<PAGE>
                    U.S. SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                  FORM 10-QSB

(Mark One)

     [ X  ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 1998

     [    ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934

               For the transition period from _________ to ______

               Commission file number   33-88802
                                        --------

                         PEOPLES FINANCIAL CORP., INC.
                         -----------------------------
       (Exact name of small business issuer as specified in its charter)


          Pennsylvania                                   25-1469914
   ----------------------------------       ---------------------------------
  (State or other jurisdiction of            (IRS Employer Identification No.
   incorporation or organization)

               Ford Street and Fourth Avenue, Ford City, Pa 16226
               --------------------------------------------------
                    (Address of principal executive offices)

                                 (724) 763-1221
                                 --------------
                          (Issuer's telephone number)


               --------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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[ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest practicable dates: November 1, 1998
                                                  ------------------

     As of  November  1, 1998,  there were  884,347  shares of the  Registrant's
common stock, $0.30 par value, outstanding.

     Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY

INDEX                                                                    PAGE

PART I.   FINANCIAL STATEMENTS

ITEM 1.   Consolidated Balance Sheets -
          September 30, 1998 (unaudited) and December 31, 1997...........  1

          Consolidated Statements of Income -
          Nine months ended September 30, 1998 and 1997 (unaudited)......  2

          Consolidated Statement of Cash Flows -
          Nine months ended September 30, 1998 and 1997 (unaudited)......  3

          Notes to Consolidated Financial Statements.....................  4

ITEM 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations..................  5

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings..............................................  13

ITEM 2.   Changes in Securities..........................................  13

ITEM 3.   Defaults Upon Senior Securities................................  13

ITEM 4.   Submission of Matters to a Vote of Security Holders............  13

ITEM 5.   Other Information..............................................  13

ITEM 6.   Exhibits and Reports on Form 8-K...............................  13

SIGNATURES ..............................................................  15

<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>

PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                September 30,
                                                    1998          December 31,
ASSET                                            (Unaudited)         1997
-----                                             ----------      ------------
<S>                                               <C>            <C>
     Cash and due from banks                      $ 12,083,837   $  7,003,534
     Federal funds sold                              9,325,000      4,075,000
     Available-for-sale securities                  34,250,098     38,069,171
     Held-to-maturity securities                    30,721,359     32,378,224
     Federal Home Loan Bank stock, at cost             841,500        740,200
     Loans receivable, net                         167,622,310    152,395,769
     Premises and equipment, net                     3,353,447      3,459,173
     Other assets                                    2,133,553      2,149,627
                                                  ------------   ------------

          Total Assets                            $260,331,104   $240,270,698
                                                  ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
     Deposits
          Non-interest bearing                   $  24,113,331  $ 23,343,039
 
          Interest bearing                         185,472,967   167,229,668
                                                  -------------  ------------
          Total deposits                           209,586,298   190,572,707

     Accrued interest and other liabilities         12,070,014    12,285,041
                                                  ------------   -----------

          Total Liabilities                        221,656,312   202,857,748

STOCKHOLDERS' EQUITY
     Common stock, par value                           265,304       264,650
     Surplus                                         4,015,348     3,932,656
     Retained earnings                              18,773,032    15,298,374
     Net unrealized holding gains on
      securities available for sale                 15,621,108    17,917,270
                                                  ------------   -----------
          Total stockholders' equity                38,674,792    37,412,950
                                                  ------------   -----------
          Total Liabilities and
          Stockholders Equity                     $260,331,104  $240,270,698
                                                  ============  ============

</TABLE>

     The accompanying notes are an integral part of these consolidated financial
statements.

                                     Page 1

<PAGE>

PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

<CAPTION>
                                                Nine Months Ended September 30,
Interest Income                                    1998             1997
                                                  ---------       ---------
<S>                                               <C>            <C>
     Loans                                        $ 10,306,325   $ 9,076,717
     Investment securities                           2,213,122     2,066,355
     Interest-bearing deposits                         255,022         1,218
     Federal funds sold                                108,937       339,791
                                                  ------------   -----------
          Total interest income                     12,883,406    11,484,081

Interest Expense
     Deposits                                        6,242,735     5,504,783
                                                  ------------   -----------

Net Interest Income                                  6,640,671     5,979,298

Provision for Loan Losses                              140,000        50,000
                                                  ------------   -----------

Net Interest Income after Provision for Loan Losses  6,500,671     5,929,298

Other Income
     Service fees                                      446,664       475,611
     Net investment gains                            3,000,379       486,060
     Other                                              32,464       229,170
                                                  ------------   -----------
                                                     3,479,507     1,190,841

Other Expenses
     Salaries                                        1,508,097    1,498,568
     Pension and other employee benefits               654,989      536,453
     Occupancy expense                                 803,698      769,353
     Legal and professional                            120,602      168,120
     Regulatory fees                                    44,613       40,837
     Data processing                                   129,249      128,245
     Other                                           1,166,244    1,252,609
                                                  ------------   ----------
                                                     4,427,492    4,394,185

Income Before Income Taxes                           5,552,686    2,725,954

Provision for Income Taxes                           1,407,014      677,390
                                                   ------------  ----------
Net Income                                         $ 4,145,672   $2,048,564
                                                   ============  ==========
Net Income per Share of Common Stock               $      4.70   $     2.33
                                                   ============  ==========
Net Income per Share of Common Stock
  (fully diluted)                                 $       4.70   $     2.33
                                                  ============   ==========
Weighted Average Shares Used in Computing
 Net Income per Share of Common Stock                  882,879      880,022
                                                  ============   ==========
</TABLE>

     The  accompanying  notes  are  an  integral  part  of  these  consolidated
financial statements.

                                     Page 2
<PAGE>

PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<CAPTION>

                                                Nine Months Ended September 30,
                                                    1998           1997
                                                   ------         ------
<S>                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net Income                                   $  4,145,672   $  2,048,564
     Adjustments to reconcile net cash from
      operating activities:
     Depreciation and amortization                     648,481        441,103
     Net accretion/amortization of
      premiums and discounts                            (8,922)       (12,840)
     Gain on sale of investments                    (3,000,379)      (411,306)
     Provision for loan losses                         140,000         50,000
     Loss on sale/disposal of assets                     3,612         27,484
     Reinvestment of stock dividends                   (36,670)       (55,973)
     Increase (decrease) in cash due to changes in
      assets and liabilities:
          Other assets                                 243,426        533,777
          Accrued interest and other liabilities       736,297        343,178
                                                  -------------  ------------

     Net Cash From Operating Activities              2,871,517      2,963,987

CASH FLOWS FROM INVESTING ACTIVITIES
     Proceeds from sales of securities available
      for sale                                       3,330,194        629,760
     Proceeds from maturities of securities held
      to maturity                                   10,030,262      7,300,911
     Purchase of securities held to maturity        (8,328,139)   (13,455,781)
     Purchase of securities available-for-sale        (199,942)             0       
     Net purchases of FHLB Stock                      (101,300)      (170,700)     
     Net loans made to customers                   (15,393,142)   (11,158,580)                     
     Purchases of Premises and equipment              (320,664)      (293,242)
                                                  -------------   ------------

     Net Cash Used By Investing Activities         (10,982,731)   (17,147,632)

CASH FLOWS FROM FINANCING ACTIVITIES
     Net increase in deposits                       19,029,184     14,666,542
     Proceeds from issuance of Common Stock             83,346         83,309
     Dividends paid                                   (671,014)      (642,393)           
                                                  -------------  -------------
Net Cash From Financing Activities                  18,441,516     14,107,458
                                                  -------------  -------------

Net Change in Cash and Cash Equivalents             10,330,302        (76,187)

Cash and Cash Equivalents at Beginning of Period    11,078,535     16,269,707
                                                  ------------   -------------
Cash and Cash Equivalents at End of Period         $21,408,837   $ 16,193,520
                                                  ============   =============
</TABLE>

     The accompanying notes are an integral part of these consolidated financial
statements.

                                     Page 3
<PAGE>

PEOPLES FINANCIAL CORP., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - BASIS OF PRESENTATION
The accompanying  unaudited  consolidated  financial  statements include Peoples
Financial Corp.,  Inc., (the Corporation) and its wholly owned  subsidiary,  PFC
Bank (the Bank),  and have been prepared in accordance  with generally  accepted
accounting  principles for interim financial information and the instructions to
Form 10-QSB and Article 10 of Regulation S-B.  Accordingly,  they do not include
all of the information and footnotes required by generally  accepted  accounting
principles for complete financial statements. In the opinion of management,  all
adjustments  (consisting  primarily  of normal  recurring  accruals)  considered
necessary for a fair presentation have been included.

NOTE B - EARNINGS PER SHARE
Shares used in the  earnings  per share  computation  are the  weighted  average
number of shares outstanding during the periods in question.

NOTE C - RECLASSIFICATIONS
Certain  previously  reported items have been  reclassified  to conform with the
current  period's  classifications.  These  reclassifications  have no effect on
total assets, total liabilities, stockholders' equity, and net income.

<PAGE>

PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

For the nine months ended  September 30, 1998,  the  Corporation's  total assets
increased  over  December 31, 1997 by nearly $20.1 million  resulting  primarily
from increases of approximately  $15.2 million in net loans and $10.3 million in
liquid assets such as cash and due from banks and federal funds sold,  offset by
a decrease in investments of $5.4 million.

The increase in total  liabilities of approximately  $18.8 million from December
31, 1997 to  September  30,  1998 is  primarily  attributable  to an increase in
deposits of $19.0 million in the nine-month period ended September 30, 1998.

As of September 30, 1998, PFC Bank, the  Corporation's  wholly owned subsidiary,
had a ratio of  non-performing  loans to total  assets of 0.21% as compared to a
ratio  of  0.40% as of the end of  December  31,  1997.  Included  in the  third
quarter,  non-performing  loan totals  were loans  totaling  $535,000  that were
delinquent  more than 90 days and held on non-accrual  status.  At September 30,
1998, the allowance for possible loan losses was $1,179,000,  which  represented
0.70% of net  loans as  compared  to 0.81% at the end of the  previous  calendar
year.  Non-performing  loans  totaled  15.95% of the allowance for possible loan
losses, as compared to 17.37% at December 31, 1997.

In management's opinion, the allowance for possible loan losses at September 30,
1998 is adequate to absorb  future loan losses  based on  information  presently
known.  Management cannot assure,  however, that additions to the allowance will
not be required in the future to cover losses that are presently unforeseen.

RESULTS OF OPERATIONS

Net Income

For the nine-month  period ended September 30, 1998, the Corporation  recognized
net income of $4,146,000,  an increase of $2,097,000 over the same period of the
prior year.  Much of this increase is  attributable  to capital gains taken from
the sale of  available-for-sale  securities.  However,  operating  income before
capital gains and taxes increased by $312,000, or 13.9%

The operating  results of the  Corporation  are largely  dependent  upon the net
income generated by its subsidiary, PFC Bank. PFC Bank also has the benefit of a
substantially appreciated  available-forsale investment portfolio, the strategic
liquidation  of portions of which enable the  Corporation to absorb the negative
effects of interest rate fluctuation and still maintain profitable operations.

<PAGE>

Net Interest Income

Interest  income for the  nine-month  period ended  September 30, 1998 was $12.9
million,  an increase of $1,399,000  from the nine-month  period ended September
30, 1997.  This increase is  attributed to a $1,230,000  increase in interest on
the loan portfolio.  Interest expense for the nine-month  period ended September
30, 1998 was  approximately  $6.2  million,  a $738,000  increase  over the same
nine-month period ended September 30, 1997.  Management attributes this increase
primarily  to the $18.2  million  increase in interest  bearing  deposits  since
December 31, 1997.

Provision for Loan Losses

The provision for loan losses is based upon management's  ongoing  assessment of
the inherent risk of loss in the outstanding loan portfolio.  Management's  risk
assessment is based on the evaluation of individual loans, past loss experience,
current economic conditions,  and other relevant factors.  While management uses
the best information  available to make such evaluations,  future adjustments to
the allowance for possible loan losses may be necessary.  PFC Bank  continues to
monitor its loan  portfolio  on a regular  basis and will make  additions to its
allowance  based on its  determination  of the necessary level of the allowance.
For the nine-month  period ended September 30, 1998, PFC Bank recorded  $140,000
to the  provision  for loan losses as compared to $50,000 for the same period in
the previous year. Net charge-offs for the nine-month period ended September 30,
1998 amounted to $210,000 as compared to $65,000 for the nine-month period ended
September 30, 1997.  This increase was attributed to a single loan charge-off of
$151,000  arising  from a successor  letter of credit,  derived from a letter of
credit originally issued in 1985 by past management.

Other Income

Other  income  for  the   nine-month   period  ended   September  30,  1998  was
approximately  $3.5  million,  an  increase  of  nearly  $2.3  million  over the
nine-month   period  ended  September  30,  1997.  This  increase  is  primarily
attributable to capital gains from the sale of available-for-sale  securities of
$3.0 million for the nine-month period ended September 30, 1998 as compared with
capital  gains of  $486,000  for the same  period of 1997.  These net gains were
primarily  the  result of the  liquidation  of a  portion  of PFC  Bank's  stock
portfolio.   The  gains  were  offset  by  a  decrease  of  $226,000,   directly
attributable  to flood  insurance  proceeds  of  $206,000  received  during  the
nine-month period ended September 30, 1997.

Other Expenses

Total other  expenses  decreased  by $33,000  for the  nine-month  period  ended
September  30, 1998 when  compared  to the same  period in the prior year.  This
decrease  was the result of decreases in  miscellaneous  expenses  such as Other
Real  Estate  expenses  ($55,000),   advertising  expenses  ($29,000),  printing
expenses  ($31,000) and other various  expenses  ($46,000)  partially  offset by
increases in pension expense of $115,000 and occupancy expense of $34,000.

Maintaining a focus on operating cost control has become increasingly  important
and the  Corporation  has succeeded in maintaining a relatively  stable overhead
burden.


<PAGE>

Provision for Income Taxes

The  Corporation  incurred a provision  for income taxes of  $1,407,000  for the
nine-month period ended September 30, 1998, as compared to $677,000 for the same
period ended September 30, 1997.  State tax liabilities are incurred both by PFC
Bank, in the form of Pennsylvania Bank Shares tax, and by the Corporation,  as a
separate entity.

<PAGE>

Regulatory Activity

In recent years,  Pennsylvania  enacted a law to permit state chartered  banking
institutions  to sell insurance.  This follows a U.S.  Supreme Court decision in
favor of nationwide insurance sales by banks. The decision also bars states from
blocking  insurance sales by national banks in towns with populations of no more
than 5,000.  PFC Bank does not currently have plans to enter the insurance field
but continue to review this option.

Congress is currently considering legislative reforms to modernize the financial
services industry,  including  repealing the Glass Steagall Act, which prohibits
commercial banks from engaging in the securities industry. Consequently,  equity
underwriting  activities of banks may increase in the near future.  However, the
Corporation does not currently anticipate entering into these activities.

Management  estimates that changes in PFC Bank's FDIC assessment rate, resulting
from the enactment of the Deposit  Insurance  Funds Act of 1996,  will adversely
impact the results of operations net of income taxes.  Prior to this  enactment,
PFC Bank was not  required to pay any FDIC  assessment.  Although the Bank is in
the minimum assessment bracket, income will be impacted in the amount of $23,200
for the year ended December 31, 1998. The act also provides regulatory relief to
the financial  services industry relative to environmental  risks,  frequency of
examinations, and simplification of forms and disclosures.

From time to time,  various  types of federal  and state  legislation  have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Corporation and of PFC Bank.  Management  cannot predict whether
such  legislation  will be adopted or, if adopted,  how such  legislation  would
affect the business of the  Corporation  and PFC Bank. As a  consequence  of the
extensive  regulation of commercial banking activities in the United States, the
Corporation's  and PFC Bank's  business is  particularly  susceptible to federal
legislation  and  regulations  that may  increase  the costs of doing  business.
Except as specifically  described above,  Management believes that the affect of
the  provisions  of  the  aforementioned   legislation  on  liquidity,   capital
resources,  and results of  operation  of the  Corporation  will be  immaterial.
Management  is not  aware  of any  other  current  specific  recommendations  by
regulatory authorities or proposed legislation, which, if they were implemented,
would have a material  adverse  effect upon  liquidity,  capital  resources,  or
results of operation,  although the general cost of compliance with the numerous
and multiple federal and state laws and regulations does have, and in the future
may have, a negative impact on the Corporation's results of operations.

Further,  the business of the  Corporation  is also affected by the state of the
financial  services  industry  in  general.  As a result of legal  and  industry
changes, Management expects the industry will continue to experience an increase
in  consolidations  and mergers as the financial  services  industry strives for
greater cost  efficiencies and market share.  Management also expects  increased
diversification  of financial  products and services offered by the Bank and its
competitors.  Management  believes  that such  consolidations  and mergers,  and
diversification  of products  and  services  may enhance PFC Bank's  competitive
position as a community bank.

<PAGE>

                         PEOPLE'S FINANCIAL CORPORATION

Forward-Looking Statements

From  time to time,  the  Corporation  may  publish  forward-looking  statements
relating  to  such  matters  as  anticipated  financial  performance,   business
prospects,  technological  developments,  new products, research and development
activities and similar matters. The Private Securities  Litigation Reform Act of
1995 provides a safe harbor for forward-looking  statements.  In order to comply
with the terms of the safe  harbor,  the  Corporation  notes  that a variety  of
factors could cause the  Corporation's  actual  results and experience to differ
materially from the anticipated  results or other expectations  expressed in the
Corporation's  forward-looking  statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Corporation's
business  include the following:  general economic  conditions,  including their
impact on capital expenditures; business conditions in the banking industry; the
regulatory  environment;   rapidly  changing  technology  and  evolving  banking
industry standards;  competitive factors,  including increased  competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price  pressures;  the inability of the Corporation
to accurately estimate the cost of systems preparation for Year 2000 compliance;
and similar items.

Year 2000 Issues

The following  section contains  forward-looking  statements which involve risks
and  uncertainties.  The actual impact on the Corporation of the Year 2000 issue
could  materially  differ from that which is anticipated in the  forward-looking
statements as a result of certain factors identified below.

The "Year 2000 Problem" (Y2K) arose because many existing  computer programs use
only the last two digits to refer to a year. Therefore,  these computer programs
do not  properly  recognize a year that begins with "20" instead of the familiar
"19".  If not  corrected,  many  computer  applications  could  fail  or  create
erroneous  results  by or at the year  2000.  This  could  cause  entire  system
failures,  miscalculations,   and  disruptions  of  normal  business  operations
including,  among other things, a temporary  inability to process  transactions,
send statements, or engage in similar day to day business activities. The extent
of the  potential  impact of the Year 2000 Problem is not yet known,  and if not
timely corrected, it could affect the global economy.

The  Bank  is  subject  to the  regulation  and  oversight  of  various  banking
regulators,  whose  oversight  includes the  provision  of specific  timetables,
programs and guidance regarding Year 2000 issues.  Regulatory examination of the
Bank's Year 2000 programs are conducted  periodically  and reports are submitted
by the Bank to the banking  regulators  on  request.  In  addition,  reports are
currently submitted on a monthly basis to the Corporation's Board of Directors.

<PAGE>

Corporation's State of Readiness

The Board of Directors is committed  to ensuring  that the  Corporation's  daily
operations  suffer  little  or no  impact  from the  century  date  change.  The
Corporation has applied due diligence throughout the Y2K process,  following the
guidelines   contained   in  the  series  of  Federal   Financial   Institutions
Examinations  Council's  Interagency  Guidelines.  The  guidelines  identify the
following phases: awareness,  assessment,  renovation or remediation, testing or
validation and implementation.

Based on an ongoing  assessment,  the Corporation has determined that it will be
required  to modify or replace  portions of its  software  so that its  computer
systems  will  properly use dates beyond  December  31,  1999.  The  Corporation
presently  believes that as a result of modifications  to existing  software and
hardware  and  conversions  to  new  software,  the  Year  2000  Problem  can be
mitigated.  However,  if such modifications and conversions are not made, or are
not  completed on a timely  basis,  the Year 2000 could have a material  adverse
impact on the operations of the Corporation.

Management has initiated an enterprise-wide program to prepare the Corporation's
computer  systems  and  applications  for the Year  2000.  The  Corporation  has
developed a comprehensive  inventory of all mainframe and PC based applications,
third-party  relationships,  environmental  systems,  proprietary  programs  and
non-computer  related  systems (such as postage meters and fax  machines).  This
assessment identified 60 systems, processes or proprietary programs, which could
be  impacted  by  the  century  date  change.  As of  September  30,  1998,  the
Corporation  has  remedied  58 or 97% of the  programs.  In November  1997,  the
Corporation  began  converting its computer systems to be Year 2000 ready. As of
September 30, 1998,  approximately  93% of the  Corporation's  systems were Year
2000 ready, with all systems expected to be ready/compliant by March 31, 1999.

The  Corporation  has acquired its  mission-critical  system which  supports the
Corporation's core business processes from a highly regarded third-party vendor.
Thus,  even  though  the  Corporation  does not  have  direct  control  over the
renovation  process, it is monitoring the progress of its third-party vendors to
assess the status of their Y2K readiness  efforts.  The Corporation tested these
systems in May 1998 and plans a second test in May 1999.  However,  because most
computer systems are, by their very nature, interdependent,  it is possible that
noncompliant  third-party  computers  could  impact the  Corporation's  computer
systems. The Corporation could be adversely affected by the Y2K problem if it or
unrelated parties fail to successfully  address the problem. The Corporation has
taken steps to  communicate  with the  unrelated  parties  with whom it deals to
coordinate Year 2000 compliance.  Additionally,  the Corporation is dependent on
external suppliers, such as, wire transfer systems,  telephone systems, electric
companies,  and  other  utility  companies  for  continuation  of  service.  The
Corporation  is also  assessing the impact,  if any, the century date change may
have on its credit risk.

<PAGE>

The  Corporation  has  initiated  communications  with  all of  its  significant
vendors,  suppliers  and large  commercial  customers to determine the extent to
which the  Corporation is vulnerable to those third  parties'  failure to remedy
their  own Year  2000  Problems.  In the  event  that  any of the  Corporation's
significant   vendors,   suppliers  and  large   commercial   customers  do  not
successfully  achieve Year 2000 compliance in a timely manner, the Corporation's
business or operations could be adversely affected. For significant vendors, the
Corporation  will validate that they are Year 2000  compliant by March 31, 1999,
or make  plans to  switch  to a new  vendor or  system  that is  compliant.  For
insignificant  vendors,  the Corporation will not necessarily validate that they
are Year 2000 compliant. However, for any insignificant vendor who responds that
they will not be compliant by March 31, 1999,  the  Corporation  will seek a new
vendor or system that is compliant.

The Year 2000 Issue also affects certain of the Bank's  customers,  particularly
in the  areas  of  access  to  funds  and  additional  expenditures  to  achieve
compliance.  The Bank has  engaged in a program  of  contacting  its  commercial
customers  regarding  the  customers'  awareness  of the Year  2000  Issue.  The
Corporation  cannot guarantee that the inability of loan customers to adequately
correct the Year 2000 Issue will not have an adverse effect on the  Corporation.
For large commercial loan customers, the Bank will take appropriate action based
upon their level of readiness for Year 2000. Nevertheless,  the Company does not
believe that the cost of addressing  the Y2K issues will be a material  event or
uncertainty  that  would  cause  reported   financial   information  not  to  be
necessarily indicative of future operating results or financial conditions,  nor
does it believe that the costs or the  consequences  of  incomplete  or untimely
resolution  of its  Year  2000  issues  represent  a  known  material  event  or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported  financial  information  not to be necessarily  indicative of
future operating results or future financial condition.

Costs of Year 2000

The Corporation will use both internal and external  resources to reprogram,  or
replace,  and test its  software  and  hardware  for  Year  2000  modifications.
Concurrent with the Year 2000 project,  the Corporation  will also be converting
all its major date processing  systems,  both hardware and software,  to current
technology.  The  Corporation  plans to complete  both the Year 2000 and systems
conversion  projects  within 6 months or no later than March 31,  1999,  for all
critical systems.

As of  September  30,  1998,  $27,500  has been  expended  as Year  2000  costs.
Management  expects to spend a total of $110,000 for the entire project.  Of the
total projects' cost,  approximately  $61,000 is attributable to the purchase of
new software which will be capitalized.  The remaining  $21,500 will be expensed
as incurred  over the next 15 months.  The  estimated  Year 2000  project  costs
include the costs and time  associated  with the impact of  third-parties'  Year
2000 issues, and are based on presently available information. The total cost of
the  project is being  funded  through  operating  cash flows.  The  Corporation
continues  to  evaluate  appropriate  courses of  corrective  action,  including
replacement  of certain  systems  whose  associated  costs  would be recorded as
assets and amortized.  Accordingly,  the Corporation  does not expect the amount
required to be expensed over the next 15 months to have a material effect on the
financial  position or results of  operations.  However,  if  compliance  is not
achieved in a timely manner by the Corporation or any of its significant related
third-parties,  be it a supplier of services  or  customer,  the Y2K issue could
possibly have a material  effect on the  Corporation's  operations and financial
position.

<PAGE>

The cost of the projects and the date on which the Corporation plans to complete
both Year 2000  modifications and systems  conversions are based on management's
best  estimates,  which were derived  utilizing  numerous  assumptions of future
events including the continued  availability of certain  resources,  third-party
modification  plans and other factors.  However,  there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those  plans.  Specific  factors  that  might  cause such  material  differences
include,  but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.

Risks of Year 2000

At present,  management  believes it's  progress in remedying the  Corporation's
systems,  programs and applications and installing Y2K compliant  upgrades is on
target.  The  Y2K  computer  problem  creates  risk  for  the  Corporation  from
unforeseen problems in its own computer systems and from third-party vendors who
provide the majority of mainframe and PC based computer applications. Failure of
third-party  systems  relative to the Y2K issue could have a material  impact on
the Corporation's ability to conduct business.

Contingency Plans

The Corporation is in the process of working up contingency  plans and assessing
the potential adverse risks to the Corporation.  The  Corporation's  contingency
plans  involve  the use of manual  labor to  compensate  for the loss of certain
automated  computer systems and  inconveniences  caused by disruption in command
systems.

A business resumption  contingency plan was developed for  mission-critical  and
required  mainfram  and  PC  based  applications,   third-party   relationships,
proprietary  programs and non-computer  related  systems.  This contingency plan
identifies scheduled completion dates, test dates and "trigger" dates. A trigger
date is the date the Corporation  would implement the contingency plan. The plan
was ratified by the Board of Directors on October 21, 1998.

<PAGE>

PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

            Not applicable

ITEM 2. Changes in Securities

          Not applicable

ITEM 3. Defaults Upon Senior Securities

          Not applicable

ITEM 4. Submission of Matters to a Vote of Security Holders

     There was no submission of matters brought to a vote of security holders in
     the second quarter of 1998.

ITEM 5. Other Information

     Not applicable.

ITEM 6. Exhibits and Reports on Form 8-K

     (a) Exhibits

     3(i) Registrant's Articles of Incorporation.
         (Incorporated by reference in Registrant's January 27, 1995,
          filing of Form S-4).

     3(ii)Registrant's  By-Laws.
         (Incorporated  by  reference  in  Registrant's January 27, 1995,
          filing of Form S-4).

     10(i)Agreement between R.B. Robertson and Bank.
         (Incorporated by Reference in the Registrant's September 30, 1997
          filing of Form 10-QSB).

     10(ii) Settlement Agreement.
           (Incorporated by Reference in the Registrant's December 31, 1996
            filing of Form 10-KSB).

<PAGE>

PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY

PART II. OTHER INFORMATION (cont.)

ITEM 6. Exhibits and Reports on Form 8-K (cont.)

     10(iii) General  Release
            (Incorporated  by Reference  in the  Registrant's
             December 31, 1996 filing of Form 10-KSB).

     11      Statement re:  Computation of Earnings Per Share.
            (included herein at Part I, Item 1, Page 2 of this Form 10-QSB).

     27      Financial Data Schedule


(b)  Reports on Form 8-K

          The registrant filed the following  current reports on Form 8-K during
          the quarter ended September 30, 1998:

          No 8-K reports filed in the quarter ended September 30, 1998.

<PAGE>
                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

Dated: November 6, 1998


                                                 PEOPLES FINANCIAL CORP., INC.
                                                                 (Registrant)
/s/ R. B. Robertson
----------------------------------------
R.B. Robertson
President & Chief Executive Officer


/s/ James L. Kifer
----------------------------------------
James L. Kifer
Executive Vice President & Asst. Secretary

<PAGE>

                                 EXHIBIT INDEX

                                                                     PAGE NO.
                                                                  IN MANUALLY
                                                                     SIGNED
EXHIBIT NO.                                                         ORIGINAL
-----------                                                      -------------

3(i) Registrant's  Articles  of  Incorporation
     (incorporated  by  reference  to Exhibit 4.1
     to  Registrant's  Registration  Statement No.
     33-88802 on Form S-4, filed January 27, 1995).

3(ii)Registrant's   By-Laws   (incorporated  by
     reference  to  Exhibit  4.2  to Registrant's
     Registration Statement No. 33-88802 on Form S-4,
     filed January 27, 1995).

10(i)Settlement Agreement and Release,  dated December
     30, 1996, among C. Edward Dunmire, the Registrant,
     and Peoples Bank of PA (incorporated by Reference
     to Exhibit 10(I) to Registrant's Annual Report on
     Form 10-KSB,  filed March 28, 1997).

10(ii) General  Release of David Fennell  (incorporated
     by reference to Exhibit 10(ii) to the  Registrant's
     Annual Report on Form 10-KSB,  filed March 28,
     1997).

11   Statement re: Computation of Earnings Per Share.
     (included herein at Part 2 I, Item 1 of this Form 10-QSB).

27   Financial Data Schedule                                          14