on loans                     5,594                 4,779
Allowance for loan losses                      2,477                 2,390
                                            --------              --------

                                            $189,485              $191,309
                                            ========              ========

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

                                              Years Ended December 31,
                                              ------------------------
                                        1998          1997            1996
                                        ----          ----            ----
                                                 (In Thousands)
Balance, beginning                    $ 2,390       $ 2,350         $ 2,228
    Provision for loan losses             210           220             230
    Recoveries                             20            53              48
    Loans charged off                    (143)         (233)           (156)
                                      -------       -------         -------
Balance, ending                       $ 2,477       $ 2,390         $ 2,350
                                      =======       =======         =======

The recorded investment in impaired loans not requiring an allowance for loan
losses was $-0- and $286,000 at December 31, 1998 and 1997 respectively. At
December 31, 1998 and 1997, the recorded investment in impaired loans requiring
an allowance for loan losses was $-0-. For the years ended December 31, 1998,
1997 and 1996, the average recorded investment in these impaired loans was
$143,000, $351,000 and $517,000 respectively, and no interest income was
recognized on impaired loans in 1998 while $16,000 and $2,000 was recognized on
impaired loans in 1997 and 1996 respectively.

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

BANK PREMISES AND EQUIPMENT

The major components of bank premises and equipment were as follows:

                                                     December 31,
                                                     ------------
                                               1998                1997
                                               ----                ----
                                                   (In Thousands)

     Land and land improvements              $    541           $    536
     Buildings and improvements                 3,168              2,946
     Furniture and equipment                    2,651              2,710
                                             --------           --------
                                                6,360              6,192
Less accumulated depreciation                   3,484              3,590
                                             --------           --------

                                             $  2,876           $  2,602
                                             ========           ========

DEPOSITS

The composition of deposits is as follows:

                                                     December 31,
                                                     ------------
                                               1998                1997
                                               ----                ----
                                                   (In Thousands)
     Demand, non-interest bearing            $ 36,114           $ 29,795
     Now and Money Market                      47,506             48,460
     Savings                                   34,111             25,458
     Time, $100,000 or more                    24,350             20,794
     Other Time                               151,809            160,631
                                             --------           --------
                      
                                             $293,890           $285,138
                                             ========           ========

At December 31, 1998, the scheduled maturities of time deposits are as follows
(in thousands):

     1999                                                       $105,225
     2000                                                         36,205
     2001                                                         13,017
     2002                                                          8,153
     2003                                                         13,514
     Thereafter                                                       45
                                                                --------
                                                            
                                                                $176,159
                                                                ========

-44-
<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
$7,163,000 from the Federal Home Loan Bank. There were no outstanding balances
under this agreement as of December 31, 1998 and 1997.

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 l capital (as defined in the regulations) to risk-weighted
assets, and of Tier l capital to average assets. Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.

As of December 31, 1998, 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, 1998 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, 1998:                                                                        
  Total capital (to risk-weighted assets)     $46,814     22.36%  $Greater than or equal to 16,748   Greater than or equal to 8.00%
  Tier l capital (to risk-weighted assets)     44,337     21.16    Greater than or equal to  8,374   Greater than or equal to 4.00 
  Tier l capital (to average assets)           44,337     13.12    Greater than or equal to 13,522   Greater than or equal to 4.00 
As of December 31, 1997:                                                                        
  Total capital (to risk-weighted assets)     $44,004     21.50%  $Greater than or equal to 16,376   Greater than or equal to 8.00% 
  Tier I capital (to risk-weighted assets)     41,614     20.33    Greater than or equal to  8,188   Greater than or equal to 4.00  
  Tier I capital (to average assets)           41,614     12.50    Greater than or equal to 13,319   Greater than or equal to 4.00  

                                                 
<CAPTION>                                        
                                                                                To Be Well
                                                                              Capitalized Under
                                                                              Prompt Corrective
                                                                              Action Provisions
                                                                              -----------------
                                                                  Amount                               Ratio
                                                                  ------                               -----
                                                                            (Dollar Amounts In Thousands)
<S>                                                  <C>                                   <C> 
As of December 31, 1998:                        
    Total capital (to risk-weighted assets)          $Greater than or equal to 20,935      Greater than or equal to 10.00%
    Tier l capital (to risk-weighted assets)          Greater than or equal to 12,561      Greater than or equal to  6.00
    Tier l capital (to average assets)                Greater than or equal to 16,903      Greater than or equal to  5.00
As of December 31, 1997:                                                                                           
    Total capital (to risk-weighted assets)          $Greater than or equal to 20,470      Greater than or equal to 10.00%
    Tier I capital (to risk-weighted assets)          Greater than or equal to 12,282      Greater than or equal to  6.00
    Tier I capital (to average assets)                Greater than or equal to 16,649      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, 1998, $32,418,000 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.

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 plan. At December 31, 1998, 95,913 shares
were available under the Dividend Reinvestment Plan.

                                                                            -45-
<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.

    Information pertaining to the activity in the Plan is as follows:

<TABLE> 
<CAPTION> 
                                                                                   1998                 1997
                                                                                   ----                 ----
                                                                                         (In Thousands)
    <S>                                                                          <C>                  <C> 
    Change in benefit obligation:
        Benefit obligation at beginning of year                                  $ 2,583              $ 2,336
        Service cost                                                                 145                   98
        Interest cost                                                                194                  166
        Actuarial loss                                                                 4                   61
        Benefits paid                                                                (68)                 (78)
                                                                                 -------              -------
 
            Benefit obligation at end of year                                      2,858                2,583
                                                                                 -------              ------- 
    Change in plan assets:
        Fair value of plan assets at beginning of year                             2,401                2,187
        Actual return on plan assets                                                 167                  197
        Employer contribution                                                        154                   95
        Benefits paid                                                                (68)                 (78)
                                                                                 -------              -------
 
            Fair value of plan assets at end of year                               2,654                2,401
                                                                                 -------              ------- 
    Funded status                                                                   (204)                (182)

        Unrecognized net actuarial loss                                             (102)                (130)
        Unrecognized net transition asset                                            (26)                 (28)
                                                                                 -------              -------
 
            Accrued benefit cost                                                 $  (332)             $  (340)
                                                                                 =======              =======
</TABLE> 
     Pension expense included the following components for the years ended
December 31:

<TABLE> 
<CAPTION> 
                                                                                   1998                 1997                 1996
                                                                                   ----                 ----                 ----
                                                                                                   (In Thousands)
    <S>                                                                          <C>                  <C>                  <C> 
    Service cost, benefits earned during the year                                $   145              $    98              $   110
    Interest cost on projected benefit obligation                                    194                  166                  157
    Actual return on plan assets                                                    (167)                (197)                (160)
    Net amortization                                                                 (20)                  36                   11
                                                                                 -------              -------              -------
                                                                                 $   152              $   103              $   118
                                                                                 =======              =======              =======
<CAPTION> 
Assumptions used in the accounting were:
                                                                                    1998                 1997                 1996
                                                                                    ----                 ----                 ----
    <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> 

-46-
<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, 1998 and 1997, the present
    value of the future liability was $876,000 and $815,000 respectively. The
    Corporation has funded these plans through the purchase of annuities and
    life insurance policies, which have an aggregate cash surrender value of
    $907,000 and $899,000 at December 31, 1998 and 1997 respectively. For the
    years ended December 31, 1998, 1997 and 1996, $154,000, $76,000 and $58,000
    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, 1998 and 1997, the present value of the future
    liability was $1,450,000 and $1,337,000 respectively. To fund the benefits
    under these agreements, the Corporation is the owner and beneficiary of life
    insurance policies on the lives of certain directors. The policies had an
    aggregate cash surrender value of $1,080,000 and $909,000 at December 31,
    1998 and 1997, respectively. For the years ended December 31, 1998, 1997 and
    1996, $283,000, $264,000 and $244,000 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, beginning July 1, 1997. 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 1998 and
    1997, 2,497 and 3,600 shares were issued under the Plan.

Salary continuation plan:
    In 1997, the Corporation established a non-qualified Salary Continuation
    Plan for key employees. At December 31, 1998 and 1997, the present value of
    the future liability was $73,000 and $10,000 respectively. The Corporation
    has funded the Plan through the purchase of life insurance policies which
    have an aggregate cash surrender value of $1,328,000 and $1,261,000 at
    December 31, 1998 and 1997 respectively. For the year ended December 31,
    1998 and 1997, $63,000 and $10,000 respectively was charged to expense in
    connection with the Plan.

Profit sharing plan;
    The profit sharing plan of Lewistown was terminated in 1998. The
    participants' balances were transferred into the Corporation's 401(k) plan,
    in which the employer does not contribute. The annual discretionary
    contributions for 1998, 1997 and 1996 were $-0-, $143,000 and $151,000
    respectively.

                                                                            -47-
<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:

<TABLE> 
<CAPTION> 
                                                                     Years Ended December 31,
                                                                     ------------------------
                                                       1998                   1997                   1996
                                                       ----                   ----                   ----
                                                                         (In Thousands)
<S>                                                  <C>                    <C>                    <C> 
Current                                              $ 1,485                $ 1,456                $ 1,406
Deferred                                                (172)                   (51)                   (50)
                                                     -------                -------                -------

                                                     $ 1,313                $ 1,405                $ 1,356
                                                     =======                =======                =======  
</TABLE> 

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:

<TABLE> 
<CAPTION> 

                                                                     Years Ended December 31,
                                                                     ------------------------
                                                       1998                   1997                   1996
                                                       ----                   ----                   ----
                                                                         (In Thousands)
<S>                                                  <C>                    <C>                    <C> 
Federal income tax at statutory rate                 $ 1,943                $ 2,032                $ 1,933
Tax-exempt interest                                     (689)                  (622)                  (631)
Disallowance of interest expense                          84                    100                    100
Other                                                    (25)                  (105)                   (46)
                                                     -------                -------                -------

                                                     $ 1,313                $ 1,405                $ 1,356
                                                     =======                =======                =======
</TABLE> 

The income tax provision includes $72,000, $49,000 and $32,000 in 1998, 1997 and
1996 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:

<TABLE> 
<CAPTION> 

                                                                         December 31,
                                                                         ------------
                                                                 1998                     1997
                                                                 ----                     ----
                                                                        (In Thousands)
<S>                                                            <C>                      <C> 
Deferred tax assets:
    Allowance for loan losses                                  $   715                  $   743
    Deferred directors' fees                                       493                      451
    Pension liabilities                                            385                      300
    Other                                                           66                        -
                                                               -------                  -------

        Total deferred tax assets                                1,659                    1,494
                                                               -------                  -------
Deferred tax liabilities:
    Bank premises and equipment                                    (78)                     (54)
    Securities accretion                                           (51)                     (75)
    Unrealized gains on securities available for sale             (390)                    (352)
    Other                                                            -                       (7)
                                                               -------                  -------

        Total deferred tax liabilities                            (519)                    (488)
                                                               -------                  -------

        Net deferred tax asset                                 $ 1,140                  $ 1,006
                                                               =======                  =======
</TABLE> 

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, 1998 and 1997, these
persons were indebted to the Bank for loans totaling $1,698,000 and $2,615,000
respectively. During 1998, loans totaling $1,262,000 were disbursed and loan
repayments totaled $1,232,000. Other changes caused the December 31, 1998
balance of the loans outstanding to decrease by $947,000.

-48-
<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 2003.
Equipment and servicing fees were $469,000, $385,000 and $378,000 for the years
ended December 31, 1998, 1997 and 1996 respectively. Additionally, the Bank
leases branch offices for which rent expense, including the license fee, was
$52,000 $61,000 and $47,000 in 1998, 1997 and 1996 respectively.

Minimum future payments under all noncancellable lease agreements as of December
31, 1998 are as follows (in thousands):

    1999                                                               $277
    2000                                                                278
    2001                                                                262
    2002                                                                166
    2003                                                                 31
                                                                     ------    

                                                                     $1,014
                                                                     ======

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,
                                                          1998         1997
                                                          ----         ----
                                                            (In Thousands)

Commitments to grant loans                             $ 2,675      $ 2,649   
Unfunded commitments under lines of credit              19,461       18,475   
Outstanding letters of credit                              415          403    

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.


                                                                           -49-
<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 judgment 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,
1998 and 1997:

 .    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,
                                                            1998                       1997
                                                            ----                       ----
                                                  Carrying        Fair        Carrying        Fair
                                                   Amount         Value        Amount         Value
                                                   ------         -----        ------         -----
                                                                    (In Thousands)
<S>                                               <C>           <C>           <C>           <C>
Financial assets:
    Cash and due from banks                       $ 12,284      $ 12,284      $ 11,469      $ 11,469
    Interest-bearing deposits in other banks           619           619           117           117
    Federal funds sold                               7,825         7,825         6,080         6,080
    Securities                                     123,505       124,164       113,757       113,999
    Loans receivable, net of allowance             189,485       189,918       191,309       190,949
    Accrued interest receivable                      2,443         2,443         2,565         2,565

Financial liabilities:
    Deposits                                       293,890       295,616       285,138       286,008
    Accrued interest payable                           994           994         1,005         1,005

Off-balance sheet financial instruments:
    Commitments to extend credit                         -             -             -             -
    Standby letters of credit                            -             -             -             -
</TABLE>

-50-
<PAGE>
 
         JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
                             THE JUNIATA VALLEY BANK
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARENT COMPANY ONLY FINANCIAL INFORMATION

                                BALANCE SHEETS

                                                  December 31,
                                                  ------------
                                                1998         1997
                                                ----         ----
        ASSETS                                    (In Thousands)

Cash                                          $     6      $    12
Interest-bearing deposits with banks              490            -
                                              -------      -------   

        Total cash and cash equivalents           496           12

Investment in Bank subsidiary                  45,094       42,308
Securities available for sale                     388          374
Other                                              34           26
                                              -------      -------   

                                              $46,012      $42,720
                                              =======      =======
    LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES, other                            $    32      $    25

STOCKHOLDERS' EQUITY                           45,980       42,695
                                              -------      -------

                                              $46,012      $42,720
                                              =======      ======= 

                             STATEMENTS OF INCOME
<TABLE> 
<CAPTION> 
                                                                             Years Ended December 31,
                                                                             ------------------------
                                                                          1998          1997         1996
                                                                          ----          ----         ----
                                                                                  (In Thousands)
<S>                                                                     <C>           <C>           <C> 
Dividends from Bank subsidiary                                          $ 1,972       $ 2,067       $ 1,324
Other dividend income                                                        29            16             5
Other expenses                                                              (23)          (28)          (42)
                                                                        -------       -------       -------

    Income before equity in undistributed net income of subsidiary        1,978         2,055         1,287

Equity in undistributed net income of Bank subsidiary                     2,423         2,517         3,042
                                                                        -------       -------       -------

        Net income                                                      $ 4,401       $ 4,572       $ 4,329
                                                                        =======       =======       =======
</TABLE> 

                                                                            -51-
<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,
                                                                         ------------------------
                                                                     1998          1997         1996
                                                                     ----          ----         ----
                                                                              (In Thousands)

<S>                                                                <C>           <C>           <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                     $ 4,401       $ 4,572       $ 4,329
    Adjustments to reconcile net income to net cash
        provided by operating activities:
        Undistributed net income of Bank subsidiary                 (2,423)       (2,517)       (3,042)
        (Increase) decrease in other assets                             (8)          (11)           17
        Decrease in other liabilities                                   (8)            -             -
                                                                   -------       -------       -------   

            Net cash provided by operating activities                1,962         2,044         1,304
                                                                   -------       -------       -------   
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       (1,962)       (1,506)       (1,303)
    Stock issued under dividend reinvestment plan                        -             -           149
    Stock issued under employee stock purchase plan                      -           113             -
    Purchase of treasury stock                                           -          (543)            -
    Treasury stock issued                                              484             -             -
                                                                   -------       -------       -------   

            Net cash used in financing activities                   (1,478)       (1,936)       (1,154)
                                                                   -------       -------       -------   

            Increase (decrease) in cash and cash equivalents           484           (91)          103

Cash and cash equivalents:
    Beginning                                                           12           103             -
                                                                   -------       -------       -------   

    Ending                                                         $   496       $    12       $   103
                                                                   =======       =======       =======
</TABLE> 

-52-
<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

                                                                            -53-