The cover for our 1998 Annual Report depicts the ribbon  cutting  ceremonies and
portrays  indoor and outdoor views of the new banking offices at Green Ridge  in
Scranton, and at East Stroudsburg.


                                   COVER PAGE


<PAGE>

                               CUSTOMER SERVICES

A detailed listing of the services offered by the Company is as follows:

DEPOSIT ACCOUNTS

All Purpose Clubs
Certificates of Deposit
Christmas Clubs
Demand Accounts
Individual Retirement Accounts
Money Market Accounts
NOW Accounts
Savings Accounts
Time Open Accounts
Vacation Clubs

LENDING

Appliance Loans
Automobile Loans
Business Loans
Collateral Loans
Construction Loans
Credit Lines
Educational Loans
Home Equity Loans
Home Repair and Remodeling Loans
Installment Loans
MasterCard and VISA (Cosmic Card)
Mortgage Loans (Residential and Commercial)
Personal Loans

OTHER SERVICES

ATM Services
Bank Money Orders
Cashier's Checks
College Campus Card Interface
Credit Card Merchant Draft Capture
Data Processing Services
Direct Deposit of Recurring Payments
EDI-ACH Service
Foreign Remittance
Home Banking and Videotex Services
Lockbox Services
Night Depository
Repurchase Agreements
Safe Deposit Boxes
Travelers Checks
Trust Department Services
  (a) Executor
  (b) Administrator
  (c) Trustee
  (d) Guardian
  (e) Agent
  (f) Custodian and Trustee for
        Pension Plans
  (g) Trustee for Public Bond Issues
  (h) Securities Depository Service
U.S. Savings Bonds


BRANCH LOCATIONS (with ATMs)

ABINGTON                                     CENTRAL CITY
1100 Northern Boulevard                      150 North Washington Avenue
Clarks Summit, PA                            Scranton, PA
(570) 587-4898                               (570) 346-7741

EAST SCRANTON                                MOUNT POCONO
Prescott Ave. & Ash Street                   Route 611 & Route 940
Scranton, PA                                 Mount Pocono, PA
(570) 342-9101                               (570) 839-8732

EAST STROUDSBURG                             NORTH POCONO
Route 209 & Route 247                        Main & Academy Streets
East Stroudsburg, PA                         Moscow, PA
(570) 420-0432                               (570) 842-7626

GOULDSBORO                                   SOUTH SCRANTON
Main & Second Streets                        526 Cedar Avenue
Gouldsboro, PA                               Scranton, PA
(570) 842-6473                               (570) 343-1151

GREEN RIDGE
1901 Sanderson Ave.
Scranton, PA
(570) 346-4695


OTHER ATM LOCATIONS

Acorn Market
Route 209
Marshall's Creek, PA

Acorn Market
Route 611
Swiftwater, PA

Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA

Kutztown University
Student Center and
South Dining Hall
Kutztown, PA

Meadow Ave & Hemlock St.
Scranton, PA

Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA

Red Barn Village
Newton Ransom Blvd
Newton, PA


ON THE COVER

The cover for our 1998 Annual Report depicts the ribbon  cutting  ceremonies and
portrays  indoor and outdoor views of the new banking offices at Green Ridge  in
Scranton, and at East Stroudsburg.

To the left of this description is a picture of the cover.



                               INSIDE FRONT COVER


<PAGE>

                              FINANCIAL HIGHLIGHTS
-----------------------------------------------------------------
In thousands, except
per share data               1998            1997            1996
-----------------------------------------------------------------
Earnings per share      $    1.99       $    2.20       $    2.14
Dividends per share     $    1.05       $    1.05       $    1.00
Total Capital           $  44,961       $  42,924       $  40,585
Total Deposits          $ 377,526       $ 374,488       $ 352,026
Total Assets            $ 436,099       $ 427,577       $ 398,035
-----------------------------------------------------------------


                                    CONTENTS

Customer Services                                             Inside Front Cover
President's Letter                                                             2
Board of Directors / New Advisory Board Members                                4
Promotions and Appointments                                                    6
Events of 1998                                                                 8
Form 10-K
  Part 1, Item 1  Business                                                    13
    Item 2  Properties                                                        14
    Item 3  Legal Proceedings                                                 14
    Item 4  Submission of Matters to a Vote of Security Holders               14
  Part 2, Item 5  Market for Registrant's Common Equity and Related
                    Stockholder Matters                                       15
    Item 6  Selected Financial Data                                           16
    Item 7  Management Discussion and Analysis of Financial Condition
              and Results of Operations                                       17
    Item 7A Quantitative and Qualitative Disclosures About Market Risk        26
    Item 8  Financial Statements and Supplementary Data                       28
            Consolidated Balance Sheets                                       28
            Consolidated Statements of Income                                 29
            Consolidated Statements of Changes in Stockholders' Equity        30
            Consolidated Statements of Cash Flows                             31
            General Notes to Financial Statements                             32
            Independent Auditor's Report                                      42
    Item 9  Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                        43
  Part 3, Item 10 Directors and Executive Officers of the Registrant          43
    Item 11 Executive Compensation                                            43
    Item 12 Security Ownership of Certain Beneficial Owners and Management    43
    Item 13 Certain Relationships and Related Transactions                    43
  Part 4, Item 14 Exhibits, Financial Statement Schedules and Reports on
                    Form 8-K                                                  44
  Signatures                                                                  45
  Index to Exhibits                                                           46
Company Officers                                                              47


                                       1
<PAGE>

                               PRESIDENT'S LETTER

Dear Shareholder

     Despite a reduction  in earnings  from $2.20 per share in 1997 to $1.99 per
share in 1998,  Penseco  Financial  Services  Corporation had another good year.
Total assets  increased  from $428 million at the end of 1997 to $436 million at
the end of 1998.  Total deposits  increased from $374 million at the end of 1997
to $378  million  at the end of 1998 and  total  capital  increased  from  $42.9
million at the end of 1997 to $44.9 million at the end of 1998.
     As, no doubt,  you have already  noticed from our front cover, we completed
and put into  operation  two new offices.  Our new modern  office in Green Ridge
contains adjacent  customer parking,  three drive-up teller lanes and a drive-up
ATM and has been made larger than an ordinary branch office to provide for sales
of non-banking  products  including trust,  investments and insurance  services.
Inside are five private  offices,  a board room,  tellers  stations,  vault, new
accounts/safe  deposit area, coupon booths,  etc. A large storage area exists in
the basement.  We took great pains architecturally so the new office would "fit"
into the existing neighborhood.  As we were finishing the construction,  we were
fortunate to be able to acquire the adjacent  property for  additional  parking,
bringing  the total  parking  spaces to  fifty-three.  This office  replaces the
existing  branch in Green Ridge which was constructed in 1914 as the Green Ridge
Bank and  which  lacked  adjacent  customer  parking,  drive-up  tellers  and an
efficient floor plan.
     Our new  branch  office  in East  Stroudsburg  Borough  is  located  at the
intersection of business Route 209 and Route 447. This  intersection  has one of
the highest traffic counts in Monroe County. This office contains three drive-up
teller  lanes,  two  drive-up  ATMs and  parking for  twenty-eight  automobiles.
Inside,  the branch contains four private  offices,  a board room, an operations
area, an employee  lounge, a vault with safe deposit boxes, and teller stations.
Again,  the  "sales"  area of the  branch  includes  room for  non-deposit  type
services such as trust, investment and insurance services.
     At year end, we had  completed the  replacement  of all of our existing IBM
ATMs with  state of the art NCR ATMs.  These new  machines  provide  us with the
ability to implement new automated services for our customers. Going forward, we
are  interested  in  providing,  through  these ATMs,  the same services we have
available  through  home/office   banking.   Among  these  are  interbank  funds
transfers,  certificate  of  deposit  purchases  and  redemptions,  and  instant
statements.  During the year we also  installed new ATMs at several  convenience
store  locations as a test of this market.  It is too early to tell whether this
endeavor will be a profitable one.
     By the  time  you are  reading  this  letter,  we will  have  finished  the
installation of on-line teller terminals at all of our branches. This new system
prints deposit receipts and has the capability to display signatures,  images of
checks and, ultimately, images of our customers. The installation has progressed
smoothly and our tellers have told us that the system is great.
     This year we  installed  two new ATMs on the campus at Kutztown  University
for use in conjunction with their new campus ID card. Their card provides access
to bank  accounts  held at Penn  Security  and we  created  a number  of  unique
services  for them.  It will be  several  years  before we will be able to fully
evaluate the  profitability  of this new service but the systems  developed  for
this  interface  seem to be  functioning  well.  Several other colleges are also
interested in developing similar campus card systems.
     Our Y2K effort  remains on  schedule  and we expect to meet all  regulatory
preparedness deadlines without difficulty.
     Our new check  processing  machine and image capture system had been placed
on hold pending  completion of our Y2K effort. We now expect to install this new
system in the second quarter of this year.
     We now also expect our home/office  banking system to be accessible through
the Internet in the third quarter of this year.
     We have  targeted a number of areas  where  cost  savings  can be  realized
through computer related systems.  At the top of our priority list, after Y2K is
behind us, is form  production  and postal bar code  savings,  utilizing our new
continuous form laser printer. As one can see, we have been very busy at Penseco
Financial  Services  Corporation.  The  costs  associated  with  these  projects
negatively impacted our earnings on a short term basis, however, over the longer
term, we believe them to be beneficial to future earnings.  In addition to these
costs,  the  net  interest  margin  has  been  shrinking,  due  largely  to  the
securitization  of loans.  Net interest margin was impacted  further by the flat
slope of the yield curve which, ordinarily, slopes positively.


There are two graph's depicted here:

     (1)  Positive sloping yield curve
     (2)  Flay yield curve     


  a = Spread between  deposit rate and loan rate 
  b = Spread between  shorter and longer term obligations


                                       2
<PAGE>

                               PRESIDENT'S LETTER

Graph at the top of the page plots the following numbers:

<TABLE>
<CAPTION>
                      1978    1979    1980    1981    1982    1983    1984    1985    1986    1987    1988 
                      ----    ----    ----    ----    ----    ----    ----    ----    ----    ----    ---- 
<S>                 <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>      <C>    <C>     <C>    
ROE                 11.94%  11.56%  12.80%  13.32%  11.63%  11.60%  11.95%  11.99%   9.81%  11.49%  11.88% 
Inflation Adj. ROE   2.92%  -1.74%   0.28%   4.39%   7.80%   7.81%   8.00%   8.19%   8.71%   7.06%   7.46% 
Inflation Rate       9.02%  13.29%  12.52%   8.92%   3.83%   3.79%   3.95%   3.80%   1.10%   4.43%   4.42% 


                      1989    1990    1991    1992    1993    1994    1995    1996    1997    1998
                      ----    ----    ----    ----    ----    ----    ----    ----    ----    ----
ROE                 12.49%  11.73%  11.12%  12.38%  11.92%  11.05%  11.36%  11.34%  11.01%   9.52%
Inflation Adj. ROE   7.84%   5.62%   8.06%   9.48%   9.17%   8.37%   8.82%   8.02%   9.31%   7.91%
Inflation Rate       4.65%   6.11%   3.06%   2.90%   2.75%   2.67%   2.54%   3.32%   1.70%   1.61%
</TABLE>


     Although the flat yield curve may be considered transient,  over the longer
term the  distance  between the loan and  deposit  curve will narrow thus giving
rise to the need over the longer term to obtain additional  revenue sources.  We
believe  that an attempt to increase  the interest  margin  through  higher risk
sub-prime loans or highly  leveraging the balance sheet or  substituting  higher
risk securities for virtually all of our substantial treasury bond portfolio may
increase the risk to the Bank to unacceptable  levels. Our long term solution is
through additional fee income from trust and asset management  services,  credit
and debit card merchant services,  electronic  transaction services,  insurance,
stock brokerage and estate planning and tax services to name a few. While we get
these  new  services  up  and  running  we may  experience  lower  returns  than
historically recorded as the pump is primed for future revenues.
     On the other hand, as the graph above  indicates,  since 1992 our inflation
adjusted  return on equity has been  averaging  9%, the highest  return over the
past 20 years.  It is not unusual to expect a lower absolute return on equity as
the inflation rate declines.
     At year end, our Senior Vice-President, D. William Hume retired. Mr. Hume's
vast experience over a life of banking greatly  benefitted our institution since
he joined us nineteen  years ago. We are indeed  fortunate that his counsel will
continue to be  available to us since he continues in his role as a director and
serves  on  many  of the  Bank's  committees.
     Also at year end, a number of appointments  were made.  Peter F. Moylan was
named  Executive  Vice-President,  Non-Deposit  Services and Trust Officer.  Mr.
Moylan  comes to us after a long and  successful  career in Trust  Services at a
local, then by merger regional,  bank where he managed their Private Bank in the
Northeastern  Pennsylvania area. In addition to the Trust Department, he will be
responsible for integrating  insurance sales and securities  activities into the
already existing  non-deposit  services.
     Andrew A.  Kettel,  Jr. was named Senior  Vice-President.  Mr.  Kettel,  in
addition to managing our Central City office,  is in charge of our retail branch
operations.  John R. Anderson III was named Financial Reporting Officer, Lisa A.
Kearney,  Loan  Officer,  Jeffrey  Solimine,  Assistant  Vice-President,   Aleta
Sebastianelli,   Assistant  Vice-President  and  Assistant  Secretary,  Anne  M.
Cottone,  Vice-President and Compliance  Officer,  Deborah A. Wright,  Assistant
Vice-President and North Pocono Office Branch Manager,  Paula A. Ralston Nenish,
Assistant   Director  of   Internal   Audit,   and  Beth  S.  Wolff,   Assistant
Vice-President  and East Scranton  Office Branch Manager.  In addition,  Carl M.
Baruffaldi was appointed as Branch  Manager of our new Green Ridge Office,  and,
in our new East  Stroudsburg  Office,  Denise M. Cebular was appointed as Branch
Manager and Nereida Santiago as Assistant Branch Manager and Assistant  Cashier.
     In our Advisory  Boards,  Anthony J. Descipio and James A. Forti were added
to our North Pocono Office Advisory Board, Everett Jones and George Noone to our
Green Ridge Advisory Board, and Attorney Brian Golden and David Lansdowne to our
Mount  Pocono  Advisory  Board.  We  named a new  Advisory  Board  for our  East
Stroudsburg  Office  consisting of Mary Citro,  Robert J. Dillman,  Ph.D.,  Jere
Dunkelberger,  Attorney  Kirby  Upright  and  Jeffrey  Weichel.  We  are  indeed
fortunate  to have such  outstanding  people to assist us in running our Bank in
their  respective  communities.
     In the economy,  the year saw the economic  expansion in the United  States
continue.  It is now  the  longest  period  of  economic  expansion  ever.  This
performance  of the  economy is truly  extraordinary  in light of the  financial
turmoil in other parts of the world.  But now the Federal  Reserve is ruminating
about whether their rate reductions last year were prudent, focusing on the very
rapid economic growth and indications of renewed  inflation and increases in the
producer  price index.  It would not be  surprising  to see the Federal  Reserve
increase  rates this year to keep  inflation  under control even though it would
most  likely  trigger the end of the  current  expansion,  pop the bubble in the
equity markets and begin a recessionary period.
     In looking to the future,  we see our Company's  strong  capital  position,
good earnings,  technological resources, our positioning in the marketplace with
regard to niche national markets, as well as our traditional  geographic market,
all providing an excellent  foundation for continued success.  In this endeavor,
you can  help  us by  recommending  us to  your  family,  friends  and  business
acquaintances. This is your institution - let it serve you.

Sincerely yours,


/s/ Otto P. Robinson Jr.


Otto P. Robinson, Jr.
President


                                       3
<PAGE>

                               BOARD OF DIRECTORS


The top portion of this page of the 1998 Annual Report to Shareholders  contains
one picture. A description of the picture follows:

Seated left to right:
Russell C. Hazelton,
P. Frank Kozik, Secretary;
Attorney Otto P. Robinson, Jr., President;
Richard E. Grimm, Executive Vice-President and Treasurer;
and Edwin J. Butler

Standing left to right:
Sandra C. Phillips,
James G. Keisling,
Robert W. Naismith, Ph.D.,
James B. Nicholas,
D. William Hume, Senior Vice-President;
and Emily S. Perry


                           NEW ADVISORY BOARD MEMBERS


The  remainder of this page of the 1998 Annual Report to  Shareholders  contains
three  pictures.  A description of each picture  follows,  starting from left to
right:


Mary Citro
East Stroudsburg Branch


Anthony J. Descipio
North Pocono Branch


Robert J. Dillman, Ph.D.
East Stroudsburg Branch


                                       4
<PAGE>

                           NEW ADVISORY BOARD MEMBERS


This page of the 1998 Annual Report to Shareholders  contains eight pictures.  A
description of each picture follows, starting at the top, from left to right:


Jere Dunkelberger
East Stroudsburg Branch


James A. Forti
North Pocono Branch


Atty. Brian Golden
Mount Pocono Branch


Everett Jones
Green Ridge Branch


David Lansdowne
Mount Pocono Branch


George Noone
Green Ridge Branch


Atty. Kirby Upright
East Stroudsburg Branch


Jeffrey Weichel
East Stroudsburg Branch


                                       5
<PAGE>

                           PROMOTIONS & APPOINTMENTS


This page of the 1998 Annual Report to Shareholders  contains seven pictures.  A
description of each picture follows, starting at the top, from left to right:


Peter F. Moylan
Executive Vice-President, Non-Deposit Services and Trust Officer


Andrew A. Kettel, Jr.
Senior Vice-President


Anne M. Cottone
Vice-President and Compliance Officer


Carl M. Baruffaldi
Assistant Vice-President


Denise M. Cebular
Assistant Vice-President


Beth S. Wolff
Assistant Vice-President


Deborah A. Wright
Assistant Vice-President


                                       6
<PAGE>

                           PROMOTIONS & APPOINTMENTS


This page of the 1998 Annual Report to  Shareholders  contains six  pictures.  A
description of each picture follows, starting at the top, from left to right:


Aleta Sebastianelli
Assistant Vice-President and Assistant Secretary


Jeffrey Solimine
Assistant Vice-President


Paula A. Ralston Nenish
Assistant Director
of Internal Audit


Nereida Santiago
Assistant Cashier


John R. Anderson III
Financial Reporting Officer


Lisa A. Kearney
Loan Officer


                                       7
<PAGE>

                                 EVENTS OF 1998


This page of the 1998 Annual Report to  Shareholders  contains two  pictures.  A
description of each picture follows:


     (1)  Bank  officials  and other  dignitaries  look on as  Attorney  Otto P.
          Robinson,  Jr.,  President of Penn  Security  Bank and Trust  Company,
          commences  the ribbon  cutting  for the  opening  of the new  drive-up
          facility at our Central City Office in Scranton.


     (2)  Part of the crowd that helped us  celebrate  the grand  opening of our
          new Green  Ridge  Office this past  summer at an  old-fashioned  block
          party, which was held on the Bank's property.


                                       8
<PAGE>

                                 EVENTS OF 1998


This page of the 1998 Annual Report to  Shareholders  contains four pictures.  A
description of each picture follows. left to right, starting at the top:


     (1&2)The photos  (above and  right) are of the  newly-remodeled  teller and
          lobby areas in our Central City Office.


     (3)  During the year,  the Bank  replaced  its  existing  automated  teller
          machines with new, state-of-the-art,  multi-function ATMs like the one
          above.


     (4)  During the year, Penn Security purchased sophisticated teller machines
          which are being  installed  in all of our banking  offices to make our
          teller operations more efficient.


                                       9
<PAGE>

                                 EVENTS OF 1998


This page of the 1998 Annual Report to  Shareholders  contains four pictures.  A
description of each picture follows, left to right, starting at the top:


          (1)  In the photo at left,  Shikha  Vyas,  Manager  of  Administrative
               Services at Kutztown  University,  (left) and Douglas R.  Duguay,
               Director of Campus  Banking at Penn  Security,  (right) look over
               the newly installed  Automated Teller Machine in the South Dining
               Hall at Kutztown University.


          (2)  In the  photo  at  right,  Arianne  Naismith  (left)  and  Robert
               Robinson  (right),  part of the Penn  Security  team that  worked
               during  freshman   orientation   this  past  summer  at  Kutztown
               University,  explain the  benefits of the "KU Card" to a group of
               new Kutztown students.


          (3&4)This is a sample  picture  of the new "KU  Card,"  with a student
               picture  and name,  that is being used by  students,  faculty and
               staff at  Kutztown  University.  The "KU Card" at the  University
               serves as a campus  card for dining  privileges,  door access and
               library   access  as  well  as  a   banking   card  for  ATM  and
               point-of-sale access through Penn Security Bank.


                                       10
<PAGE>

                                 EVENTS OF 1998


This page of the 1998 Annual Report to Shareholders  contains three pictures.  A
description of each picture follows, starting at the top:


          (1)  During the year, Penn Security  purchased new,  state-of-the-art,
               item  processing  equipment that makes use of both MICR (magnetic
               ink   character   recognition)   and   OCR   (optical   character
               recognition) technologies to process transactions.  Documents can
               be retrieved and viewed on the screen, and customers will be able
               to retrieve  copies of pertinent  documents  through the Internet
               when Penn Security has its web site established.


          (2)  Dr. Virginia Hughson-Otte,  President of the American Association
               of Women  Dentists,  visited Penn  Security  last summer.  She is
               pictured here with Otto P. Trostel, Vice-President, Marketing.


          (3)  Attorney Otto P.  Robinson,  Jr.  welcomes a young visitor to our
               new East Stroudsburg Office which opened in late November.


                                       11
<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-K


 Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934


                  For the Fiscal Year Ended December 31, 1998

                        Commission File Number 000-23777


                     PENSECO FINANCIAL SERVICES CORPORATION


                             Scranton, Pennsylvania
                          Commonwealth of Pennsylvania
                I.R.S. Employer Identification Number 23-2939222
                          150 North Washington Avenue
                       Scranton, Pennsylvania 18503-1848
                         Telephone number 570-346-7741

                          Securities Registered Under
                            Section 12(G) of the Act

                    Common Stock, Par Value $ .01 per share



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes (X) No ( )


Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )


The aggregate market value of the Company's voting stock held by  non-affiliates
of the registrant on March 1, 1999,  based on the average of the closing bid and
asked prices of such stock on that date equals  Approximately  $90,216,000.  The
number  of  shares  of  common  stock  outstanding  as of March 1,  1999  equals
2,148,000


Documents Incorporated by Reference

Portions of the Corporations 1998 Annual Report to Stockholders are incorporated
by reference in Parts I and II.

Portions of the  Corporation's  definitive proxy statement  relating to the 1999
Annual Meeting of Stockholders are incorporated by reference in Part III.


                                       12
<PAGE>

                     PENSECO FINANCIAL SERVICES CORPORATION

                                     PART I
                                     ------

ITEM 1    BUSINESS


GENERAL

PENSECO  FINANCIAL  SERVICES  CORPORATION,  (the "Company" or "PFNS"),  which is
headquartered   in  Scranton,   Pennsylvania,   was  formed  under  the  general
corporation  laws of the State of  Pennsylvania  in 1997 and is  registered as a
bank  holding  company.  The  Company  became a bank  holding  company  upon the
acquisition  of all of the  outstanding  shares of Penn  Security Bank and Trust
Company (the "Bank"),  a state chartered bank, on December 31, 1997. The Company
is subject to  supervision by the Federal  Reserve  Board.  The Bank, as a state
chartered  financial  institution,  is subject  to  supervision  by the  Federal
Deposit Insurance Corporation and the Pennsylvania Department of Banking.
     The Company's  principal  banking office is located at 150 North Washington
Avenue, Scranton, Pennsylvania, containing trust, marketing, audit, credit card,
human resources,  executive,  data processing and central  bookkeeping  offices.
There are eight additional offices.
     Through its banking subsidiary,  the Company generates interest income from
its outstanding loans receivable and its investment  portfolio.  Other income is
generated  primarily  from  merchant  transaction  fees,  trust fees and service
charges on deposit  accounts.  The Company's  primary costs are interest paid on
deposits and general operating expenses.  The Bank provides a variety of general
commercial and retail banking services to business and  professional  customers,
as well as retail customers, on a personalized basis. The Bank's primary lending
products are real estate,  commercial and consumer  loans.  The Bank also offers
ATM access, credit cards, active investment accounts,  trust department services
and other various lending, depository and related financial services. The Bank's
primary   deposit   products  are  savings  and  demand  deposit   accounts  and
certificates of deposit.
     The Company is not dependent  upon a single  customer,  or a few customers,
the loss of one or more of which  would  have a material  adverse  effect on its
operations.  The operations and earnings of the  Corporation  are not materially
affected by seasonal changes or by Federal, state or local environmental laws or
regulations.

COMPETITION

The Bank operates in a competitive environment in which it must share its market
with many local  independent banks as well as several banks which are affiliates
or  branches  of very large  regional  holding  companies.  The Bank  encounters
competition from diversified financial institutions,  ranging in size from small
banks to the nationwide banks operating in this region,  and include  commercial
banks,   savings  and  loan  associations,   credit  unions  and  other  lending
institutions.
     The principal  competitive  factors among the Company's  competitors can be
grouped into two categories: pricing and services. In the Bank's primary service
area, interest rates on deposits,  especially time deposits,  and interest rates
and fees  charged to  customers  on loans are very  competitive.  From a service
perspective,  the Bank competes in other areas such as  convenience of location,
types of services, service costs and banking hours.

EMPLOYEES

As of March 1, 1999, the Company  employed 206 full-time  equivalent  employees.
The employees of the Company are not  represented by any  collective  bargaining
group.  Management of the Company  considers  relations with its employees to be
good.

SUPERVISION AND REGULATION

OVERVIEW

The Company is  registered  as a bank  holding  company  under the Bank  Holding
Company Act of 1956,  as amended,  and, as such, is subject to  supervision  and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board" or "FRB").  The Company is required to file quarterly  reports of
its operations with the FRB.


                                       13
<PAGE>

The Bank, as a Pennsylvania state-chartered non-member financial institution, is
subject primarily to supervision, regulation and examination by the Commonwealth
of  Pennsylvania  Department  of Banking  and by the Federal  Deposit  Insurance
Corporation  (the  "FDIC"),  which  insures  the Bank's  deposits to the maximum
extent permitted by law.

BANK HOLDING COMPANY REGULATIONS

As a bank holding company, the Company is permitted to engage in banking-related
activities  as  authorized  by the Federal  Reserve  Board,  directly or through
newly-formed  subsidiaries or by acquiring companies already established in such
activities subject to the FRB regulations relating to those activities.

FORWARD LOOKING INFORMATION

This Form 10-K contains forward-looking informational statements, in addition to
the  historical  financial  information  required by the Securities and Exchange
Commission.  There are certain  risks and  uncertainties  associated  with these
forward-looking statements which could cause actual results to differ materially
from those stated herein. Such differences are discussed in the section entitled
"Management  Discussion  and  Analysis  of  Financial  Condition  and Results of
Operations".  These forward-looking  statements reflect management's analysis as
of this point in time.  Readers  should  review the other  documents the Company
periodically files with the Securities and Exchange  Commission in order to keep
apprised of any material changes.


ITEM 2    PROPERTIES


     Thereare  nine  offices  positioned  throughout  the  greater  Northeastern
Pennsylvania  Region.  They are located in the South  Scranton,  East  Scranton,
Green Ridge, and Central City sections of Scranton,  the Borough of Moscow,  the
Town of Gouldsboro, South Abington Township, the Borough of Mount Pocono and the
Borough of East Stroudsburg at Eagle Valley Corners.  Through these offices, the
Company  provides a full range of banking and trust services to the  Lackawanna,
Wayne,  Monroe, Pike and Wyoming County areas. All offices are owned by the Bank
or through a wholly owned subsidiary of the Bank, Penseco Realty, Inc., with the
exception of the Mount  Pocono  Office which is owned by the Bank but is located
on land occupied under a long-term lease.
     The principal office,  located at the corner of North Washington Avenue and
Spruce Street in the "Central City" of Scranton's business district,  houses the
operations,  trust, marketing,  credit card and audit departments as well as the
Company's  executive  offices.  Several  remote ATM  locations are leased by the
Bank, which are located throughout Northeastern Pennsylvania.  All branches have
ATMs, mostly drive-ups. Also, all branches and remote ATM locations are equipped
with closed circuit television monitoring.
     Additional  Bank assets held for sale consist of residential  properties in
Scranton,  Pennsylvania and Buck Hill Falls,  Pennsylvania and the Bank's former
Green Ridge  office  located at the corner of East Market  Street and  Boulevard
Avenue, Scranton, Pennsylvania.


ITEM 3    LEGAL PROCEEDINGS


There are no material  pending legal  proceedings  other than  ordinary  routine
litigation  incidental to the business of the Company as to which the Company or
subsidiary is a party or of which any of their property is subject.


ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


No  matter  was  submitted  by the  Company  to  its  shareholders  through  the
solicitation  of proxies or  otherwise  during the fourth  quarter of the fiscal
year covered by this report.


                                       14
<PAGE>

                                    PART II

ITEM 5    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

This Annual  Report is the  Company's  annual  disclosure  statement as required
under Section 13 or 15(d) of the Securities Exchange Act of 1934.  Questions may
be  directed  to  any  branch  location  of the  Company  or by  contacting  the
Controller's office at:

 Patrick Scanlon, Controller
        Penseco Financial Services Corporation
        150 North Washington Avenue
        Scranton, Pennsylvania 18503-1848
        1-800-327-0394

Management of the Company is aware of the following  securities dealers who make
a market in the Company stock:

      Baird, Patrick & Company, Inc.             Legg Mason Wood Walker, Inc.
      Ferris, Baker, Watts, Inc.                 Monroe Securities, Inc.
      F.J. Morrissey & Company, Inc.             Ryan, Beck & Company, Inc.
      Hopper Soliday & Company, Inc.             Sandler, O'Neill & Partners, LP
      Janney Montgomery Scott, Inc.

The Company's capital stock is traded on the  "Over-the-Counter"  BULLETIN BOARD
under the symbol "PFNS". The following table sets forth the price range together
with  dividends  paid for each of the past two years.  These  quotations  do not
necessarily reflect the value of actual transactions.


                                    Dividends
                                    Paid
1998                High     Low    Per Share
---------------------------------------------
First Quarter       $ 35    $ 28    $   .21
Second Quarter        41      35        .21
Third Quarter         43      39        .21
Fourth Quarter        44      40        .42
                                    -------
                                    $  1.05
                                    =======


                                    Dividends
                                    Paid
1997                High     Low    Per Share
---------------------------------------------
First Quarter       $ 23    $ 22    $   .20
Second Quarter        23      23        .20
Third Quarter         25      23        .20
Fourth Quarter        29      25        .45
                                    -------
                                    $  1.05
                                    =======


DIVIDENDS PAID (in millions)           YEAR
-------------------------------------------
           $ 2,255                     1998
             2,256                     1997
             2,148                     1996
             2,014                     1995
             1,745                     1994


As of March 1 , 1999 there were approximately  1,014 stockholders of the Company
based  on  the  number  of  recordholders.  Reference  should  be  made  to  the
information  about the Company's  dividend  policy and regulatory  guidelines on
pages 24 and 39.

TRANSFER AGENT
Penseco Financial Services Corporation,  150 North Washington Avenue,  Scranton,
Pennsylvania  18503-1848.  Stockholders'  questions  should be  directed  to the
Company's corporate headquarters at 570-346-7741.


                      QUARTERLY FINANCIAL DATA (unaudited)
                    (in thousands, except per share amounts)


                           First      Second     Third      Fourth
        1998              Quarter    Quarter    Quarter    Quarter
------------------------------------------------------------------
Net Interest Income       $ 4,356    $ 4,141    $ 4,283    $ 4,016
Provision for Loan Losses     106        104         75        310
Other Income                1,911      1,340      2,116      1,471
Other Expenses              4,374      3,876      4,632      4,104
Net Income                  1,248      1,047      1,180        806
Earnings Per Share        $   .58    $   .49    $   .55    $   .37



                           First      Second     Third      Fourth
        1997              Quarter    Quarter    Quarter    Quarter
------------------------------------------------------------------
Net Interest Income       $ 4,235    $ 4,263    $ 4,382    $ 4,834
Provision for Loan Losses     130         46         63         77
Other Income                1,745      1,196      1,959      1,385
Other Expenses              4,171      3,892      4,278      4,543
Net Income                  1,172      1,079      1,376      1,098
Earnings Per Share        $   .55    $   .50    $   .64    $   .51


                                       15
<PAGE>

ITEM 6    SELECTED FINANCIAL DATA


(in thousands, except per share data)
RESULTS OF OPERATIONS:

                                1998       1997       1996       1995       1994
--------------------------------------------------------------------------------
Interest Income            $  29,975  $  30,099  $  27,893  $  27,474  $  23,907
Interest Expense              13,179     12,385     11,201     11,218      8,832
--------------------------------------------------------------------------------
Net Interest Income           16,796     17,714     16,692     16,256     15,075
Provision for Loan Losses        595        316        334        321        337
--------------------------------------------------------------------------------
Net Interest Income
  after Provision for
  Loan Losses                 16,201     17,398     16,358     15,935     14,738
Other Income                   6,838      6,285      5,952      6,202      6,249
Other Expenses                16,986     16,884     15,733     15,672     15,935
Income Tax                     1,772      2,074      1,975      2,009      1,414
--------------------------------------------------------------------------------
Net Income                 $   4,281  $   4,725  $   4,602  $   4,456  $   3,638
--------------------------------------------------------------------------------

BALANCE SHEET DATA:

Assets                     $ 436,099  $ 427,577  $ 398,035  $ 378,968  $ 363,317
Investment Securities      $ 118,762  $ 125,048  $ 125,263  $ 146,246  $ 160,585
Net Loans                  $ 280,389  $ 269,446  $ 237,915  $ 207,708  $ 178,605
Deposits                   $ 377,526  $ 374,488  $ 352,026  $ 336,386  $ 326,482
Stockholders' Equity       $  44,961  $  42,924  $  40,585  $  39,239  $  32,927

PER SHARE DATA: (1)

Earnings per Share         $    1.99  $    2.20  $    2.14  $    2.07  $    1.69
Dividends per Share        $    1.05  $    1.05  $    1.00  $    .937  $    .812
Book Value per Share       $   20.93  $   19.98  $   18.89  $   18.27  $   15.33
Common Shares Outstanding  2,148,000  2,148,000  2,148,000  2,148,000  2,148,000

FINANCIAL RATIOS:

Net Interest Margin            4.12%      4.51%      4.51%      4.57%      4.51%
Return on Average Assets        .99%      1.14%      1.17%      1.19%      1.02%
Return on Average Equity       9.54%     11.22%     11.54%     11.86%     10.76%
Average Equity to Average
   Assets                     10.38%     10.16%     10.14%     10.01%      9.47%
Dividend Payout Ratio         52.76%     47.73%     46.67%     45.18%     48.01%


(1) Per share data is based on 2,148,000  shares  outstanding,  giving effect to
the common stock reorganization on December 31, 1997.


                                       16
<PAGE>

ITEM 7    MANAGEMENT  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
            OF OPERATIONS


The following  discussion is intended to provide  information  to facilitate the
understanding  and assessment of  significant  changes and trends related to the
financial  condition  of the  Company and the  results of its  operations.  This
discussion and analysis should be read in conjunction with the Company's audited
consolidated   financial  statements  and  notes  thereto.  All  information  is
presented in thousands of dollars, except as indicated.

SUMMARY

Net earnings for 1998 totalled  $4.3  million,  a decrease of 8.5% from the $4.7
million  earned  in 1997,  which in turn was an  increase  of 2.7% from the $4.6
million earned in 1996. Net earnings per share were $1.99 in 1998, compared with
$2.20 in 1997 and  $2.14 in 1996.  Net  earnings  for 1998  decreased  from 1997
results  primarily due to a narrowing of the net interest  margin based on lower
yields on earning assets and increases in funding costs,  together with a higher
provision for loan losses. Net earnings for 1997 were improved over 1996 results
primarily  due to an increase  in net  interest  income  from  better  yields on
earning assets and higher levels of average earning assets.


NET INCOME (in millions)               YEAR
-------------------------------------------
          $  4,281                     1998
             4.725                     1997
             4.602                     1996
             4.456                     1995
             3.638                     1994


The  Company's  return on average  assets was .99% in 1998  compared to 1.14% in
1997 and 1.17% in 1996. Return on average equity was 9.54%, 11.22% and 11.54% in
1998, 1997 and 1996, respectively.


RETURN ON AVERAGE ASSETS               YEAR
-------------------------------------------
              .99%                     1998
             1.14%                     1997
             1.17%                     1996
             1.19%                     1995
             1.02%                     1994


RETURN ON AVERAGE EQUITY               YEAR
-------------------------------------------
             9.54%                     1998
            11.22%                     1997
            11.54%                     1996
            11.86%                     1995
            10.76%                     1994


                                       17
<PAGE>

                             RESULTS OF OPERATIONS

Net Interest Income

The principal component of the Company's earnings is net interest income,  which
is the difference  between interest and fees earned on  interest-earning  assets
and interest paid on deposits and other borrowings.
     Net interest income was $16.8 million in 1998,  compared with $17.7 million
in 1997,  a  decrease  of 5.1%.  The  decrease  in net  interest  income in 1998
resulted from the Federal Reserve  lowering rates  throughout the year and local
competitive pricing, forcing banks to live with smaller margins.
        Net  interest  income  was $17.7  million in 1997,  compared  with $16.7
million in 1996, an increase of 6.0%. The  improvement in net interest income in
1997 resulted from an increase in the loan portfolio of the Company.
     Net  interest   income,   when   expressed  as  a  percentage   of  average
interest-earning  assets,  is referred to as net interest margin.  The Company's
net interest margin for the year ended December 31, 1998 was 4.12% compared with
4.51% for the year  ended  December  31,  1997,  and  4.51%  for the year  ended
December 31, 1996.


NET INTEREST INCOME (in millions)        YEAR
---------------------------------------------
       $ 16,796                          1998
         17,714                          1997
         16,692                          1996
         16,256                          1995
         15,075                          1994


Interest  income in 1998 totalled  $30.0  million,  compared to $30.1 million in
1997, remaining  essentially unchanged from the prior year. The yield on average
interest-earning  assets was 7.35% in 1998,  compared to 7.66% in 1997.  Average
interest-earning  assets increased in 1998 to $407.8 million from $392.8 million
in 1997. Average loans, which are the Company's highest yielding earning assets,
increased $23.7 million in 1998, while  investment  securities and other earning
assets decreased on average by $8.7 million.  Average loans represented 69.7% of
1998 average interest-earning assets, compared to 66.3% in 1997.
     Interest expense also increased in 1998 to $13.2 million from $12.4 million
in 1997, an increase of $.8 million or 6.5%. This increase  resulted from higher
time   deposit   volume  and  rate   increases.   The   average   rate  paid  on
interest-bearing liabilities during 1998 was 3.95%, compared to 3.86% in 1997.
     Interest  income in 1997 totalled $30.1 million,  compared to $27.9 million
in 1996 an increase of $2.2 million or 7.9%.  This increase  resulted  primarily
from increased  loan volume.  The yield on average  interest-earning  assets was
7.66% in 1997,  compared  to 7.54%  in  1996.  Average  interest-earning  assets
increased in 1997 to $392.8 million from $370.0  million in 1996.  Average loans
increased $29.1 million in 1997, while  investment  securities and other earning
assets decreased on average by $6.3 million.  Average loans represented 66.3% of
1997 average interest-earning assets, compared to 62.5% in 1996.
     Interest  expense  increased in 1997 to $12.4 million from $11.2 million in
1996, an increase of $1.2 million or 10.7%.  This increase  resulted from higher
time   deposit   volume  and  rate   increases.   The   average   rate  paid  on
interest-bearing liabilities during 1997 was 3.86%, compared to 3.72% in 1996.
     The most  significant  impact on net  interest  income  between  periods is
derived  from the  interaction  of changes in the volume of and rates  earned or
paid on interest-earning assets and interest-bearing  liabilities. The volume of
earning   dollars  in  loans  and   investments,   compared  to  the  volume  of
interest-bearing  liabilities  represented by deposits and borrowings,  combined
with the spread, produces the changes in net interest income between periods.


                                       18
<PAGE>

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'  EQUITY/INTEREST RATES AND
INTEREST DIFFERENTIAL 

The table below presents  average  balances,  interest income on a fully taxable
equivalent basis and interest expense,  as well as average rates earned and paid
on the Company's  major asset and liability  items for the years 1998,  1997 and
1996.


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                1997                           1996                           1995
ASSETS                              Average   Revenue/  Yield/     Average   Revenue/  Yield/     Average   Revenue/  Yield/
                                    Balance   Expense    Rate      Balance   Expense    Rate      Balance   Expense   Rate
----------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>       <C>       <C>        <C>       <C>       <C>        <C>       <C>   
Investment Securities
  Available-for-sale:     
    U.S. Treasury securities       $  99,405  $  6,024   6.06%    $ 113,559  $  7,092   6.25%    $ 125,114  $  7,880   6.30%
    U.S. Agency obligations            1,250        71   5.68             -         -       -            -         -      - 
    States & political
      subdivisions                     2,683        89   5.03             -         -       -            -         -      - 
    Federal Home Loan Bank
      stock                              619        43   6.95             -         -       -            -         -      - 
    Other                                 20         1   5.00            20         1   5.00            20         1    5.00
  Held-to-maturity:  
    U.S. Agency obligations            8,228       505   6.14        11,342       712   6.28         8,401       548    6.52
Loans, net of unearned income:
  Real estate mortgages              221,601    17,642   7.96       204,705    16,734   8.17       179,315    14,190   7.91
  Commercial                          18,508     1,562   8.44        13,465     1,207   8.96         9,876       884   8.95
  Consumer and other                  43,931     3,405   7.75        42,205     3,943   9.34        42,080     4,086   9.71
Federal funds sold                     9,994       521   5.21         7,535       410   5.44         5,191       304   5.86
Interest on balances with banks        1,565       112   7.16             -         -      -             -         -      - 
----------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
  Total Interest Income              407,804  $ 29,975   7.35%      392,831  $ 30,099   7.66%      369,997  $ 27,893   7.54%
----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks               10,642                          9,629                          7,985
Bank premises and equipment           10,532                          7,950                          6,275
Accrued interest receivable            3,544                          3,573                          3,603
Other assets                           2,398                          2,988                          7,728
Less: Allowance for loan losses        2,711                          2,439                          2,230
----------------------------------------------------------------------------------------------------------------------------
Total Assets                       $ 432,209                      $ 414,532                      $ 393,358
----------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
  Demand-Interest bearing          $  23,371  $    347   1.48%    $  23,057  $    349   1.51%    $  22,312  $    366   1.64%
  Savings                             71,001     1,409   1.98        72,815     1,447   1.99        76,898     1,724   2.24
  Money markets                       63,489     1,818   2.86        68,437     2,039   2.98        73,626     2,347   3.19
  Time - Over $100                    39,769     2,165   5.44        30,697     1,616   5.26        19,695       975   4.95
  Time - Other                       126,737     7,035   5.55       121,201     6,729   5.55       107,019     5,736   5.36
Federal funds purchased                  265        11   4.15           278        14   5.04           559        23   4.11
Repurchase agreements                  8,051       364   4.52         3,971       161   4.05           100         4   4.00
Short-term borrowings                    638        30   4.70           558        30   5.38           497        26   5.23
----------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
  Total Interest Expense             333,321  $ 13,179   3.95%      321,014  $ 12,385   3.86%      300,706  $ 11,201   3.72%
----------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing         51,159                         48,241                         46,885
All other liabilities                  2,868                          3,154                          5,882
Stockholders' equity                  44,861                         42,123                         39,885
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
  Stockholders' Equity             $ 432,209                      $ 414,532                      $ 393,358
----------------------------------------------------------------------------------------------------------------------------
Interest Spread                                          3.40%                          3.80%                         3.82%
Net Interest Income                $  16,796                      $  17,714                      $ 16,692 
                             
Financial Ratios           
  Net interest margin                  4.12%                          4.51%                                   4.51%
  Return on average assets              .99%                          1.14%                                   1.17%
  Return on average equity             9.54%                         11.22%                                  11.54%
  Average equity to average assets    10.38%                         10.16%                                  10.14%
  Dividend payout ratio               52.76%                         47.73%                                  46.67%


                                       19
<PAGE>

DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

                                                   Dollar                              Change
                                                   Amount     Change in   Change in   in Rate-
             1998 compared to 1997                of Change    Volume        Rate      Volume
             ----------------------------------------------------------------------------------
<S>          <C>                                  <C>         <C>         <C>         <C>    

EARNING      Investment securities:
ASSETS         Available-for-sale:
                 U.S. Treasury securities         $ (1,068)   $   (883)   $   (204)   $     19
                 U.S. Agency obligations                71           -           -          71
                 States & political subdivisions        89           -           -          89
                 Federal Home Loan Bank stock           43           -           -          43
                 Other                                   -           -           -           -
               Held-to-maturity:
                 U.S. Agency obligations              (207)       (196)         11         (22)
             Loans, net of  unearned income:
               Real estate mortgages                   908       1,380        (430)        (42)
               Commercial                              355         452         (70)        (27)
               Consumer and other                     (538)        161        (671)        (28)
             Federal funds sold                        111         134         (17)         (6)
             Interest bearing balances with banks      112           -           -         112
             ----------------------------------------------------------------------------------
               Total Interest Income                  (124)      1,048      (1,381)        209
             ----------------------------------------------------------------------------------
INTEREST     Deposits:
BEARING        Demand - Interest bearing                (2)          5          (7)          -
LIABILITIES    Savings                                 (38)        (36)         (2)          -
               Money markets                          (221)       (149)        (82)         10
               Time - Over $100                        549         478          52          19
               Time - Other                            306         306           -           -
             Federal funds purchased                    (3)         (1)         (2)          -
             Repurchase agreements                     203         166          18          19
             Short-term borrowings                       -           -           -           -
             ----------------------------------------------------------------------------------
               Total Interest Expense                  794         769         (23)         48
             ----------------------------------------------------------------------------------
               Net Interest Income                $   (918)   $    279    $ (1,358)   $    161
             ==================================================================================

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

                                                   Dollar                              Change
                                                   Amount     Change in   Change in   in Rate-
             1997 compared to 1996                of Change    Volume        Rate      Volume
             ----------------------------------------------------------------------------------

EARNING      Investment securities:
ASSETS         U.S. Treasury securities           $   (788)   $   (728)   $    (75)   $     15
               U.S. Agency obligations                 164         192         (20)         (8)
               Other                                     -           -           -           -
             Loans, net of  unearned income:
               Real estate mortgages                 2,544       2,008         532           4
               Commercial                              323         321           2           -
               Consumer and other                     (143)         12        (156)          1
             Federal funds sold                        106         137         (22)         (9)
             ----------------------------------------------------------------------------------
               Total Interest Income                 2,206       1,942         261           3
             ----------------------------------------------------------------------------------
INTEREST     Deposits:
BEARING        Demand - Interest bearing               (17)         12         (29)          -
LIABILITIES    Savings                                (277)        (91)       (192)          6
               Money markets                          (308)       (166)       (155)         13
               Time - Over $100                        641         545          63          33
               Time - Other                            993         760         203          30
             Federal funds purchased                    (9)        (12)          5          (2)
             Repurchase agreements                     157         160           -          (3)
             Short-term borrowings                       4           4           -           -
             ----------------------------------------------------------------------------------
               Total Interest Expense                1,184       1,212        (105)         77
             ----------------------------------------------------------------------------------
               Net Interest Income                $   1,022   $    730    $    366    $    (74)
             ==================================================================================

</TABLE>


                                       20
<PAGE>

PROVISION FOR LOAN LOSSES

The  provision  for loan losses  represents  management's  determination  of the
amount  necessary  to bring  the  allowance  for  loan  losses  to a level  that
management  considers  adequate to reflect the risk of future losses inherent in
the Company's loan  portfolio.  The process of  determining  the adequacy of the
allowance  is  necessarily   judgmental  and  subject  to  changes  in  external
conditions.  Accordingly,  there can be no assurance that existing levels of the
allowance will ultimately prove adequate to cover actual loan losses.

OTHER INCOME

The following  table sets forth  information by category of other income for the
Company for the past three years:

Years Ended December 31,         1998       1997       1996
-----------------------------------------------------------
Trust department income       $ 1,001    $   858    $   730
Service charges on
  deposit accounts                657        648        664
Merchant transaction
  income                        4,500      4,083      4,043
Other fee income                  539        602        438
Other operating income            141         94         77
Realized gains on
  securities, net                   -          -          -
-----------------------------------------------------------
  Total Other Income          $ 6,838    $ 6,285    $ 5,952
===========================================================


     Total other income  increased  $553 during 1998.  Most of the increase came
from new trust  business  which was up $143 from 1997, a 16.7%  increase.  Also,
there was a strong  improvement  in our merchant  transaction  income of $417 or
10.2% due to an increase in our customer  base and  increased  business with our
existing  customers.  Total other income increased $333 during 1997. Most of the
increase  came from new trust  business  which  was up $128 from  1996,  a 17.5%
increase.  Also,  there was a slight  improvement  in our  merchant  transaction
income of $40 due to an increase in our  customer  base and  increased  business
with our existing customers.
     Total other income  increased  $333 during 1997.  Most of the increase came
from new trust  business  which was up $128 from 1996, a 17.5%  increase.  Also,
there was a slight improvement in our merchant  transaction income of $40 due to
an  increase in our  customer  base and  increased  business  with our  existing
customers.

OTHER EXPENSES

The following table sets forth information by category of other expenses for the
Company for the past three years:

Years Ended December 31,         1998        1997        1996
-------------------------------------------------------------
Salaries and employee
  benefits                   $  7,331    $  7,578    $  6,860
Occupancy expenses, net         1,274       1,278       1,221
Furniture and equipment
  expenses                        908         850         806
FDIC assessments                   45          44           2
Merchant transaction
  expenses                      3,764       3,365       3,412
Other operating expenses        3,664       3,769       3,432
-------------------------------------------------------------
  Total Other Expenses       $ 16,986    $ 16,884    $ 15,733
=============================================================


     Salaries and employee benefits  decreased by $247 or 3.3% in 1998 from 1997
and  increased  by $718 or 10.4% in 1997 from 1996.  The  Company  employed  209
people on a full-time  equivalent basis at December 31, 1998,  compared with 202
at December  31,  1997 and 197 at December  31,  1996.  The salary and  benefits
expense in 1998 reflects cost of living increases  granted to employees,  offset
by a lower cost of employee  benefits.  The salary and benefits expense increase
in 1997 was due to  significantly  higher health care  coverage  provided by the
Company to its employees, merit increases, and staff additions.
     Occupancy expenses,  furniture and equipment,  and FDIC assessment expenses
were not significantly  different during the years 1998, 1997 and 1996. However,
the Company did incur additional expense in its merchant transaction business in
1998 due to  additional  growth.  Other  operating  expenses  increased  in 1997
primarily due to costs associated with foreclosed properties.

INCOME TAXES

Federal  income  tax  expense  amounted  to  $1,772 in 1998  compared  to $2,074
recorded in 1997.  The $302  decrease in the  Company's tax provision was due to
lower taxable income. The Company's effective income tax rate for 1998 was 29.3%
compared  to 30.5% for 1997.  In 1997,  income tax  expense  increased  $99 from
$1,975 in 1996 due to an increase in pre-tax  income.  The effective  income tax
rate for 1997 was 30.5% compared to 30.0% for 1996.
     For further  discussion  pertaining to Federal income taxes, see Note 13 to
the Consolidated Financial Statements.

FINANCIAL CONDITION

Total assets  increased  $8.5 million or 2.0% during 1998 and amounted to $436.1
million at December  31, 1998  compared to $427.6  million at December 31, 1997.
Also, for the year ended December 31, 1997 total assets  increased $29.6 million
to $427.6 million or a 7.4% increase over $398.0 million at December 31, 1996.


ASSETS (in millions)             YEAR
---------------------------------------
       $ 436,099                 1998
         427,577                 1997
         398,035                 1996
         378,968                 1995
         363,317                 1994


INVESTMENT PORTFOLIO

The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.
     The following  table  presents the carrying  value by security type for the
Company's investment portfolio.


December 31,                         1998         1997         1996
-------------------------------------------------------------------
U.S.Treasury securities         $  81,916    $ 114,922    $ 112,904
U.S. Agency obligations            11,402       10,106       12,339
State & political subdivisions     23,634            -            -
Other securities                    1,810           20           20
-------------------------------------------------------------------
  Total Investment Securities   $ 118,762    $ 125,048    $ 125,263
===================================================================


                                       21
<PAGE>

LOAN PORTFOLIO

Details  regarding the Company's  loan  portfolio for the past five years are as
follows:
<TABLE>
<CAPTION>

December 31,                         1998       1997       1996       1995       1994
-------------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>       <C>
Real estate - construction
  and land development          $   4,152  $   3,731  $   3,770  $   4,042  $   4,174
Real estate mortgages             221,879    213,128    184,577    161,217    137,947
Commercial                         18,169     17,173     13,476     11,770     10,136
Credit card and related plans       2,286      2,293      2,298      2,404      2,520
Installment                        28,538     26,811     26,667     20,663     17,796
Obligations of states &
  political subdivisions            8,195      8,910      9,427      9,712      8,132
-------------------------------------------------------------------------------------
  Loans, net of unearned income   283,219    272,046    240,215    209,808    180,705
Less: Allowance for loan losses     2,830      2,600      2,300      2,100      2,100
-------------------------------------------------------------------------------------
  Loans, net                    $ 280,389  $ 269,446  $ 237,915  $ 207,708  $ 178,605
=====================================================================================
</TABLE>


LOANS

Total net loans  increased  $11.0 million to $280.4 million at December 31, 1998
from $269.4  million at December 31, 1997, an increase of 4.1%.  Total net loans
increased  $31.5  million to $269.4  million at  December  31,  1997 from $237.9
million at December 31, 1996,  an increase of 13.2%.  The increase in both years
is due to  continued  growth  in  the  Company's  real  estate,  commercial  and
installment loan portfolios.


NET LOANS (in millions)                YEAR
-------------------------------------------
       $ 280,389
         269,446                       1997
         237,915                       1996
         207,708                       1995
         178,605                       1994


Loan  Quality

The lending  activities  of the Company are guided by the basic  lending  policy
established  by the Board of Directors.  Loans must meet criteria  which include
consideration of the character, capacity and capital of the borrower, collateral
provided for the loan, and prevailing economic conditions.
     Regardless  of credit  standards,  there is risk of loss  inherent in every
loan  portfolio.  The  allowance  for loan losses is an amount  that  management
believes will be adequate to absorb  possible  losses on existing loans that may
become  uncollectible,  based on evaluations of the collectibility of the loans.
The evaluations take into consideration such factors as change in the nature and
volume of the loan  portfolio,  overall  portfolio  quality,  review of specific
problem  loans,  industry  experience,  collateral  value and  current  economic
conditions that may affect the borrower's  ability to pay.  Management  believes
that the allowance for loan losses is adequate.  While management uses available
information to recognize losses on loans,  future additions to the allowance may
be  necessary  based on changes in economic  conditions.  In  addition,  various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Company's  allowance for loan losses. Such agencies may
require the  Company to  recognize  additions  to the  allowance  based on their
judgment of information available to them at the time of their examination.
     The  allowance  for loan losses is  increased by periodic  charges  against
earnings  as  a  provision  for  loan  losses,  and  decreased  periodically  by
charge-offs  of loans  (or  parts of  loans)  management  has  determined  to be
uncollectible, net of actual recoveries on loans previously charged-off.


                                       22
<PAGE>

NON-PERFORMING ASSETS

Non-performing  assets consist of non-accrual  loans,  loans past due 90 days or
more and still  accruing  interest and other real estate  owned.  The  following
table sets forth  information  regarding  non-performing  assets as of the dates
indicated:
<TABLE>
<CAPTION>

December 31,                                       1998     1997     1996     1995     1994
-------------------------------------------------------------------------------------------
<S>                                             <C>      <C>      <C>      <C>      <C>    
Non-accrual loans                               $   929  $ 1,031  $   866  $   940  $ 1,435
  Loans past due 90 days or more and accruing:
    Guaranteed student loans                        348      343      342      166      187
    Credit card and home equity loans                27       98       93      133      101
-------------------------------------------------------------------------------------------
  Total non-performing loans                      1,304    1,472    1,301    1,239    1,723
Other real estate owned                             111      339      610      306      496
-------------------------------------------------------------------------------------------
  Total non-performing assets                   $ 1,415  $ 1,811  $ 1,911  $ 1,545  $ 2,219
===========================================================================================
</TABLE>

Loans are generally placed on a nonaccrual  status when principal or interest is
past  due 90 days or when  payment  in full is not  anticipated.  When a loan is
placed on nonaccrual status,  all interest  previously accrued but not collected
is charged  against  current  income.  Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.
     Loans on which the accrual of  interest  has been  discontinued  or reduced
amounted  to $929,  $1,031  and  $866 at  December  31,  1998,  1997  and  1996,
respectively.  If interest on those loans had been  accrued,  such income  would
have been  $108,  $89 and $66 for 1998,  1997 and 1996,  respectively.  Interest
income on those loans,  which is recorded only when  received,  amounted to $30,
$35 and $45 for 1998, 1997 and 1996,  respectively.  There are no commitments to
lend additional funds to individuals whose loans are on non-accrual status.
     The  management  process for  evaluating  the adequacy of the allowance for
loan losses  includes  reviewing each month's loan committee  reports which list
all  loans  that  do  not  meet  certain  internally  developed  criteria  as to
collateral adequacy, payment performance, economic conditions and overall credit
risk.  These  reports also address the current  status and actions in process on
each listed loan. From this  information,  adjustments are made to the allowance
for loan losses.  Such adjustments include both specific loss allocation amounts
and general  provisions  by loan category  based on present and past  collection
experience,  nature and volume of the loan portfolio, overall portfolio quality,
and current economic conditions that may affect the borrower's ability to pay.
     As of  December  31,  1998,  there  are no  significant  loans  as to which
management  has  serious  doubt  about  their  ability to continue to perform in
accordance  with their  contractual  terms. At December 31, 1998, 1997 and 1996,
the Company did not have any loans specifically classified as impaired.
     Most of the Company's  lending  activity is with  customers  located in the
Company's  geographic  market area and repayment thereof is affected by economic
conditions in this market area.

The following  tables  present the  Company's  loan loss  experience  during the
periods indicated:

Years Ended December 31,            1998     1997     1996     1995     1994
----------------------------------------------------------------------------

Balance at beginning of year     $ 2,600  $ 2,300  $ 2,100  $ 2,100  $ 2,100
Charge-offs:
  Real estate mortgages               69       38       87      300      341
  Commercial (time and demand)
    and all others                   252        -        -       11        -
  Credit card and related plans       37       52       64       67       55
  Installment loans                   25       32       32        3       12
----------------------------------------------------------------------------
Total charge-offs                    383      122      183      381      408
----------------------------------------------------------------------------
Recoveries:
  Real estate mortgages                1       79       22        2        3
  Commercial (time and demand)
               and all others          -        1        2        1       25
  Credit card and related plans        9       17       16       11       18
  Installment loans                    8        9        9       46       25
----------------------------------------------------------------------------
Total recoveries                      18      106       49       60       71
----------------------------------------------------------------------------
Net charge-offs                      365       16      134      321      337
----------------------------------------------------------------------------
Provision charged to operations      595      316      334      321      337
----------------------------------------------------------------------------
  Balance at End of Year         $ 2,830  $ 2,600  $ 2,300  $ 2,100  $ 2,100
============================================================================
Ratio of net charge-offs
to average loans outstanding       0.13%    0.01%    0.06%    0.17%    0.19%
============================================================================


                                       23
<PAGE>


The allowance for loan losses is allocated as follows:
<TABLE>
<CAPTION>

December 31,                   1998           1997           1996           1995           1994
----------------------------------------------------------------------------------------------------
                             Amount   %1    Amount   %1    Amount   %1    Amount   %1    Amount   %1
----------------------------------------------------------------------------------------------------
<S>                         <C>     <C>    <C>     <C>    <C>     <C>    <C>     <C>    <C>     <C> 
Real estate
  mortgages                 $ 1,550  80%   $ 1,350  71%   $ 1,125  71%   $ 1,100  72%   $ 1,100  74%
Commercial
  (time and demand)
   and all others               830   9        850  19        875  22        750  23        700  22
Credit card and
  related plans                 150   1        150   1        150   1        150   1        200   2
Personal installment loans      300  10        250   9        150   6        100   4        100   2
----------------------------------------------------------------------------------------------------
  Total                     $ 2,830 100%   $ 2,600 100%   $ 2,300 100%   $ 2,100 100%   $ 2,100 100%
====================================================================================================
</TABLE>

Note: 1 - Percent of loans in each category to total loans


DEPOSITS 

The primary source of funds to support the Company's growth is its deposit base.
Company  deposits  increased $3.0 million to $377.5 million at December 31, 1998
from $374.5 million at December 31, 1997, an increase of .8%.  Company  deposits
increased  $22.5  million to $374.5  million at  December  31,  1997 from $352.0
million at December 31, 1996, an increase of 6.4%. This growth occurred  despite
the  trend  of  customers  finding  alternate   repositories  for  their  funds,
principally the equity market via mutual funds.  Management is responding to the
competition  for these funds by  offering  competitively  priced or  alternative
banking products.

The maturities of time deposits of $100,000 or more are as follows:

Three months or less                    $ 12,427
Over three months through six months      23,308
Over six months through twelve months      6,512
Over twelve months                         3,944
                                        --------
Total                                   $ 46,191
                                        ========


DEPOSITS (in millions)            YEAR
--------------------------------------
$ 377,526                         1998
  374,488                         1997
  352,026                         1996
  336,386                         1995
  326,482                         1994


ASSET/LIABILITY  MANAGEMENT

The  Company's  policy  is to match  its  level  of  rate-sensitive  assets  and
rate-sensitive liabilities within a limited range, thereby reducing its exposure
to interest rate fluctuations.  While no single measure can completely  identify
the impact of changes in interest  rates on net  interest  income,  one gauge of
interest  rate-sensitivity  is to measure,  over a variety of time periods,  the
differences  in  the  amounts  of  the  Company's   rate-sensitive   assets  and
rate-sensitive liabilities.  These differences, or "gaps", provide an indication
of the extent to which net interest  income may be affected by future changes in
interest  rates.  A  positive  gap  exists  when  rate-sensitive  assets  exceed
rate-sensitive  liabilities  and indicates  that a greater volume of assets than
liabilities  will  reprice  during a given  period.  This  mismatch  may enhance
earnings in a rising  interest rate  environment  and may inhibit  earnings when
interest rates  decline.  Conversely,  when  rate-sensitive  liabilities  exceed
rate-sensitive  assets,  referred  to as a negative  gap,  it  indicates  that a
greater volume of liabilities than assets may reprice during the period. In this
case, a rising  interest  rate  environment  may inhibit  earnings and declining
interest  rates  may  enhance  earnings.  However,  because  interest  rates for
different asset and liability products offered by financial institutions respond
differently, the gap is only a general indicator of interest rate sensitivity.

LIQUIDITY

The objective of liquidity  management is to maintain a balance  between sources
and uses of funds in such a way that  the cash  requirements  of  customers  for
loans and deposit withdrawals are met in the most economical manner.  Management
monitors its liquidity position  continuously in relation to trends of loans and
deposits for  short-term  as well as long-term  requirements.  Liquid assets are
monitored  on a daily  basis to  assure  maximum  utilization.  Management  also
manages its liquidity  requirements  by maintaining an adequate level of readily
marketable assets and access to short-term funding sources.
     The Company remains in a highly liquid condition both in the short and long
term. Sources of liquidity include the Company's  substantial U.S. Treasury bond
portfolio,  additional  deposits,  earnings,  overnight  loans to and from other
companies  (Federal  Funds) and lines of credit at the Federal Reserve Bank. The
designation of securities as "Held-To-Maturity"  lessens the ability of banks to
sell  securities  so  classified,   except  in  regard  to  certain  changes  in
circumstances or other events that are isolated, nonrecurring and unusual.


                                       24
<PAGE>

CAPITAL RESOURCES

A strong  capital  position is important to the continued  profitability  of the
Company and promotes  depositor and investor  confidence.  The Company's capital
provides a basis for future growth and  expansion  and also provides  additional
protection against unexpected losses.
     Additional  sources of capital would come from  retained  earnings from the
operations  of the  Company  and  from  the  sale of  additional  common  stock.
Management  has no plans to offer  additional  common  stock at this  time.
     The  Company's  total  risk-based  capital ratio was 18.36% at December 31,
1998. The Company's  risk-based capital ratio is more than the 10.00% ratio that
Federal regulators use as the "well capitalized" threshold.  This is the current
criteria  which the FDIC  uses in  determining  the  lowest  insurance  rate for
deposit  insurance.  The Company's  risk-based capital ratio is more than double
the 8.00% limit which determines whether a company is "adequately  capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital  requirements  without the necessity of increasing its
equity capital.

DIVIDEND POLICY

Payment of future  dividends  will be subject to the  discretion of the Board of
Directors  and will  depend  upon the  earnings of the  Company,  its  financial
condition, its capital requirements, its need for funds and other matters as the
Board deems  appropriate.
     Dividends  on the  Company  common  stock,  if  approved  by the  Board  of
Directors,  are customarily paid on or about March 15, June 15, September 15 and
December 15.


STOCKHOLDERS' EQUITY (in millions)            YEAR
--------------------------------------------------
         $ 44,961                             1998
           42,924                             1997
           40,585                             1996
           39,239                             1995
           32,927                             1994


YEAR 2000 COMPLIANCE (Y2K)

The "Year 2000" (Y2K) issue is the result of computer  programs  and files being
written using a two digit as opposed to a four digit year field.  Programs which
use two digit year fields in comparing  dates,  sorting  dates or using dates in
calculations can result in system failures or significant miscalculations if not
corrected.
     The  Company's  formal  written Y2K  Readiness  Plan was developed in early
1998, although much systems and programming work on existing and new systems had
been  accomplished  long before that date. The plan has  awareness,  assessment,
renovation,  validation and implementation phases. The Company has completed the
awareness  and  assessment  phases  of the plan  and has  nearly  completed  the
renovation, validation and implementation phases.
     Most of the Company's  software  used in  conducting  its business has been
internally  developed,  although the Company  does license a minor  portion from
third party software vendors.  The Company has developed a comprehensive list of
all software and hardware in use within the organization, as well as all systems
that may be affected  by computer  chip  failures  such as heating and  lighting
systems, elevators, etc.
     All mission  critical  internally  developed  software  has been  modified,
tested and is in production.  As of the end of 1998,  our only mission  critical
vendor supplied system is under  modification.  It is presently being tested and
is expected to be in  production  by March 31, 1999.  Modification,  testing and
placing in production  of all  non-mission  critical  software is expected to be
finished by June 30, 1999.
     The  Company is closely  tracking  the  progress  each  vendor is making in
resolving the problems  associated  with Y2K.  Testing has commenced  with third
parties  such as  MasterCard  and Visa,  MAC ATM  Network  and  Federal  Reserve
FedLine.
     Additionally,  the Company has contacted  its major  borrowers to determine
the level of progress each has made in addressing the Y2K problem.
     The Company has developed  and is  continually  updating a Y2K  Contingency
Plan.  This Plan is separate  and distinct  from,  but takes into  account,  the
Company's   Disaster   Recovery  Plan.  The  Y2K  Contingency  Plan  covers  two
situations.  First, it provides for the contingency  that despite the conclusion
that a system has been  remediated,  validated and implemented and is Y2K ready,
that  nevertheless,  the system fails (Business  Resumption  Contingency  Plan).
Second,  it provides for the contingency  that the  remediation,  validation and
implementation  of any  system  fails to be  accomplished  within the time frame
specified in our overall schedule for remediation, validation and implementation
(Remediation   Contingency   Plan).  To  date  no  remediation,   validation  or
implementation  has failed to be  accomplished  within our  overall  schedule or
within guidelines  issued by the Federal  regulators which regulate this Company
or any of its subsidiaries.  Therefore,  no Remediation Contingency Plan exists,
although,  the  framework  is there to produce  such a Plan if it were to become
necessary.  Extensive Business Resumption Contingency Plans have been generated.
     The  overall  Contingency  Plan  identifies  the  Company's  core  business
processes  and  analyzes  the effect of  failures  of systems on the  ability to
perform the various  business  processes.  It further  identifies  those systems
which are mission  critical - those which the Company cannot do without for more
than a day or two,  and those  that the  Company  can  alternately  process on a
manual basis or not process at all for a week or two - non-mission critical. For
all  systems,  the  Plan  identifies  how the  Company's  other  systems  can be
processed  without the failing systems and what must be done to bring the failed
system up to date when it is repaired.
     The  Contingency  Plan also covers what the Company will do if  electricity
and/or  communications fail. It also provides for coverage of additional funding
and cash needs  which may arise  before and after the  century  date  change and
provides for the possible  temporary  closing of offices due to loss of security
systems, electricity, etc.
     The  responsibility  of  validating  the  Contingency  Plan  lies  with the
Company's  Director of Internal  Audit.  The scheduled  completion  date for the
Contingency  Plan is June 30,  1999,  although,  it is a  document  that will be
continually updated as systems change in the future.
     The estimated  cost for  resolving the Y2K issues is $120,000,  and $80,000
has been spent so far. These costs are, to a large degree,  absorbed as ordinary
operating  expenses as most of the work is being  performed  by regular  Company
staff.  This  concentrated  effort has forced  the  postponement  of a number of
projects,  including,  but not limited to, fully implementing the new continuous
form laser printer, image processing and Internet access.


                                       25
<PAGE>

ITEM 7A   Quantitative and Qualitative Disclosures About Market Risk


The Company  currently  does not enter into  derivative  financial  instruments,
which include futures, forwards, interest rate swaps, option contracts and other
financial  instruments  with similar  characteristics.  However,  the Company is
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,  financial  guarantees and
letters of credit.  These  instruments  involve to varying degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
Consolidated Balance Sheets. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition  established  in
the  contract.  Commitments  generally  have  fixed  expiration  dates  or other
termination  clauses and may require payment of a fee. Standby letters of credit
are conditional commitments issued to guarantee the performance of a customer to
a third party up to a stipulated amount and with specified terms and conditions.
     Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Company until the instrument is exercised.
     The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability  Committee.  Interest  rate risk is the  potential  of  economic
losses  due to future  interest  rate  changes.  These  economic  losses  can be
reflected as a loss of future net interest  income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximizing income.  Management  realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and a recently  instituted  interest  rate shock  simulation
report.  The Company has no market risk sensitive  instruments  held for trading
purposes. It appears the Company's market risk is reasonable at this time.
     The following table provides  information  about the Company's  market rate
sensitive instruments used for purposes other than trading that are sensitive to
changes  in  interest  rates.  For  loans,  securities,   and  liabilities  with
contractual  maturities,  the table  presents  principal  cash flows and related
weighted-average  interest  rates  by  contractual  maturities  as  well  as the
Company's  historical  experience of the impact of interest rate fluctuations on
the  prepayment  of  residential  and  home  equity  loans  and  mortgage-backed
securities.  For core deposits (e.g., DDA, interest checking,  savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable,  related weighted-average interest rates based on
the Company's  historical  experience,  management's  judgment,  and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.


                                       26
<PAGE>

MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 1998
<TABLE>

<CAPTION>
                                                                                                      Non-Rate              Fair
                                           1999       2000      2001      2002      2003  Thereafter Sensitive    Total    Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>        <C>        <C>       <C>       <C>       <C>        <C>        <C>        <C>
ASSETS

Investment securities:
  Fixed interest rate securities:
    U.S. Treasury securities          $  62,557  $  19,359  $      -  $      -  $      -  $       -  $       -  $  81,916  $  81,916
       Yield                              6.40%      6.33%         -         -         -          -          -      6.38%
    U.S. Agency obligations                   -          -         -         -     4,986          -          -      4,986      4,986
       Yield                                  -          -         -         -     5.71%          -          -      5.71%
    States & political subdivisions           -      1,102     3,465     5,639     4,211      9,217          -     23,634     23,634
       Yield                                  -      5.45%     6.08%     5.82%     5.27%      5.26%          -      5.62%
  Variable interest rate securities:
    U.S. Agency obligations               3,000      3,000       416         -         -          -          -      6,416      6,266
       Yield                              6.14%      6.14%     6.14%         -         -          -          -      6.14%
    Federal Home Loan Bank stock              -          -         -         -         -      1,790          -      1,790      1,790
       Yield                                  -          -         -         -         -      6.50%          -       6.50%
    Other                                     -          -         -         -         -         20          -         20         20
       Yield                                  -          -         -         -         -      5.00%          -      5.00%
Loans, net of unearned income:
  Fixed interest rate loans:
    Real estate mortgages                20,556     14,494    13,545    12,473    11,757     96,556          -    169,381    169,955
       Yield                              7.88%      7.63%     7.61%     7.57%     7.56%      7.51%          -      7.58%
    Consumer and other                    1,734      1,612     1,121       704       597      3,594          -      9,362      9,169
       Yield                              7.87%      7.64%     7.67%     7.88%     7.62%      7.52%          -      7.66%
  Variable interest rate loans:
    Real estate mortgages                 4,934      6,561     6,476     5,671     5,624     27,384          -     56,650     56,650
       Yield                              8.18%      8.12%     8.09%     8.21%     8.23%      8.15%          -      8.16%
    Commercial                           18,169          -         -         -         -          -          -      18,169    18,169
       Yield                              8.44%          -         -         -         -          -          -      8.44%
    Consumer and other                   11,103      3,236     3,255     3,164     3,372      5,527          -     29,657     29,657
       Yield                              7.89%      8.25%     8.28%     8.33%     8.35%      8.19%          -      8.13%
Less: Allowance for loan losses             564        259       244       220       213      1,330          -      2,830
Federal funds sold                        6,650          -         -         -         -          -          -      6,650      6,650
       Yield                              5.21%          -         -         -         -          -          -      5.21%
Cash and due from banks                       -          -         -         -         -          -     12,076     12,076     12,076
Other assets                                  -          -         -         -         -          -     18,222     18,222
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                          $ 128,139  $  49,105  $ 28,034  $ 27,431  $ 30,334  $ 142,758  $  30,298  $ 436,099  $ 420,938
====================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
  Variable interest rate deposits:
    Demand - Interest bearing         $       -  $  25,438  $      -  $      -  $      -  $       -  $       -  $  25,438  $  25,438
       Yield                                  -      1.48%         -         -         -          -          -      1.48%
    Savings                                   -     71,771         -         -         -          -          -     71,771     71,771
       Yield                                  -      1.98%         -         -         -          -          -      1.98%
    Money markets                        56,707          -         -         -         -          -          -     56,707     56,707
       Yield                              2.86%          -         -         -         -          -          -      2.86%
    Time - Other                         13,657          -         -         -         -          -          -     13,657     13,657
       Yield                              5.32%          -         -         -         -          -          -      5.32%
  Fixed interest rate deposits:
    Time - Over $100,000                 42,246      2,469       970       206       300          -          -     46,191     46,418
       Yield                              5.45%      5.82%     6.49%     5.99%     6.00%          -          -      5.50%
    Time - Other                         96,321      7,100     1,807     1,457       669         10        109    107,473    108,013
       Yield                              5.24%      5.45%     5.47%     5.90%     5.36%      5.39%          -      5.27%
Demand - Non-interest bearing                 -          -         -         -         -          -     56,289     56,289     56,289
Repurchase agreements                    10,959          -         -         -         -          -          -     10,959     10,959
       Yield                              4.52%          -         -         -         -          -          -      4.52%
Other liabilities                             -          -         -         -         -          -      2,653      2,653
Stockholders' equity                          -          -         -         -         -          -     44,961     44,961
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity                  $ 219,890  $ 106,778  $  2,777  $  1,663  $    969  $      10  $ 104,012  $ 436,099  $ 389,252
====================================================================================================================================
Excess of (liabilities) assets
subject to interest rate change       $ (91,751) $ (57,673) $ 25,257  $ 25,768  $ 29,365  $ 142,748  $ (73,714) $       -
====================================================================================================================================
</TABLE>


                                       27
<PAGE>

ITEM 8    Financial Statements and Supplementary Data


                          CONSOLIDATED BALANCE SHEETS


(in thousands, except per share data)

               December 31,                                    1998         1997
               -----------------------------------------------------------------
ASSETS         Cash and due from banks                    $  12,076    $  10,928
               Federal funds sold                             6,650        7,650
               -----------------------------------------------------------------
                 Cash and Cash Equivalents                   18,726       18,578
               Investment securities:
                 Available-for-sale, at fair value          112,346      114,942
                 Held-to-maturity (fair value of $6,266
                   and $10,102, respectively)                 6,416       10,106
               -----------------------------------------------------------------
                 Total Investment Securities                118,762      125,048
               Loans, net of unearned income                283,219      272,046
                 Less: Allowance for loan losses              2,830        2,600
               -----------------------------------------------------------------
                 Loans, Net                                 280,389      269,446
               Bank premises and equipment                   12,631        8,646
               Other real estate owned                          111          339
               Accrued interest receivable                    3,234        3,895
               Other assets                                   2,246        1,625
               -----------------------------------------------------------------
               Total Assets                               $ 436,099    $ 427,577
               =================================================================

LIABILITIES    Deposits:
                 Non-interest bearing                     $  56,398    $  46,127
                 Interest bearing                           321,128      328,361
               -----------------------------------------------------------------
                 Total Deposits                             377,526      374,488
               Other borrowed funds:
                 Repurchase agreements                       10,959        5,922
                 Short-term borrowings                            -          893
               Accrued interest payable                       2,039        2,524
               Other liabilities                                614          826
               -----------------------------------------------------------------
                 Total Liabilities                          391,138      384,653
               -----------------------------------------------------------------

STOCKHOLDER'S  Common stock, $.01 par value, 15,000,000
EQUITY           shares authorized, 2,148,000
                 shares issued and outstanding                   21           21
               Surplus                                       10,819       10,819
               Retained earnings                             33,688       31,662
               Accumulated other comprehensive income           433          422
               -----------------------------------------------------------------
                 Total Stockholders' Equity                  44,961       42,924
               -----------------------------------------------------------------
                 Total Liabilities and
                 Stockholders' Equity                     $ 436,099    $ 427,577
               =================================================================

The  accompanying  Notes are an integral  part of these  Consolidated  Financial
Statements.


                                       28
<PAGE>

                       CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

             Years Ended December 31,                   1998      1997      1996
             -------------------------------------------------------------------
INTEREST     Interest and fees on loans             $ 22,609  $ 21,884  $ 19,160
INCOME       Interest and dividends on investments:
               U.S. Treasury securities and U.S.
                 Agency obligations                    6,600     7,804     8,428
               States & political subdivisions            89         -         -
               Other securities                           44         1         1
             Interest on Federal funds sold              521       410       304
             Interest on balances with banks             112         -         -
             -------------------------------------------------------------------
               Total Interest Income                  29,975    30,099    27,893
             -------------------------------------------------------------------
INTEREST     Interest on time deposits
EXPENSE        of $100,000 or more                     2,165     1,616       975
             Interest on other deposits               10,609    10,564    10,173
             Interest on other borrowed funds            405       205        53
             -------------------------------------------------------------------
               Total Interest Expense                 13,179    12,385    11,201
             -------------------------------------------------------------------
               Net Interest Income                    16,796    17,714    16,692
             Provision for loan losses                   595       316       334
             -------------------------------------------------------------------
               Net Interest Income After Provision
                 for Loan Losses                      16,201    17,398    16,358
             -------------------------------------------------------------------
OTHER        Trust department income                   1,001       858       730
INCOME       Service charges on deposit accounts         657       648       664
             Merchant transaction income               4,500     4,083     4,043
             Other fee income                            539       602       438
             Other operating income                      141        94        77
             Realized gains on securities, net             -         -         -
             -------------------------------------------------------------------
               Total Other Income                      6,838     6,285     5,952
             -------------------------------------------------------------------
OTHER        Salaries and employee benefits            7,331     7,578     6,860
EXPENSES     Occupancy expenses, net                   1,274     1,278     1,221
             Furniture and equipment expenses            908       850       806
             FDIC assessments                             45        44         2
             Merchant transaction expenses             3,764     3,365     3,412
             Other operating expenses                  3,664     3,769     3,432
             -------------------------------------------------------------------
               Total Other Expenses                   16,986    16,884    15,733
             -------------------------------------------------------------------
NET INCOME   Income before income taxes                6,053     6,799     6,577
             Applicable income taxes                   1,772     2,074     1,975
             -------------------------------------------------------------------
               Net Income                           $  4,281  $  4,725  $  4,602
             ===================================================================
               Earnings Per Share                   $   1.99  $   2.20  $   2.14
             ===================================================================

The  accompanying  Notes are an integral  part of these  Consolidated  Financial
Statements.


                                       29
<PAGE>

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY



Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------


(in thousands, except per share data)
<TABLE>

<CAPTION>
                                                                              Accumulated
                                                                                 Other          Total
                                             Common               Retained   Comprehensive   Stockholders'
(in thousands except per share data)         Stock      Surplus   Earnings      Income          Equity
----------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>        <C>           <C>            <C>       
Balance, December 31, 1995                  $     21   $ 10,819   $ 26,739      $ 1,660        $ 39,239

Comprehensive income:
  Net income, 1996                                 -          -      4,602            -           4,602
  Unrealized losses on securities,
    net of taxes of $571                           -          -          -       (1,108)         (1,108)
                                                                                                 ------- 
Comprehensive income                                                                              3,494

Cash dividends declared ($1.00 per share)          -          -     (2,148)           -          (2,148)
----------------------------------------------------------------------------------------------------------

Balance, December 31, 1996                        21     10,819     29,193          552          40,585

Comprehensive income:
  Net income, 1997                                 -          -      4,725            -           4,725
  Unrealized losses on securities,
    net of taxes of $67                            -          -          -         (130)           (130)
                                                                                                 -------
Comprehensive income                                                                              4,595

Cash dividends declared ($1.05 per share)          -          -     (2,256)           -          (2,256)
----------------------------------------------------------------------------------------------------------

Balance, December 31, 1997                        21     10,819     31,662          422          42,924
 
Comprehensive income: 
  Net income, 1998                                 -          -      4,281            -           4,281
  Unrealized gains on securities,
    net of taxes of $6                             -          -          -           11              11
                                                                                                 -------
Comprehensive income                                                                              4,292

Cash dividends declared ($1.05 per share)          -          -     (2,255)           -          (2,255)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998                  $     21   $ 10,819   $ 33,688      $   433        $ 44,961
==========================================================================================================
</TABLE>

The  accompanying  Notes are an integral  part of these  Consolidated  Financial
Statements.


                                       30
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

(in thousands)  Years Ended December 31,                               1998        1997        1996
                ------------------------------------------------------------------------------------
<S>                                                                <C>         <C>         <C>   

OPERATING       Net Income                                         $  4,281    $  4,725    $  4,602
ACTIVITIES      Adjustments to reconcile net income to net
                  cash provided by operating activities:
                    Depreciation                                      1,005         972         929
                    Provision for loan losses                           595         316         334
                    Deferred income tax (benefit) provision            (284)         (8)         17
                    Amortization of securities
                    (net of accretion)                                  232         296         510
                    Net realized gains on securities                      -           -           -
                    Loss on other real estate                            41         176          52
                    Decrease (increase) in interest receivable          661        (387)        885
                    (Increase) decrease in other assets                (475)       (136)         98
                    (Decrease) increase in income taxes payable        (182)         51          65
                    (Decrease) increase in interest payable            (485)        523         105
                    Increase (decrease) in other liabilities            102        (105)        172
                ------------------------------------------------------------------------------------
                    Net cash provided by
                      operating activities                            5,491       6,423       7,769
                ------------------------------------------------------------------------------------
INVESTING       Purchase of investment securities
ACTIVITIES        available-for-sale                                (53,579)    (48,472)    (14,793)
                Proceeds from maturities of investment
                  securities available-for-sale                      56,000      46,000      37,000
                Purchase of investment securities to be
                  held-to-maturity                                        -           -      (5,002)
                Proceeds from repayments of investment
                  securities to be held-to-maturity                   3,650       2,194       1,590
                Net loans originated                                (11,664)    (32,274)    (31,040)
                Proceeds from other real estate                         313         523         143
                Investment in premises and equipment                 (4,990)     (3,196)     (1,163)
                ------------------------------------------------------------------------------------
                    Net cash used in
                      investing activities                          (10,270)    (35,225)    (13,265)
                ------------------------------------------------------------------------------------
FINANCING       Net increase (decrease) in demand and
ACTIVITIES        savings deposits                                    6,236     (12,393)       (647)
                Net (payments) proceeds on time deposits             (3,198)     34,855      16,287
                Increase in repurchase agreements                     5,037       3,925       1,997
                Net (decrease) increase in short-term borrowings       (893)        422         295
                Cash dividends paid                                  (2,255)     (2,256)     (2,148)
                ------------------------------------------------------------------------------------
                    Net cash provided by
                      financing activities                            4,927      24,553      15,784
                ------------------------------------------------------------------------------------
                Net increase (decrease) in cash
                and cash equivalents                                    148      (4,249)     10,288
                
                Cash and cash equivalents at January 1               18,578      22,827      12,539
                ------------------------------------------------------------------------------------
                Cash and cash equivalents at December 31           $ 18,726    $ 18,578    $ 22,827
                ====================================================================================
</TABLE>

The  accompanying  Notes are an integral  part of these  Consolidated  Financial
Statements.


                                       31
<PAGE>

                     GENERAL NOTES TO FINANCIAL STATEMENTS

1    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Penseco  Financial  Services  Corporation  (Company) is a bank holding  company,
incorporated  under the laws of  Pennsylvania.  It is the parent company of Penn
Security Bank and Trust Company (Bank), a state chartered bank.
         The  Company  operates  from nine  banking  offices  under a state bank
charter and  provides  full  banking  services,  including  trust  services,  to
individual and corporate customers primarily in Northeastern  Pennsylvania.  The
Company's  primary deposit  products are savings and demand deposit accounts and
certificates  of  deposit.   Its  primary  lending  products  are  real  estate,
commercial and consumer loans.
     The Company's  revenues are  attributable to a single  reportable  segment,
therefore segment  information is not presented.
     The  accounting  policies of the Company  conform with  generally  accepted
accounting principles and with general practices within the banking industry.

BASIS OF PRESENTATION

The Financial Statements of the Company have been consolidated with those of its
wholly owned subsidiary,  Penn Security Bank and Trust Company,  eliminating all
intercompany items and transactions.

     On December  31,  1997,  the Bank was  reorganized  into a holding  company
structure.  Each  outstanding  share of the Bank's  common  stock,  par value of
$10.00 per share,  was exchanged for four shares of Penseco  Financial  Services
Corporation  common  stock,  par  value of $.01 per  share.  As a result  of the
reorganization,  the Bank became a wholly-owned  subsidiary of the Company.
     This  reorganization  among entities under common control was accounted for
at  historical  cost in a  manner  similar  to a  pooling  of  interests.  Prior
financial  statements  have  been  restated  to  reflect  the  transaction.
     The Statements are presented on the accrual basis of accounting, except for
Trust  Department  income which is recorded when payment is received.
     Effective  January 1, 1998,  the Company  adopted  Statement  of  Financial
Accounting Standards No. 130, "Reporting  Comprehensive Income" (SFAS 130) which
was issued in June 1997.  SFAS 130  established  new rules for the reporting and
display of  comprehensive  income and its  components,  but had no effect on the
Company's net income or total stockholders' equity. SFAS 130 requires unrealized
gains and losses on the Company's available-for-sale  securities, which prior to
adoption were reported  separately in  stockholders'  equity,  to be included in
comprehensive income. Prior years financial statements have been reclassified to
conform  to the  requirements  of SFAS 130.
     All  information  is presented  in  thousands of dollars,  except per share
data.

USE OF 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.
     Material estimates that are particularly  susceptible to significant change
relate  to the  determination  of the  allowance  for  losses  on loans  and the
valuation  of  real  estate  acquired  in  connection  with  foreclosures  or in
satisfaction of loans. In connection  with the  determination  of the allowances
for losses on loans and foreclosed real estate,  management obtains  independent
appraisals for significant properties.

INVESTMENT SECURITIES

     Investments  in securities  are  classified in two categories and accounted
for as follows:

Securities  Held-to-Maturity.
-----------------------------
Bonds, notes,  debentures and  mortgage-backed  securities for which the Company
has the  positive  intent and ability to hold to maturity  are reported at cost,
adjusted for amortization of premiums and accretion of discounts computed on the
straight-line basis over the period to maturity, which approximates the interest
method.

Securities  Available-for-Sale.
-------------------------------

Bonds,  notes,  debentures  and certain  equity  securities  not  classified  as
securities  to be held to  maturity  are  carried at fair value with  unrealized
holding  gains and  losses,  net of tax,  reported as a net amount in a separate
component of stockholders' equity until realized.
     Gains  and  losses  on  the  sale  of  securities   available-for-sale  are
determined  using the  specific  identification  method  and are  reported  as a
separate  component of other income in the Statements of Income.
     The  Company  has  no  derivative  financial  instruments  required  to  be
disclosed under SFAS No. 119.

LOANS AND PROVISION  (ALLOWANCE) FOR POSSIBLE LOAN

Losses Loans are stated at the principal amount outstanding, net of any unearned
income,  deferred  loan fees and the  allowance  for loan  losses.  Interest  on
discounted  loans is  generally  recognized  as  income  based on  methods  that
approximate the interest method. For all other loans,  interest is accrued daily
on the outstanding  balances.
     Loans are  generally  placed  on a  nonaccrual  status  when  principal  or
interest is past due 90 days or when payment in full is not anticipated.  When a
loan is placed on nonaccrual  status,  all interest  previously  accrued but not
collected  is charged  against  current  income.  Loans are  returned to accrual
status when past due interest is collected  and the  collection  of principal is
probable.
     The  provision  for loan  losses  is based on past  loan  loss  experience,
management's  evaluation  of the  potential  loss in the current loan  portfolio
under current  economic  conditions  and such other factors as, in  management's
best  judgement,  deserve  current  recognition in estimating  loan losses.  The
annual  provision  for loan losses  charged to operating  expense is that amount
which is  sufficient  to bring the balance of the  allowance  for possible  loan
losses to an adequate level to absorb anticipated losses.

PREMISES AND EQUIPMENT

Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Provision  for  depreciation  and  amortization,  computed  principally  on  the
straight-line method, is charged to operating expenses over the estimated useful
lives of the assets.  Maintenance  and repairs are charged to current expense as
incurred.

LONG-LIVED ASSETS

The Company  reviews the  carrying  value of  long-lived  assets for  impairment
whenever events or changes in  circumstances  indicate that carrying  amounts of
the assets might not be  recoverable,  as  prescribed  in Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).


                                       32
<PAGE>

1    NATURE OF  OPERATIONS AND  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
     (continued)

PENSION EXPENSE

Pension  expense has been  determined in accordance  with Statement of Financial
Accounting Standards No. 87, "Employers Accounting for Pensions" (SFAS 87).

POSTRETIREMENT BENEFITS EXPENSE

Postretirement benefits expense has been determined in accordance with Statement
of  Financial   Accounting   Standards  No.  106,   "Employers   Accounting  for
Postretirement Benefits Other Than Pensions" (SFAS 106).

INCOME TAXES

Provisions  for income taxes are based on taxes  payable or  refundable  for the
current year (after  exclusion of  non-taxable  income such as interest on state
and municipal  securities) as well as deferred  taxes on temporary  differences,
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported  amounts in the Financial
Statements.  Deferred tax assets and  liabilities  are included in the Financial
Statements  at currently  enacted  income tax rates  applicable to the period in
which the  deferred  tax assets and  liabilities  are expected to be realized or
settled as  prescribed in Statement of Financial  Accounting  Standards No. 109,
"Accounting  for Income  Taxes" (SFAS 109).  As changes in tax laws or rates are
enacted,  deferred tax assets and liabilities are adjusted through the provision
for income taxes.

CASH FLOWS

For purposes of the Statements of Cash Flows, cash and cash equivalents  include
cash on hand, due from banks,  interest  bearing balances with banks and Federal
funds sold for a one-day period.

The Company paid  interest and income taxes during the years ended  December 31,
1998, 1997 and 1996 as follows:

                          1998       1997      1996
---------------------------------------------------
Income taxes paid     $  2,238   $  1,985   $ 1,935
Interest paid         $ 13,664   $ 11,861   $11,097

Non-cash  transactions  during the years ended December 31, 1998, 1997 and 1996,
comprised  entirely of the net  acquisition  of real estate in the settlement of
loans, amounted to $126, $427, and $498, respectively.

TRUST ASSETS AND INCOME

Assets held by the Company in a fiduciary or agency  capacity for its  customers
are not included in the Financial  Statements since such items are not assets of
the Company.  Trust  income is reported on the cash basis and is not  materially
different  than if it were  reported on the accrual  basis.

EARNINGS PER SHARE

Basic  earnings per share is computed on the weighted  average  number of common
shares  outstanding  during each year  (2,148,000) as prescribed in Statement of
Financial  Accounting  Standards  No. 128,  "Earnings  Per Share"  (SFAS 128). A
calculation  of diluted  earnings  per share is not  applicable  to the Company.

PENDING ACCOUNTING  PRONOUNCEMENTS

Management does not believe that any pending accounting pronouncements will have
a material impact on the Consolidated Financial Statements.

RECLASSIFICATIONS

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 1998
presentation.


2    CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                                 1998     1997
----------------------------------------------------------
Cash items in process of collection    $     66   $  1,796
Non-interest bearing deposits             6,982      4,131
Interest bearing deposits with banks        345          -
Cash on hand                              4,683      5,001
----------------------------------------------------------
Total                                  $ 12,076   $ 10,928
==========================================================

3    INVESTMENT SECURITIES

The amortized cost and fair value of investment  securities at December 31, 1998
and 1997 are as follows:

                               AVAILABLE-FOR-SALE

                                          Gross       Gross
                           Amortized   Unrealized   Unrealized      Fair
1998                          Cost       Gains        Losses       Value
--------------------------------------------------------------------------
U.S. Treasury
  securities               $  81,210   $      706   $        -   $  81,916
U.S. Agency
  securities                   5,000            -           14       4,986
States & political
  subdivisions                23,669           15           50      23,634
--------------------------------------------------------------------------
  Total Debt
    Securities               109,879          721           64     110,536
Equity
  securities                   1,810            -            -       1,810
--------------------------------------------------------------------------
  Total Available -
    for-Sale               $ 111,689   $      721   $       64   $ 112,346
==========================================================================


                                         Gross        Gross
                           Amortized   Unrealized   Unrealized     Fair
1997                          Cost       Gains        Losses      Value
--------------------------------------------------------------------------
U.S. Treasury
  securities               $ 114,283   $      639   $        -   $ 114,922
Equity
  securities                      20            -            -          20
--------------------------------------------------------------------------
Total Available-
  for-Sale                 $ 114,303   $      639   $       -    $ 114,942
--------------------------------------------------------------------------


There were no sales of  available-for-sale  debt  securities  in 1998,  1997 and
1996.


                                       33
<PAGE>

3    INVESTMENT SECURITIES (continued)

                                HELD-TO-MATURITY

                                         Gross        Gross
                           Amortized   Unrealized   Unrealized     Fair
1998                          Cost       Gains        Losses       Value
------------------------------------------------------------------------
Obligations of U.S. 
  Agencies:
Mortgage-backed
  securities               $   6,416   $        -   $      150   $  6,266
-------------------------------------------------------------------------
  Total Held-to-
    Maturity               $   6,416   $        -   $      150   $  6,266
-------------------------------------------------------------------------


                                         Gross        Gross
                           Amortized   Unrealized   Unrealized     Fair
1997                         Cost         Gains       Losses       Value
-------------------------------------------------------------------------
Obligations of U.S. 
  Agencies:
Mortgage-backed
  securities               $  10,106   $        3   $        7   $ 10,102
-------------------------------------------------------------------------
  Total Held-to-
    Maturity               $  10,106   $        3   $        7   $ 10,102
-------------------------------------------------------------------------


Investment  securities  with  amortized  costs and fair  values of  $56,194  and
$56,697 at December 31, 1998 and $56,026 and $56,381 at December 31, 1997,  were
pledged  to secure  trust  funds,  public  deposits  and for other  purposes  as
required by law.
         The  amortized  cost and fair value of debt  securities at December 31,
1998 by  contractual  maturity,  are  shown  in the  following  table.  Expected
maturities will differ from contractual  maturities  because  borrowers may have
the right to call or  prepay  obligations  with or  without  call or  prepayment
penalties.


                                  Available-for-Sale        Held-to-Maturity
-------------------------------------------------------------------------------
                                Amortized      Fair      Amortized      Fair
                                   Cost        Value        Cost        Value
-------------------------------------------------------------------------------
Due in one year or less:
  U.S. Treasury securities      $  62,124   $   62,557   $        -   $       -
After one year through
  five years:
    U.S. Treasury
      securities                   19,086       19,359            -           -
    U.S. Agency 
      securities                    5,000        4,986            -           -
    States & political
      subdivisions                 14,409       14,417            -           -
After five years
  through ten years:
    States & political
      subdivisions                  7,721        7,693            -           -
After ten years:
    States & political
      subdivisions                  1,539        1,524            -           -
-------------------------------------------------------------------------------
    Subtotal                      109,879      110,536            -           -
Mortgage-backed
  securities                            -            -        6,416       6,266
-------------------------------------------------------------------------------
    Total Debt Securities       $ 109,879   $  110,536   $    6,416   $   6,266
===============================================================================


4    LOANS

Major classifications of loans are as follows:

December 31,                                              1998        1997
--------------------------------------------------------------------------
Loans secured by real estate:
  Construction and land development                  $   4,152   $   3,731
  Secured by farmland                                        5           7
  Secured by 1-4 family residential
    properties:
      Revolving, open-end loans                          7,901       9,932
      Secured by first liens                           131,564     131,112
      Secured by junior liens                           33,063      26,620
  Secured by multi-family properties                       829         561
  Secured by non-farm, non-residential
    properties                                          48,517      44,896
Commercial and industrial loans
  to U.S. addressees                                    18,169      17,173
Loans to individuals for household, family
  and other personal expenditures:
Credit card and related plans                            2,286       2,293
Other (installment and student loans, etc.)             28,486      26,593
Obligations of states &
  political subdivisions                                 8,195       8,910
All other loans                                             58         240
--------------------------------------------------------------------------
  Gross Loans                                          283,225     272,068
Less: Unearned income on loans                               6          22
--------------------------------------------------------------------------
  Loans, Net of Unearned Income                      $ 283,219   $ 272,046
==========================================================================


Loans on which the accrual of interest has been discontinued or reduced amounted
to $929, $1,031 and $866 at December 31, 1998, 1997 and 1996,  respectively.  If
interest on those loans had been accrued,  such income would have been $108, $89
and $66 for 1998, 1997 and 1996,  respectively.  Interest income on those loans,
which is recorded  only when  received,  amounted to $30,  $35 and $45 for 1998,
1997 and 1996,  respectively.  Also, at December 31, 1998 and 1997, the Bank had
loans totalling $375 and $441, respectively, which were past due 90 days or more
and still accruing  interest  (credit card,  home equity and guaranteed  student
loans).


5    ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

Years Ended December 31,                       1998       1997       1996
-------------------------------------------------------------------------
Balance at beginning of year                $ 2,600    $ 2,300    $ 2,100
Provision charged to operations                 595        316        334
Recoveries credited to allowance                 18        106         49
                                              3,213      2,722      2,483
Losses charged to allowance                    (383)      (122)      (183)
-------------------------------------------------------------------------
  Balance at End of Year                    $ 2,830    $ 2,600    $ 2,300
-------------------------------------------------------------------------


A comparison of the provision for loan losses for Financial  Statement  purposes
with the allowable bad debt deduction for tax purposes is as follows:

Years Ended December 31,        Book Provision      Tax Deduction
------------------------        --------------      -------------
        1998                       $ 595                $ 365
        1997                       $ 316                $  16
        1996                       $ 334                $ 134

The  balance of the Reserve  for Bad Debts as  reported  for Federal  income tax
purposes was $948 at December 31, 1998, 1997 and 1996.


                                       34
<PAGE>

6    BANK PREMISES AND EQUIPMENT

December 31,                            1998       1997
-------------------------------------------------------
Land                                $  2,929   $  2,764
Buildings and improvements            14,178     10,853
Furniture and equipment                9,634      8,134
-------------------------------------------------------
                                      26,741     21,751
Less: Accumulated depreciation        14,110     13,105
-------------------------------------------------------
  Net Bank Premises
    and Equipment                   $ 12,631   $  8,646
-------------------------------------------------------


Buildings and improvements are being  depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods.  Depreciation expense amounted to $1,005 in
1998, $972 in 1997 and $929 in 1996.
     Occupancy  expenses were reduced by rental income received in the amount of
$58,  $58  and  $60 in the  years  ended  December  31,  1998,  1997  and  1996,
respectively.


7    OTHER REAL ESTATE OWNED

Real estate  acquired  through  foreclosure  is recorded at the lower of cost or
market  at the time of  acquisition.  Any  subsequent  write-downs  are  charged
against operating expenses.  The other real estate owned as of December 31, 1998
and 1997 was $111 and $339,  respectively,  supported by  appraisals of the real
estate involved.



8    INVESTMENT IN AND LOAN TO,  INCOME FROM DIVIDENDS AND EQUITY IN EARNINGS OR
       LOSSES OF SUBSIDIARY

Penseco Realty, Inc. is a wholly owned subsidiary of the Bank which owns certain
banking premises. Selected financial information is presented below:


                                    Equity in
                                    underlying                   Bank's
           Percent         Total    net assets    Amount    proportionate
          of voting     investment  at balance      of      part of loss
         stock owned     and loan   sheet date   dividends  for the period
-------------------------------------------------------------------------


1998         100%        $  3,950    $  3,936      None        $     -
1997         100%        $  3,950    $  3,936      None        $     -
1996         100%        $  2,055    $  2,041      None        $     -


9    DEPOSITS

December 31,                       1998            1997
-------------------------------------------------------
Demand - Non-interest
  bearing                     $  56,289       $  46,127
Demand - Interest bearing        25,438          23,826
Savings                         71,771           71,722
Money markets                    56,707          63,055
Time - Over $100,000             46,191          38,152
Time - Other                    121,130         131,606
-------------------------------------------------------
  Total                       $ 377,526       $ 374,488
-------------------------------------------------------


9    DEPOSITS  (continued)

Scheduled maturities of time deposits are as follows:

1999                  $ 152,333
2000                      9,569
2001                      2,777
2002                      1,663
2003                        969
2004 and thereafter          10
-------------------------------
Total                 $ 167,321
===============================


10      OTHER BORROWED FUNDS

At December 31, 1998 and 1997, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase Agreements.
     Short-term borrowings generally have original maturity dates of thirty days
or less.
     Investment  securities  with amortized costs of $13,069 and $7,987 and fair
values of $13,200 and $8,023 were  pledged to secure  repurchase  agreements  at
December 31, 1998 and 1997, respectively.

Years Ended December 31,               1998           1997
----------------------------------------------------------
Amount outstanding at year end     $ 10,959        $ 6,815
Average interest rate at year end     4.37%          4.57%
Maximum amount outstanding at
  any month end                    $ 12,382        $ 6,815
Average amount outstanding         $  8,849        $ 4,807
Weighted average interest rate
  during the year:
  Federal funds purchased             4.15%          5.04%
  Repurchase agreements               4.52%          4.05%
  Demand notes to U.S. Treasury       4.70%          5.38%


The Company has an available  credit  facility with the Federal  Reserve Bank in
the amount of $10,000,  secured by pledged  securities  with amortized costs and
fair values of $10,002 and $10,044 at December 31, 1998 and $9,971 and $9,919 at
December  31, 1997 with an  interest  rate of 4.50% and 5.00% for 1998 and 1997,
respectively. There is no stated expiration date for the credit facility as long
as the Company  maintains the pledged  securities  at the Federal  Reserve Bank.
There was no outstanding balance as of December 31, 1998 and 1997, respectively.
     The Company has the availability of a $5,000 overnight Federal funds
line of credit  with First Union Bank.  There was no balance  outstanding  as of
December 31, 1998 and 1997, respectively
     The  Company  maintains  a  collateralized  maximum  borrowing  capacity of
$165,943  with the Federal  Home Loan Bank of  Pittsburgh  (FHLB).  There was no
balance outstanding or assets pledged as of December 31, 1998.


                                       35
<PAGE>

11   EMPLOYEE BENEFIT PLANS

The Company  provides an Employee  Stock  Ownership  Plan  (ESOP),  a Retirement
Profit  Sharing  Plan,  an  Employees'  Pension Plan and a  Postretirement  Life
Insurance Plan, all non-contributory, covering all eligible employees.
     The Company also maintains an unfunded supplemental executive pension plan,
that provides  certain officers with additional  retirement  benefits to replace
benefits lost due to limits imposed on qualified plans by Federal tax law.
     Under the Employee Stock Ownership Plan (ESOP),  amounts voted by the Board
of Directors  are paid into the ESOP and each  employee is credited with a share
in proportion to their annual  compensation.  All  contributions to the ESOP are
invested in or will be invested  primarily in Company stock.  Distribution  of a
participant's  ESOP account  occurs upon  retirement,  death or  termination  in
accordance with the plan provisions.
     At  December  31, 1998 and 1997,  the ESOP held  94,725 and 92,448  shares,
respectively  of the  Company's  stock,  all of which were acquired as described
above and allocated to specific participant  accounts.  These shares are treated
the same for dividend  purposes and earnings per share  calculations  as are any
other  outstanding  shares of the Company's stock.  The Company  contributed $0,
$140 and $140 to the plan during the years ended  December  31,  1998,  1997 and
1996, respectively.
     Under the  Retirement  Profit  Sharing Plan,  amounts voted by the Board of
Directors  are paid into a fund and each  employee is  credited  with a share in
proportion to their annual compensation.  Upon retirement, death or termination,
each  employee is paid the total amount of their credits in the fund in one of a
number of optional  ways in  accordance  with the plan  provisions.  The Company
contributed $20, $0 and $0 to the plan during the years ended December 31, 1998,
1997 and 1996, respectively.
     Under the Pension Plan,  amounts computed on an actuarial basis are paid by
the Company into a trust fund.  Provision is made for fixed benefits payable for
life  upon  retirement  at  the  age of 65,  based  on  length  of  service  and
compensation  levels as defined in the plan.  Plan  assets of the trust fund are
invested and  administered  by the Trust  Department  of Penn  Security Bank and
Trust Company.
     The postretirement life insurance plan is an unfunded,  non-vesting defined
benefit plan. The plan is non-contributory  and provides for a reducing level of
term life insurance coverage following retirement.


In determining the benefit obligation the following assumptions were made:

                            Pension Benefits      Other Benefits
----------------------------------------------------------------
December 31,                   1998    1997        1998    1997
----------------------------------------------------------------
Weighted - average
  assumptions:
    Discount rate             6.50%   6.75%       6.50%   6.75%
    Expected return on
      plan assets             9.00%   9.00%           -       -
    Rate of compensation
      increase                4.50%   4.50%           -       -
---------------------------------------------------------------

A reconciliation  of the funded status of the plans with amounts reported on the
Balance Sheet is as follows:

                                    Pension Benefits      Other Benefits
------------------------------------------------------------------------
December 31,                          1998      1997       1998     1997
------------------------------------------------------------------------
Change in benefit
  obligation:
    Benefit obligation, beginning  $ 6,764   $ 6,013     $   48   $   42
    Service cost                       295       267          2        2
    Interest cost                      444       414          3        3
    Actuarial gain                     206       254          2        2
    Benefits paid                     (221)     (184)        (2)      (1)
------------------------------------------------------------------------
  Benefit obligation, ending         7,488     6,764         53       48
------------------------------------------------------------------------
Change in plan assets:
  Fair value of plan
    assets, beginning                6,872     5,967          -        -
  Actual return on plan
    assets                             911       850          -        -
  Employer contribution                 65       239          2        1
  Benefits paid                       (221)     (184)        (2)      (1)
------------------------------------------------------------------------
  Fair value of plan
    assets, ending                   7,627     6,872          -        -
------------------------------------------------------------------------
Funded status                          139       108        (53)     (48)
Unrecognized net transition
  asset                               (198)     (265)         -        -
Unrecognized net actuarial
  Loss                               1,008     1,124       (121)    (131)
Unrecognized prior service
  cost                                 (45)      (43)         6        6
------------------------------------------------------------------------
  Prepaid (accrued) benefit
    cost                           $   904   $   924     $ (168)  $ (173)
------------------------------------------------------------------------


A reconciliation of net periodic pension and other benefit costs is as follows:

                                         Pension Benefits
                                         ----------------
Years Ended December 31,              1998     1997     1996
-------------------------------------------------------------
Components of net periodic
  pension cost:
    Service cost                     $ 295    $ 267    $ 249
    Interest cost                      444      414      361
    Expected return on plan assets    (615)    (540)    (487)
    Amortization of transition
      asset                            (66)     (66)     (66)
    Amortization of unrecognized
      net loss                          26       48       61
-------------------------------------------------------------
      Net periodic pension cost      $  84    $ 123    $ 118
-------------------------------------------------------------


                                             Other Benefits
                                             --------------
Years Ended December 31,                 1998      1997      1996
------------------------------------------------------------------
Components of net periodic
  other benefit cost:
    Service cost                        $   2     $   2     $   2
    Interest cost                           3         3         3
    Amortization of prior service
      cost                                  1         1         1
    Amortization of unrecognized
      net loss                             (9)      (10)       (9)
------------------------------------------------------------------
      Net periodic other benefit cost   $  (3)    $  (4)    $  (3)
------------------------------------------------------------------


The projected benefit obligation,  accumulated benefit obligation and fair value
of plan assets for the pension  plan with  accumulated  benefit  obligations  in
excess of plan assets were $144, $97 and $0,  respectively  at December 31, 1998
and $153, $77 and $0, respectively at December 31, 1997.


                                       36
<PAGE>

12   INCOME TAXES

The total income taxes in the Statements of Income are as follows:

Years Ended December 31,            1998        1997         1996
-----------------------------------------------------------------
Currently payable                $ 2,056     $ 2,082     $ 1,958
Deferred (benefit) provision        (284)         (8)         17
----------------------------------------------------------------
  Total                          $ 1,772     $ 2,074     $ 1,975
-----------------------------------------------------------------


A reconciliation  of income taxes at statutory rates to applicable  income taxes
reported in the Statements of Income is as follows:

Years Ended December 31,            1998        1997        1996
-----------------------------------------------------------------
Tax at statutory rate            $ 2,058     $ 2,312     $ 2,236
Reduction for non-taxable
  interest                          (269)       (299)       (256)
Other (reductions) additions         (17)         61          (5)
-----------------------------------------------------------------
  Applicable Income Taxes        $ 1,772     $ 2,074     $ 1,975
-----------------------------------------------------------------


The components of the deferred income tax (benefit) provision, which result from
temporary differences, are as follows:

Years Ended December 31,            1998        1997        1996
-----------------------------------------------------------------
Accretion of discount on bonds   $ (147)     $   73      $   47
Accelerated depreciation            (32)        (54)        (61)
Supplemental benefit plan            (7)         (8)          -
Allowance for loan losses           (78)       (102)        (68)
Prepaid pension cost                (20)         48          47
Loan fees/costs                       -          35          52
-----------------------------------------------------------------
  Total                          $ (284)     $   (8)     $   17
-----------------------------------------------------------------

The  significant  components  of  deferred  tax  assets and  liabilities  are as
follows:

December 31,                                    1998        1997
-----------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses                  $   640     $   562
  Depreciation                                   131          99
  Supplemental Benefit Plan                       15           8
-----------------------------------------------------------------
    Total Deferred Tax Assets                    786         669
-----------------------------------------------------------------

Deferred tax liabilities:
  Unrealized securities gains                    223         217
  Prepaid pension costs                          352         372
  Accretion                                       65         212
-----------------------------------------------------------------
    Total Deferred Tax Liabilities               640         801
-----------------------------------------------------------------
    Net Deferred Tax Asset (Liability)       $   146     $  (132)
-----------------------------------------------------------------


In  management's  opinion,  the deferred tax assets are realizable in as much as
there is a history of strong earnings and a carryback potential greater than the
deferred tax assets. Management is not aware of any evidence that would preclude
the  realization  of the  benefit  in  the  future  and,  accordingly,  has  not
established a valuation allowance against the deferred tax assets.

13   COMMITMENTS AND CONTINGENT LIABILITIES

In the  normal  course  of  business,  there  are  outstanding  commitments  and
contingent   liabilities,   created  under   prevailing   terms  and  collateral
requirements  such as  commitments to extend  credit,  financial  guarantees and
letters  of  credit,  which  are not  reflected  in the  accompanying  Financial
Statements.  The  Company  does not  anticipate  any losses as a result of these
transactions.  These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.
     The contract or notional amounts of those instruments reflect the extent of
involvement  the Company has in  particular  classes of  financial  instruments.

     Financial  instruments  whose  contract  amounts  represent  credit risk at
December  31,  1998 and 1997 are as  follows:

                                             1998       1997
------------------------------------------------------------
Commitments to extend credit:
  Fixed rate                             $ 11,722   $ 12,604
  Variable rate                          $ 36,990   $ 30,340

Standby letters of credit                $    614   $    849

     Commitments  to extend credit are  agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
     Standby letters of credit are conditional  commitments  issued 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.
     Various actions and proceedings are presently  pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising  from such  actions  would  not have a  material  adverse  effect on the
financial position of the Company.
     The Company  may,  from time to time,  maintain  bank  balances  with other
financial  institutions  in excess of $100,000 each.  Management is not aware of
any evidence that would indicate that such deposits are at risk.


14   FAIR  VALUE DISCLOSURE

GENERAL

Statement of Financial  Accounting  Standards  No.107,  "Disclosures  about Fair
Value of  Financial  Instruments"  (SFAS 107),  requires the  disclosure  of the
estimated fair value of on and off - balance sheet financial instruments.

VALUATION METHODS AND ASSUMPTIONS

Estimated fair values have been  determined  using the best  available  data, an
estimation methodology suitable for each category of financial instruments.  For
those loans and  deposits  with  floating  interest  rates it is  presumed  that
estimated fair values generally approximate the carrying amount balances.
     Financial  instruments  actively  traded in a  secondary  market  have been
valued using quoted available market prices.  Those with stated  maturities have
been valued  using a present  value  discounted  cash flow with a discount  rate
approximating   current  market  for  similar  assets  and  liabilities.   Those
liabilities with no stated maturities have an estimated

                                       37
<PAGE>

14   FAIR VALUE DISCLOSURE (continued)

fair value equal to both the amount  payable on demand and the  carrying  amount
balance. The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is the current loan rate
adjusted for non-interest  operating costs,  credit loss and assumed  prepayment
risk.  Off balance  sheet  carrying  amounts and fair value of letters of credit
represent  the deferred  income fees arising from those  unrecognized  financial
instruments.
     Changes in  assumptions  or  estimation  methodologies  may have a material
effect on these estimated fair values.
     All assets and liabilities which are not considered  financial  instruments
have not been valued  differently  than has been customary with  historical cost
accounting.
     Management is concerned that reasonable comparability between companies may
not be  likely  due to the wide  range of  permitted  valuation  techniques  and
numerous  estimates  which  must be made given the  absence of active  secondary
markets for many of the financial  instruments.  This lack of uniform  valuation
methodologies  also  introduces  a  greater  degree  of  subjectivity  to  these
estimated fair values.

<TABLE>
<CAPTION>

                                            December 31, 1998        December 31, 1997
---------------------------------------------------------------------------------------
                                           Carrying     Fair       Carrying      Fair
                                            Amount      Value       Amount       Value
---------------------------------------------------------------------------------------
<S>                                        <C>        <C>          <C>        <C>   
Financial Assets:
  Cash and due from banks                  $  12,076  $  12,076    $  10,928  $  10,928
  Federal funds sold                           6,650      6,650        7,650      7,650
---------------------------------------------------------------------------------------
    Cash and cash equivalents                 18,726     18,726       18,578     18,578
  Investment Securities:
    Available-for-sale:
      U.S. Treasury securities                81,916     81,916      114,922    114,922
      U.S. Agency obligations                  4,986      4,986            -          -
      States & political subdivisions         23,634     23,634            -          -
      Federal Home Loan Bank stock             1,790      1,790            -          -
      Other securities                            20         20           20         20
    Held-to-maturity:
      U.S. Agency obligations                  6,416      6,266       10,106     10,102
---------------------------------------------------------------------------------------
        Total investment securities          118,762    118,612      125,048    125,044
  Loans, net of unearned income:
    Real estate mortgages                    226,031    226,605      194,389    194,757
    Commercial                                18,169     18,169       26,841     26,841
    Consumer and other                        39,019     38,826       50,816     50,652
    Less:  Allowance for loan losses           2,830                   2,600
---------------------------------------------------------------------------------------
      Loans, net                             280,389    283,600      269,446    272,250
---------------------------------------------------------------------------------------
      Total Financial Assets                 417,877  $ 420,938      413,072  $ 415,872
Other assets                                  18,222                  14,505
---------------------------------------------------------------------------------------
      Total Assets                         $ 436,099               $ 427,577
=======================================================================================

Financial Liabilities:
  Demand - Non-interest bearing            $  56,289  $  56,289    $  46,127  $  46,127
  Demand - Interest bearing                   25,438     25,438       23,826     23,826
  Savings                                     71,771     71,771       71,722     71,722
  Money markets                               56,707     56,707       63,055     63,055
  Time                                       167,321    168,088      169,758    170,019
---------------------------------------------------------------------------------------
      Total Deposits                         377,526    378,293      374,488    374,749
  Repurchase agreements                       10,959     10,959        5,922      5,922
  Short-term borrowings                            -         -           893        893
---------------------------------------------------------------------------------------
      Total Financial Liabilities            388,485  $ 389,252      381,303  $ 381,564
Other Liabilities                              2,653                  3,350
Stockholders' Equity                          44,961                  42,924
---------------------------------------------------------------------------------------
      Total Liabilities and
      Stockholders' Equity                 $ 436,099               $ 427,577
=======================================================================================

Standby Letters of Credit                  $      (6) $      (6)   $      (8) $      (8)
</TABLE>


                                       38
<PAGE>


15   OPERATING LEASES

The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several  locations  which are being used as remote  banking
facilities.  Rental  expense was $71 in 1998,  $67 in 1997 and $66 in 1996.  All
leases contain  renewal  options.  The Mount Pocono and the Meadow Avenue leases
contain  the right of first  refusal  for the  purchase  of the  properties  and
provisions for annual rent adjustments based upon the Consumer Price Index.
     Future minimum rental  commitments  under these leases at December 31, 1998
are as follows:

                          Mount    Meadow    ATM
                          Pocono   Avenue   Sites   Total
---------------------------------------------------------
1999                      $   44   $   18   $  18   $  80
2000                          44       18       -      62
2001                          44       12       -      56
2002                          44        -       -      44
2003                          44        -       -      44
2004 to 2011                 331        -       -     331
---------------------------------------------------------
  Total minimum
    payments required     $  551   $   48   $  18   $ 617
---------------------------------------------------------


16      LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES

The  Company  has  had,  and may be  expected  to have  in the  future,  banking
transactions  in the  ordinary  course of  business  with  directors,  principal
officers,  their immediate  families and affiliated  companies in which they are
principal  stockholders  (commonly referred to as related parties),  on the same
terms, including interest rates and collateral,  as those prevailing at the time
for  comparable  transactions  with  others.  A summary  of loans to  directors,
principal officers and related parties is as follows:


Years Ended December 31,     1998       1997
---------------------------------------------
Beginning Balance         $ 4,658    $ 4,550
Additions                   4,787      3,383 
Collections                (5,437)    (3,275)
---------------------------------------------
  Ending Balance          $ 4,008    $ 4,658
---------------------------------------------

17   REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital  requirements
administered  by the Federal banking  agencies.  Failure to meet minimum capital
requirements   can   initiate   certain   mandatory--and   possibly   additional
discretionary--actions  by regulators  that, if undertaken,  could have a direct
material effect on the Company and the Bank's consolidated financial statements.
Under  capital  adequacy  guidelines  and the  regulatory  framework  for prompt
corrective  action,  the  Company  and  the  Bank  must  meet  specific  capital
guidelines that involve quantitative measures of their assets, liabilities,  and
certain  off-balance-sheet  items  as  calculated  under  regulatory  accounting
practices.  The Company and the Bank's capital  amounts and  classification  are
also subject to qualitative judgements by the regulators about components,  risk
weightings and other factors.
     Quantitative  measures established by regulation to ensure capital adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  Capital  Adequacy  table  below)  of Tier I and Total  Capital  to
risk-weighted  asset and of Tier I Capital to average assets  (Leverage  ratio).
The table also presents the Company's  actual  capital  amounts and ratios.  The
Bank's  actual  capital  amounts and ratios are  substantially  identical to the
Company's.  Management  believes,  as of December 31, 1998, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.
     As of December  31,  1998,  the most recent  notification  from the Federal
Deposit  Insurance   Corporation   (FDIC)   categorized  the  Company  as  "well
capitalized" under the regulatory  framework for prompt corrective action. To be
categorized  as "well  capitalized",  the Company must  maintain  minimum Tier I
Capital,  Total Capital and Leverage ratios as set forth in the Capital Adequacy
table. There are no conditions or events since that notification that management
believes have changed the Company's categorization by the FDIC.
     The Company and Bank are also subject to minimum capital levels which could
limit the payment of  dividends,  although the Company and Bank  currently  have
capital levels which are in excess of minimum capital level ratios required.
     The Pennsylvania Banking Code restricts capital funds available for payment
of dividends to the Retained Earnings of the Bank. Accordingly,  at December 31,
1998, the balances in the Capital Stock and Surplus accounts  totalling  $10,840
are unavailable for dividends.
     In addition,  the Bank is subject to restrictions imposed by Federal law on
certain transactions with the Company's  affiliates.  These transactions include
extensions  of  credit,  purchases  of or  investments  in stock  issued  by the
affiliate,  purchases of assets  subject to certain  exceptions,  acceptance  of
securities  issued by an affiliate as collateral for loans,  and the issuance of
guarantees,  acceptances,  and letters of credit on behalf of affiliates.  These
restrictions  prevent the  Company's  affiliates  from  borrowing  from the Bank
unless the loans are secured by obligations of designated amounts.  Further, the
aggregate of such transactions by the Bank with a single affiliate is limited in
amount to 10 percent of the Bank's capital stock and surplus,  and the aggregate
of such  transactions with all affiliates is limited to 20 percent of the Bank's
capital stock and surplus.  The Federal Reserve System has interpreted  "capital
stock and surplus" to include undivided profits.


                                       39
<PAGE>

17   REGULATORY MATTERS (continued)



               Actual                              Regulatory Requirements
------------------------------------------    ----------------------------------

                                                 For Capital       To Be "Well
                                              Adequacy Purposes    Capitalized"

As of December 31, 1998    Amount    Ratio    Amount    Ratio   Amount    Ratio
                           ------    -----    ------    -----   ------    -----
--------------------------------------------  ----------------------------------

Total Capital
(to Risk Weighted Assets   $47,289   18.36%  >$20,610   >8.0%  >$25,764   >10.0%
                                             -          -      -          -
Tier I Capital
(to Risk Weighted Assets)  $44,459   17.26%  >$10,305   >4.0%  >$15,458   > 6.0%
                                             -          -      -          -
Tier I Capital
(to Average Assets)        $44,459   10.29%  >      *   >   *  >$21,610   > 5.0%
                                             -          -      -          -


*  3.0%  ($12,966),  4.0%  ($17,288) or 5.0%  ($21,610)  depending on the bank's
   CAMELS Rating and other regulatory risk factors.



               Actual                              Regulatory Requirements
------------------------------------------    ----------------------------------

                                                 For Capital      To Be "Well
                                              Adequacy Purposes    Capitalized"

As of December 31, 1997    Amount    Ratio    Amount    Ratio   Amount    Ratio
                           ------    -----    ------    -----   ------    -----
--------------------------------------------  ----------------------------------

Total Capital
 (to Risk Weighted Assets) $45,102   19.22%  >$18,776   >8.0%   >$23,470  >10.0%
                                             -          -       -         -
Tier I Capital
 (to Risk Weighted Assets) $42,502   18.11%  >$ 9,388   >4.0%   >$14,082  > 6.0%
                                             -          -       -         -
Tier I Capital
 (to Average Assets)       $42,502   10.25%  >      *   >   *   >$20,727  > 5.0%
                                             -          -       -         -


*  3.0%  ($12,436),  4.0%  ($16,581) or 5.0%  ($20,727)  depending on the bank's
   CAMELS Rating and other regulatory risk factors.


                                       40
<PAGE>

18   PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

On December 31, 1997, the Bank was reorganized into a holding company structure.
Each  outstanding  share of the  Bank's  common  stock,  par value of $10.00 per
share, was exchanged for four shares of Penseco Financial  Services  Corporation
common stock,  par value of $.01 per share.  As a result of the  reorganization,
the Bank became a wholly-owned subsidiary of the Company.
         This  reorganization  among entities under common control was accounted
for at  historical  cost in a manner  similar to a pooling of  interests.  Prior
financial statements have been restated to reflect the transaction.
         The condensed Company-only information follows:

BALANCE SHEETS


December 31,                          1998        1997
------------------------------------------------------
Investment in subsidiary          $ 44,961    $ 42,924
------------------------------------------------------
  Total Assets                    $ 44,961    $ 42,924
======================================================
  Total Stockholders' Equity      $ 44,961    $ 42,924
======================================================


STATEMENTS OF INCOME

Years Ended December 31,              1998        1997        1996
------------------------------------------------------------------
Earnings of subsidiary:
  Dividends received              $  2,255    $  2,256    $  2,148
  Undistributed net income
    of subsidiary                    2,026       2,469       2,454
------------------------------------------------------------------
  Net Income                      $  4,281    $  4,725    $  4,602
==================================================================

STATEMENTS OF CASH FLOWS

Years Ended December 31,                      1998       1997       1996
-------------------------------------------------------------------------
Operating Activities:
Net Income                                 $ 4,281    $ 4,725    $ 4,602
Adjustments to reconcile net income
  to net cash provided by
    operating activities:
      Equity in undistributed net
        income of subsidiary                (2,026)    (2,469)    (2,454)
-------------------------------------------------------------------------
      Net cash provided by 
        operating activities                 2,255      2,256      2,148
-------------------------------------------------------------------------
Investing Activities:
Investment in Interim Bank subsidiary            -       (465)         -
Special dividend from subsidiary                 -        465          -
-------------------------------------------------------------------------
      Net cash provided by
        investing activities                     -          -          -
-------------------------------------------------------------------------
Financing Activities:
Proceeds from short-term debt                    -        470          -
Payment of short-term debt                       -       (470)         -
Proceeds from sale of stock                      -          5          -
Purchase of stock                                -         (5)         -
Cash dividends paid                         (2,255)    (2,256)    (2,148)
-------------------------------------------------------------------------
      Net cash used by
        financing activities                (2,255)    (2,256)    (2,148)
-------------------------------------------------------------------------
      Net increase in cash and
        cash equivalents                         -          -          -

Cash and cash equivalents at January 1           -          -          -
-------------------------------------------------------------------------
Cash and cash equivalents at December 31   $     -    $     -    $     -
=========================================================================


                                       41
<PAGE>


                                                               February 19, 1999



To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania

                          Independent Auditor's Report
                          ----------------------------

         We have audited the accompanying consolidated balance sheets of Penseco
Financial  Services  Corporation and its wholly owned subsidiary,  Penn Security
Bank and  Trust  Company  as of  December  31,  1998 and 1997,  and the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the years in the three year 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  financial  statements  referred to above  present
fairly, in all material respects, the consolidated financial position of Penseco
Financial Services  Corporation and subsidiary as of December 31, 1998 and 1997,
and the  consolidated  results of their operations and their cash flows for each
of the years in the three year period ended  December 31,  1998,  in  conformity
with generally accepted accounting principles.



                                         /s/ McGrail, Merkel, Quinn & Associates
                                         Scranton, Pennsylvania


                                       42
<PAGE>

ITEM 9    Changes in and  Disagreements  with  Accountants  on Accounting  and
            Financial Disclosure


There  were no  changes  in or  disagreements  with  accountants  on  matters of
accounting principles or practices or financial statement disclosures in 1998.


                                    PART III

ITEM 10   Directors and Executive Officers of the Registrant


The  information  on Directors of the Company on pages 4 and 5 in the definitive
proxy  statement  relating to the  Company's  1999  meeting of  stockholders  is
incorporated herein by reference thereto.

The information on Executive  Officers on pages 6 and 7 in the definitive  proxy
statement relating to the Company's 1999 meeting of stockholders is incorporated
herein by reference thereto.


ITEM 11   Executive Compensation


The information  contained under the heading "Executive  Compensation" on page 6
in the  definitive  proxy  statement  relating to the Company's  1999 meeting of
stockholders is incorporated herein by reference thereto.


ITEM 12   Security Ownership of Certain Beneficial Owners and Management


The  information  contained  under the heading  "Voting  Securities  & Principal
Holders Thereof" on pages 2,3 and 4 in the definitive  proxy statement  relating
to the  Company's  1999  meeting  of  stockholders  is  incorporated  herein  by
reference thereto.


ITEM 13   Certain Relationships and Related Transactions


The  information  contained in Note 16 under Item 8 on page 39 under the heading
"General  Notes to Financial  Statements" in the Company's 1998 Annual Report to
Shareholders is incorporated herein by reference thereto.


                                       43
<PAGE>



PART IV

ITEM 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K


(a)  (1)  Financial   Statements  -  The  following  financial   statements  are
          incorporated by reference in Part II, Item 8 hereof:

            Balance Sheets
            Consolidated Statements of Income
            Consolidated Statements of Changes in Stockholders' Equity
            Consolidated Statements of Cash Flows
            General Notes to Financial Statements
            Independent Auditor's Report

     (2)  Financial  Statement Schedules - The Financial Statement Schedules are
          incorporated by reference in Part II, Item 8 hereof.

     (3)  Exhibits

             The following  exhibits are filed herewith or  incorporated by
             reference  as part of this Annual  Report.

               3(i) Registrant's Articles of Incorporation  (Incorporated herein
                    by  reference  to 3(i) of  Registrant's  report on Form 10-K
                    filed with the SEC on March 30, 1998.)

               3(ii)Registrant's  By-Laws  (Incorporated  herein by reference to
                    3(ii) of Registrant's report on Form 10-K filed with the SEC
                    on March 30,  1998.)

               10   Material  contracts -  Supplemental  Benefit Plan  Agreement
                    (The  information  contained  on  page  8 in  the  Company's
                    definitive  proxy  statement  relating to the Company's 1999
                    meeting of stockholders is incorporated  herein by reference
                    thereto). 

               13   Annual  report  to  security  holders  (Included  herein  by
                    reference   on  pages   1-48,   including   the  cover.)

               21   Subsidiaries  of  the  registrant  (Incorporated  herein  by
                    reference to Exhibit 21 of Registrant's  report on Form 10-K
                    filed  with the SEC on March 30,  1998.)

               27   Financial Data Schedule

(b)  No current  Report on Form 8-K was filed for the fourth  quarter of 1998 of
     the fiscal year ended December 31, 1998.

(c)  The  exhibits  required to be filed by this Item are listed  under Item 14.
     (a) 3, above.

(d)  There are no financial  statement schedules required to be filed under this
     item.


                                       44
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 9, 1999.



By:  /s/  Otto P. Robinson, Jr.
----------------------------------
          Otto P. Robinson, Jr.
          President


By:  /s/  Richard E. Grimm
----------------------------------
          Richard E. Grimm
          Executive Vice-President


By:  /s/  Patrick Scanlon
----------------------------------
          Patrick Scanlon
          Controller


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities indicated on March 9, 1999.



By: /s/  Edwin J. Butler                      By: /s/  Robert W. Naismith, Ph.D.
----------------------------------            ----------------------------------
         Edwin J. Butler                               Robert W. Naismith, Ph.D.
         Director                                      Director


By: /s/  Richard E. Grimm                     By: /s/  James B. Nicholas
----------------------------------            ----------------------------------
         Richard E. Grimm                              James B. Nicholas
         Director                                      Director


By: /s/  Russell C. Hazelton                  By:  /s/ Emily S. Perry
----------------------------------            ----------------------------------
         Russell C. Hazelton                           Emily S. Perry
         Director                                      Director


By: /s/  D. William Hume                      By: /s/  Sandra C. Phillips
----------------------------------            ----------------------------------
         D. William Hume                               Sandra C. Phillips
         Director                                      Director


By: /s/  James G. Keisling                    By: /s/  Otto P. Robinson, Jr.
----------------------------------            ----------------------------------
         James G. Keisling                             Otto P. Robinson, Jr.
         Director                                      Director 


By: /s/  P. Frank Kozik
----------------------------------
         P. Frank Kozik
         Director


                                       45
<PAGE>

                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>

Exhibit Number
Referred to 
Item 601 of                                                 Prior Filing or Exhibit
Regulation S-K          DESCRIPTION OF EXHIBIT                 Page Number Herein
--------------------------------------------------------------------------------------------
<S>               <C>                                       <C>

    2             Plan of acquisition, reorganization,      None  
                  arrangement, liquidation or succession    

    3             (i)   Articles of Incorporation           Incorporated herein by
                                                            reference to Exhibit 3 (i) of
                                                            Registrant's report on Form 
                                                            10-K filed with the SEC on
                                                            March 30, 1998.

                  (ii)  By-Laws                             Incorporated herein by reference
                                                            to Exhibit 3 (ii)of Registrant's
                                                            report on Form 10-K filed with 
                                                            the SEC on March 30, 1998.

    4             Instruments defining the rights of        None
                  security holders, including indentures    

    9             Voting trust agreement                    None

    10            Material contracts - Supplemental         Page 8 of the Definitive Proxy 
                  Benefit Plan Agreement                    Statement relating to the 
                                                            Company's 1999 Meeting of Stock-
                                                            holders is incorporated herein
                                                            by reference thereto.

    11            Statement re:  Computation of per         None
                  share earnings 

    12            Statements re:  Computation of ratios     None

    13            Annual report to security holders,        Included herein by reference on
                  Form 10-Q or quarterly report to          pages 1-48, including the cover.
                  security holders 

    16            Letter re:  Change in certifying          None
                  accountant 

    18            Letter re:  Change in accounting          None
                  principles 

    21            Subsidiaries of the registrant            Incorporated herein by reference
                                                            to Exhibit 21 of Registrant's 
                                                            report on Form 10-K filed with 
                                                            the SEC on March 30, 1998.

    22            Published report regarding matters        None
                  submitted to vote of security holders

    23            Consents of experts and counsel           None

    24            Power of attorney                         None

    27            Financial Data Schedule                   None

    99            Additional Exhibits                       None
</TABLE>


                                       46
<PAGE>

                                COMPANY OFFICERS

PENSECO FINANCIAL SERVICES CORPORATION AND
PENN SECURITY BANK AND TRUST COMPANY

EXECUTIVE OFFICERS

Otto P. Robinson, Jr.
President and General Counsel

Richard E. Grimm
Executive Vice-President and Treasurer

Peter F. Moylan
Executive Vice-President, Non-Deposit Services and Trust Officer

Robert F. Duguay
Senior Vice-President, Trust Department

D. William Hume
Senior Vice-President and Assistant Secretary

Andrew A. Kettel, Jr.
Senior Vice-President

Thomas E. Clewell
Vice-President and Assistant Trust Officer

Anne M. Cottone
Vice-President and Compliance Officer

Michael Kosh
Vice-President and Assistant Trust Officer

Audrey F. Markowski
Vice-President

Richard P. Rossi
Vice-President, Director of Human Resources

James Tobin
Vice-President, Charge Card Department Manager

Otto P. Trostel
Vice-President, Marketing

John H. Warnken
Vice-President, Operations

P. Frank Kozik
Secretary

Patrick Scanlon
Controller

Robert P. Heim
Director of Internal Audit

Gerard P. Vasil
Manager, Data Processing

Henry V. Janoski
Chief Investment Officer, Trust Department


PENN SECURITY BANK AND TRUST COMPANY OFFICERS

ASSISTANT VICE-PRESIDENTS

Carl M. Baruffaldi
Nancy Burns
Denise M. Cebular
Carol Curtis McMullen, Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
J. Patrick Dietz
Geraldine Hughes
Ann M. Kennedy
Eleanor Kruk
Donald F. Latorre
Caroline Mickelson
Aleta Sebastianelli, and Assistant Secretary

OFFICERS (continued)

Jeffrey Solimine
Beth S. Wolff
Deborah A. Wright

ASSISTANT CASHIERS

Pamela Edwards
Karyn Gaus
Susan T. Holweg
Jacqueline Lucke
Kristen A. McGoff, and Branch Operations Officer
Candace F. Quick
Nereida Santiago
Sharon Thauer
Eileen Walsh

ACCOUNTING OFFICER
Luree M. Waltz

ASSISTANT CONTROLLER
Susan M. Bray

ASSISTANT DIRECTOR OF INTERNAL AUDIT
Paula A. Ralston Nenish

ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua

BRANCH OPERATIONS OFFICER
Lauren L. Lankford

BUSINESS DEVELOPMENT OFFICER
Christe A. Casciano

CHARGE CARD OPERATIONS OFFICER
Eileen Yanchak

COMPUTER OPERATIONS OFFICER
Charles Penn

CREDIT REVIEW OFFICER
Mark M. Bennett, and Assistant Secretary

DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay

DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo

FINANCIAL REPORTING OFFICER
John R. Anderson III

HUMAN RESOURCES OFFICER
Sharon Rosar

LOAN OFFICERS
Denise Belton
Frank Gardner
Barbara Garofoli
Lisa A. Kearney

OPERATIONS OFFICER
Patricia Pliske

TELLER TRAINING OFFICER
Linda  A. Wolf

TRUST ACCOUNTING OFFICER
Joseph Woytovich

TRUST OPERATIONS OFFICER
Carol Trezzi


                                       47
<PAGE>

                                COMPANY OFFICERS

PENSECO FINANCIAL SERVICES CORPORATION AND
PENN SECURITY BANK AND TRUST COMPANY

BOARD OF DIRECTORS

Edwin J. Butler
Retired Bank Officer

Richard E. Grimm
Executive Vice-President and Treasurer

Russell C. Hazelton
Captain, Trans World Airlines

D. William Hume
Senior Vice-President and Assistant Secretary

James G. Keisling
Partner, Compression Polymers Group, Manufacturer of Plastic Sheet Products

P. Frank Kozik
President, Scranton Craftsmen, Inc., Manufacturer of Ornamental Iron and Precast
Concrete Products

Robert W. Naismith, Ph.D.
Chairman & CEO, Genome Securities, Inc.

James B. Nicholas
President, D. G. Nicholas Co., Wholesale Auto Parts Company

Emily S. Perry
Account Executive, Murray Insurance Company

Sandra C. Phillips
Penn State Master Gardener Community Volunteer

Otto P. Robinson, Jr.
Attorney-at-Law, President


PENN SECURITY BANK AND TRUST COMPANY

ADVISORY BOARDS

ABINGTON OFFICE
James L. Burne, DDS
Nancy Burns
Keith Eckel
Richard C. Florey
C. Lee Havey, Jr.
Atty. Patrick J. Lavelle
Sandra C. Phillips

EAST SCRANTON OFFICE
Marie W. Allen
J. Conrad Bosley
Judge Carmen Minora
Mark R. Sarno
Beth S. Wolff

EAST STROUDSBURG OFFICE
Denise M. Cebular
Mary Citro
Robert J. Dillman, Ph.D.
Jere Dunkelberger
Atty. Kirby Upright
Jeffrey Weichel

GREEN RIDGE OFFICE
Carl M. Baruffaldi
Joseph N. Connor
Everett Jones
Atty. Patrick J. Mellody
Caroline Mickelson
George Noone
Howard J. Snowdon

MOUNT POCONO OFFICE
Bruce Berry
Francis Cappelloni
J. Patrick Dietz
Atty. Brian Golden
Robert C. Hay
David Lansdowne

NORTH POCONO OFFICE
Anthony J. Descipio
George F. Edwards
James A. Forti
Atty. David Z. Smith
Deborah A. Wright

SOUTH SIDE OFFICE
Atty. Zygmunt R. Bialkowski, Jr.
Michael P. Brown
Lois Ferrari
Donald F. LaTorre
Jeffrey J. Leventhal
Dr. Ted M. Stampien


                                       48
<PAGE>