SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K


[x]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1997

[    ] TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ____to_____

Commission file Number:  2-85306

                            LAKE ARIEL BANCORP, INC.
             (Exact name of registrant as specified in its charter)

PENNSYLVANIA                              23-2244948
(State of other jurisdiction of           (I.R.S. Employer
incorporation or organization)            Identification Number)

Post Office Box 67, Route 191, Lake Ariel, Pennsylvania          18436
(Address of principal executive offices)                         (Zip Code)

Registrant=s telephone number, including area code:  (717) 698-5695

Securities registered pursuant to Section 12(b) of the Act:  Not Applicable

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.21 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 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______

     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. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant  based on average bid and asked prices:  $58,453,883  million at
March 17, 1998.

     As of March 17, 1998, the registrant had  outstanding  4,562,148  shares of
its common stock, par value $.21 per share.

                       DOCUMENTS INCORPORATED BY REFERENCE

                  Portions  of  the  Annual  Report  to   shareholders   of  the
registrant for the year ended December 31, 1997, are  incorporated  by reference
in Part II of this Annual Report.

                                  Page 1 of 82
                            Exhibit Index on Page 41
<PAGE>


                            LAKE ARIEL BANCORP, INC.
                                    FORM 10-K

                                      Index
Part I                                                          Page

Item 1.   Business.......................................        3

Item 2.   Properties.....................................        22

Item 3.   Legal Proceedings..............................        23

Item 4.   Submission of Matters to a Vote of Security Holders..  Not Applicable

Part II

Item 5.   Market for the Registrant=s Common Equity and
          Related Shareholder Matters.....................       24

Item 6.   Selected Financial Data.........................       26

Item 7.   Management=s Discussion and Analysis of Financial
          Condition and Results of Operations..............      26

Item 7A.  Quantitative and Qualitative Disclosures About
          Market Risk............................                27

Item 8.   Financial Statements and Supplementary Data.......     27

Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure..............      Not Applicable

Part III

Item 10.  Directors and Executive Officers of the Registrant     27

Item 11.  Executive Compensation..........................       31

Item 12.  Security Ownership of Certain Beneficial Owners and
          Management.......................................      33

Item 13.  Certain Relationships and Related Transactions....     35

Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports
          on Form 8-K......................................      36

Signatures        .........................................      38

Exhibit Index     .........................................      41






<PAGE>




                            LAKE ARIEL BANCORP, INC.
                                    FORM 10-K

                                     Part I


Item 1.  Business

         General

     Lake Ariel Bancorp,  Inc.("Bancorp"),  a Pennsylvania business corporation,
is a bank  holding  company,  registered  with and  supervised  by the  Board of
Governors of the Federal Reserve System (the "Federal Reserve  Board").  Bancorp
was organized on May 23, 1983,  and  commenced  operations on November 26, 1983.
Bancorp has one  wholly-owned  subsidiary,  LA Bank,  National  Association (the
"Bank").  Bancorp's business has consisted primarily of managing and supervising
the Bank,  and its  principal  source of income has been  dividends  paid by the
Bank. At December 31, 1997, Bancorp had total consolidated assets,  deposits and
stockholders' equity of approximately  $368.1 million,  $280.5 million and $35.8
million, respectively.

     The Bank was organized in 1910. The Bank is a national banking  association
that is a member of the  Federal  Reserve  System and the  deposits of which are
insured by the Federal Deposit Insurance Corporation (the "FDIC") under the Bank
Insurance  Fund  ("BIF").  The Bank has  fifteen  (15) branch  locations  (three
branches within Wayne County,  seven branches  within  Lackawanna  County,  four
branches  within  Pike  County  and one  branch  within  Monroe  County),  and a
Financial Center (within  Lackawanna County,  Pennsylvania).  The Bank is a full
service  commercial  bank providing a wide range of services to individuals  and
small to medium sized businesses in its Northeastern  Pennsylvania  market area,
including  accepting time,  demand,  and savings deposits and making secured and
unsecured  commercial,  real  estate  and  consumer  loans.  The  Bank  has  two
subsidiaries,  LA Lease, Inc., that engages in the leasing of personal property,
and Ariel  Financial  Services,  Inc., a newly  formed  business  unit  offering
stocks, bonds, annuities and other insurance-related products.

     Supervision and Regulation - Bancorp

     Bancorp is subject  to the  jurisdiction  of the  Securities  and  Exchange
Commission ("SEC") relating to the offering and sale of its securities.  Bancorp
is  currently  subject to the SEC's rules and  regulations  relating to periodic
reporting,   insider  trading  reports  and  proxy  solicitation   materials  in
accordance with the Securities Exchange Act of 1934 (the "Exchange Act").


<PAGE>

     Bancorp is also subject to the  provisions of the Bank Holding  Company Act
of 1956, as amended  ("Bank  Holding  Company  Act"),  and to supervision by the
Federal  Reserve  Board.  The Bank Holding  Company Act will require  Bancorp to
secure  the  prior  approval  of the  Federal  Reserve  Board  before it owns or
controls,  directly  or  indirectly,  more  than  5% of  the  voting  shares  of
substantially all of the assets of any institution,  including another bank. The
Bank Holding Company Act prohibits acquisition by Bancorp of more than 5% of the
voting  shares of, or interest  in, or  substantially  all of the assets of, any
bank located  outside  Pennsylvania  unless such an acquisition is  specifically
authorized by laws of the state in which such bank is located.

     A bank holding company is prohibited  from engaging in or acquiring  direct
or indirect  control of more than 5% of the voting shares of any company engaged
in  non-banking  activities  unless  the  Federal  Reserve  Board,  by  order or
regulation,  has found such  activities  to be so closely  related to banking or
managing or controlling banks as to be a proper incident thereto. In making this
determination,  the Federal Reserve Board  considers  whether the performance of
these  activities by a bank holding  company would offer  benefits to the public
that outweigh possible adverse effects.

     The Bank Holding  Company Act also prohibits  acquisitions  of control of a
bank  holding  company,  such as Bancorp,  without  prior  notice to the Federal
Reserve  Board.  Control is defined for this  purpose as the power,  directly or
indirectly, to direct the management or policies of a bank holding company or to
vote  twenty-five  percent  (25%) (or ten percent  (10%),  if no other person or
persons  acting on concert,  holds a greater  percentage of the Common Stock) or
more of Bancorp's Common Stock.

     Bancorp is required to file an annual report with the Federal Reserve Board
and any  additional  information  that the  Federal  Reserve  Board may  require
pursuant to the Bank Holding  Company Act.  The Federal  Reserve  Board may also
make  examinations  of Bancorp  and any or all of its  subsidiaries.  Subject to
certain  exceptions,  a bank holding company and its  subsidiaries are generally
prohibited  from engaging in certain tie-in  arrangements in connection with any
extension  of credit or  provision  of credit or  provision  of any  property or
services. The so-called AAnti-tie-in@ provisions state generally that a bank may
not extend credit,  lease, sell property or furnish any service to a customer on
the  condition  that the customer  provide  additional  credit or service to the
bank, to its bank holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other credit or service
from a competitor of the bank, its bank holding company or any subsidiary of its
bank holding company.

     Subsidiary  banks  of  a  bank  holding  company  are  subject  to  certain
restrictions  imposed by the Federal  Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other  securities of the bank holding  company and on taking of such stock or
securities as collateral for loans to any borrower.


<PAGE>

     Permitted Non-Banking Activities

     The  Federal  Reserve  Board  permits  bank  holding   companies  or  their
subsidiaries to engage in nonbanking activities so closely related to banking or
managing or  controlling  banks as to be a proper  incident  thereto.  While the
types of  permissible  activities  are subject to change by the Federal  Reserve
Board, the principal nonbanking  activities that presently may be conducted by a
bank holding  company or its  subsidiary  without prior  approval of the Federal
Reserve Board are:

     (1) Extending credit and servicing loans. Making, acquiring,  brokering, or
servicing  loans or other  extensions of credit  (including  factoring,  issuing
letters of credit and  accepting  drafts) for the  company's  account or for the
account of others.

     (2)  Activities   related  to  extending  credit.  Any  activity  usual  in
connection  with  making,  acquiring,  brokering  or  servicing  loans  or other
extensions of credit,  as determined by the Federal  Reserve Board.  The Federal
Reserve  Board  has  determined  that  the  following  activities  are  usual in
connection  with  making,  acquiring,  brokering  or  servicing  loans  or other
extensions of credit:

(i)  Real estate and personal property appraising. Performing appraisals of real
     estate and tangible and intangible personal property, including securities.

(ii) Arranging  commercial real estate equity financing.  Acting as intermediary
     for the financing of commercial or industrial  income-producing real estate
     by  arranging  for the transfer of the title,  control,  and risk of such a
     real estate project to one or more  investors,  if the bank holding company
     and its  affiliates do not have an interest in, or  participate in managing
     or  developing,  a  real  estate  project  for  which  it  arranges  equity
     financing, and do not promote or sponsor the development of the property.

(iii)Check-guaranty  services.  Authorizing  a  subscribing  merchant  to accept
     personal checks  tendered by the merchant's  customers in payment for goods
     and services,  and purchasing from the merchant validly  authorized  checks
     that are subsequently dishonored.

(iv) Collection agency services.  Collecting overdue accounts receivable, either
     retail or commercial.

(v)  Credit  bureau  services.  Maintaining  information  related  to the credit
     history of consumers and providing the  information to a credit grantor who
     is  considering  a  borrower's  application  for credit or who has extended
     credit to the borrower.

(vi) Asset  management,  servicing,  and collection  activities.  Engaging under
     contract with a third party in asset management,  servicing, and collection
     of assets of a type that an insured  depository  institution  may originate
     and own, if the company does not engage in real property management or real
     estate brokerage services as part of these services.

<PAGE>

(vii)Acquiring  debt in default.  Acquiring  debt that is in default at the time
     of acquisition under certain conditions.

(viii) Real  estate  settlement  servicing.  Providing  real  estate  settlement
     services.

     (3) Leasing personal or real property. Leasing personal or real property or
acting as agent,  broker,  or adviser in leasing  such  property  under  certain
conditions.

     (4) Operating nonbank depository institutions:

(i)  Industrial banking. Owning,  controlling,  or operating an industrial bank,
     Morris Plan bank, or industrial loan company, so long as the institution is
     not a bank.

(ii) Operating savings association.  Owning,  controlling or operating a savings
     association,  if the savings  association  engages  only in  deposit-taking
     activities,  lending,  and other  activities  that are permissible for bank
     holding companies.

     (5) Trust company functions. Performing functions or activities that may be
performed by a trust company  (including  activities of a fiduciary,  agency, or
custodial nature),  in the manner authorized by federal or state law, so long as
the company is not a bank for purposes of the Bank Holding Company Act.

     (6) Financial and investment advisory  activities.  Acting as investment or
financial advisor to any person,  including  (without,  in any way, limiting the
foregoing):

                  (i)  Serving  as  investment  adviser  (as  defined in section
         2(a)(20)   of  the   Investment   Company   Act  of  1940,   15  U.S.C.
         80a-2(a)(20)),  to an  investment  company  registered  under that act,
         including sponsoring,  organizing, and managing a closed-end investment
         company;

                  (ii)  Furnishing  general  economic  information  and  advice,
         general  economic  statistical   forecasting  services,   and  industry
         studies;

                  (iii)   Providing   advice   in   connection   with   mergers,
         acquisitions,  divestitures,  investments,  joint  ventures,  leveraged
         buyouts,    recapitalizations,    capital    structurings,    financing
         transactions  and  similar   transactions,   and  conducting  financial
         feasibility studies;

                  (iv)  Providing  information,   statistical  forecasting,  and
         advice with respect to any transaction in foreign exchange,  swaps, and
         similar transactions,  commodities,  and any forward contract,  option,
         future, option on a future, and similar instruments;





<PAGE>

                  (v) Providing educational courses, and instructional materials
         to consumers on individual financial management matters; and

                  (vi) Providing  tax-planning and  tax-preparation  services to
         any person.


         (7) Agency transactional services for customer investments:

                  (i)  Securities  brokerage.   Providing  securities  brokerage
         services  (including  securities  clearing and/or securities  execution
         services  on  an  exchange),  whether  alone  or  in  combination  with
         investment  advisory  services,  and incidental  activities  (including
         related  securities credit activities and custodial  services),  if the
         securities  brokerage  services  are  restricted  to buying and selling
         securities  solely as agent for the  account  of  customers  and do not
         include securities underwriting or dealing.

                  (ii) Riskless  principal  transactions.  Buying and selling in
         the secondary  market all types of securities on the order of customers
         as a "riskless principal" to the extent of engaging in a transaction in
         which the company, after receiving an order to buy (or sell) a security
         from a customer,  purchases (or sells) the security for its own account
         to offset a  contemporaneous  sale to (or purchase  from) the customer.
         This does not include:

                           (A) Selling  bank-ineligible  securities at the order
                  of a customer that is the issuer of the securities, or selling
                  bank-ineligible   securities  in  any  transaction  where  the
                  company has a contractual agreement to place the securities as
                  agent of the issuer; or

                           (B) Acting as a riskless principal in any transaction
                  involving a bank-ineligible  security for which the company or
                  any of its affiliates  acts as underwriter  (during the period
                  of the underwriting or for 30 days thereafter) or dealer.

                  (iii)  Private  placement  services.  Acting  as agent for the
         private  placement of securities in accordance with the requirements of
         the Securities Act of 1933 ("1933 Act") and the rules of the Securities
         and Exchange  Commission,  if the company  engaged in the activity does
         not purchase or  repurchase  for its own account the  securities  being
         placed,  or hold in  inventory  unsold  portions  of  issues  of  these
         securities.

                  (iv)  Futures  commission   merchant.   Acting  as  a  futures
         commission merchant ("FCM") for unaffiliated  persons in the execution,
         clearance,  or  execution  and  clearance  of any futures  contract and
         option on a futures contract traded on an exchange in the United States
         or abroad under certain conditions.

                  (v) Other  transactional  services.  Providing to customers as
         agent  transactional   services  with  respect  to  swaps  and  similar
         transactions.






<PAGE>

         (8)      Investment transactions as principal:

                  (i)  Underwriting  and dealing in government  obligations  and
         money market  instruments.  Underwriting  and dealing in obligations of
         the United States,  general  obligations of states and their  political
         subdivisions,  and other  obligations  that state  member  banks of the
         Federal  Reserve  System may be authorized  to  underwrite  and deal in
         under  12  U.S.C.  24  and  335,  including  banker's  acceptances  and
         certificates  of  deposit,  under  the  same  limitations  as  would be
         applicable if the activity were performed by the bank holding company's
         subsidiary  member banks or its subsidiary  nonmember  banks as if they
         were member banks.

                  (ii) Investing and trading  activities.  Engaging as principal
          in:

                           (A) Foreign exchange;

                           (B) Forward contracts,  options,  futures, options on
                  futures,  swaps,  and  similar  contracts,  whether  traded on
                  exchanges or not, based on any rate,  price,  financial  asset
                  (including gold, silver, platinum,  palladium,  copper, or any
                  other metal  approved by the Board),  nonfinancial  asset,  or
                  group of assets,  other than a bank-ineligible  security under
                  certain conditions.

                           (C) Forward contracts,  options,  futures, options on
                  futures,  swaps,  and  similar  contracts,  whether  traded on
                  exchanges or not, based on an index of a rate, a price, or the
                  value of any financial asset,  nonfinancial asset, or group of
                  assets, if the contract requires such settlement.

                  (iii)  Buying and selling  bullion,  and  related  activities.
         Buying,  selling and storing bars, rounds,  bullion, and coins of gold,
         silver,  platinum,  palladium,  copper, and any other metal approved by
         the  Federal  Reserve  Board,  for the  company's  own  account and the
         account of others, and providing  incidental services such as arranging
         for storage, safe custody, assaying, and shipment.

         (9) Management consulting and counseling activities:

                  (i) Management  consulting.  Providing  management  consulting
         advice under certain conditions.

                  (ii)  Employee   benefits   consulting   services.   Providing
         consulting  services to employee  benefit,  compensation  and insurance
         plans, including designing plans, assisting in





<PAGE>

         the  implementation  of plans,  providing  administrative  services  to
         plans, and developing employee communication programs for plans.

                  (iii)    Career   counseling   services.    Providing   career
                           counseling services to: (A) A financial  organization
                           and individuals currently employed by, or
                              recently displaced from, a financial organization;

                           (B)Individuals who are seeking employment at a
                  financial organization; and

                           (C) Individuals who are currently  employed in or who
                  seek   positions  in  the  finance,   accounting,   and  audit
                  departments of any company.

         (10)     Support services:

                  (i)      Courier services.  Providing courier services for:

                           (A) Checks, commercial papers, documents, and written
                  instruments  (excluding  currency  or  bearer-type  negotiable
                  instruments)  that are  exchanged  among  banks and  financial
                  institutions; and

                           (B)  Audit  and  accounting  media  of a  banking  or
                  financial nature and other business records and documents used
                  in processing such media.

                  (ii)     Printing and selling MICR-encoded items.  Printing
                           and selling checks and  related  documents,
                           including  corporate image checks, cash tickets,
                           voucher checks,  deposit slips, savings withdrawal
                           packages,  and other forms that  require  Magnetic
                           Ink  Character   Recognition ("MICR") encoding.

         (11)     Insurance agency and underwriting:

                  (i) Credit  insurance.  Acting as principal,  agent, or broker
         for insurance (including home mortgage redemption insurance) that is:

                           (A)  Directly related to an extension of credit
                  by the bank holding company or any of its subsidiaries; and

                           (B)  Limited  to  ensuring   the   repayment  of  the
                  outstanding  balance  due on the  extension  of  credit in the
                  event of the death, disability, or involuntary unemployment of
                  the debtor.

                  (ii) Finance company subsidiary. Acting as agent or broker for
          insurance directly





<PAGE>



         related  to an  extension  of  credit by a  finance  company  that is a
         subsidiary of a bank holding company under certain conditions.

                  (iii)  Insurance  in small  towns.  Engaging in any  insurance
         agency  activity  in a  place  where  the  bank  holding  company  or a
         subsidiary of the bank holding company has a lending office and that:

                           (A)Has a population not exceeding 5,000 (as shown in
                  the preceding decennial census); or

                           (B) Has inadequate  insurance agency  facilities,  as
                  determined  by the Federal  Reserve  Board,  after  notice and
                  opportunity for hearing.

                  (iv)  Insurance-agency  activities  conducted  on May 1, 1982.
         Under certain restrictions,  engaging in any specific  insurance-agency
         activity if the bank holding  company,  or  subsidiary  conducting  the
         specific activity,  conducted such activity on May 1, 1982, or received
         the  Federal  Reserve  Board  approval to conduct  such  activity on or
         before May 1, 1982.

                  (v)  Supervision of retail  insurance  agents.  Supervising on
         behalf of insurance  underwriters  the  activities of retail  insurance
         agents who sell:

                           (A)  Fidelity  insurance  and  property  and casualty
                  insurance  on the  real  and  personal  property  used  in the
                  operations  of the bank holding  company or its  subsidiaries;
                  and

                           (B) Group  insurance  that  protects the employees of
                  the bank holding company or its subsidiaries.

                  (vi)   Small  bank   holding   companies.   Engaging   in  any
         insurance-agency  activity  if  the  bank  holding  company  has  total
         consolidated assets of $50 million or less.

                  (vii)  Insurance-agency   activities  conducted  before  1971.
         Engaging in any insurance-agency  activity performed at any location in
         the United States directly or indirectly by a bank holding company that
         was engaged in insurance-agency activities prior to January 1, 1971, as
         a consequence of approval by the Federal Reserve Board prior to January
         1, 1971.

         (12)     Community development activities:

                  (i) Financing  and  investment  activities.  Making equity and
         debt  investments in  corporations  or projects  designed  primarily to
         promote  community  welfare,  such as the economic  rehabilitation  and
         development of low-income areas by providing housing, services, or jobs
         for residents.





<PAGE>
                 (ii)  Advisory  activities.  Providing  advisory  and  related
         services for programs designed primarily to promote community welfare.

         (13) Money orders,  savings bonds, and traveler's  checks. The issuance
and  sale  at  retail  of  money  orders  and  similar   consumer-type   payment
instruments;  the  sale of U.S.  savings  bonds;  and the  issuance  and sale of
traveler's checks.

         (14) Data processing. Providing data processing and data processing and
data  transmission  services,  facilities  (including  data  processing and data
transmission hardware,  software,  documentation,  or operating personnel), data
bases,  advice,  and access to such services,  facilities,  or data bases by any
technological means under certain conditions.

     Pennsylvania Banking Law

     Under the  Pennsylvania  Banking  Code of 1965,  as amended  (the  ACode@),
Bancorp is permitted to control an unlimited number of banks.  However,  Bancorp
would be  required,  under the Bank  Holding  Company  Act,  to obtain the prior
approval  of  the  Federal   Reserve  Board  before  it  could  acquire  all  or
substantially  all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank,  if, after such  acquisition,
it would own or control more than five percent (5%) of the voting shares of such
bank.


     Interstate Banking and Branching

     The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
(the "Interstate Banking Law"),  amended various federal banking laws to provide
for  nationwide  interstate  banking,  interstate  bank  mergers and  interstate
branching. The interstate banking provisions allow for the acquisition by a bank
holding company of a bank located in another state.

     Interstate  bank mergers and branch  purchase and  assumption  transactions
were allowed effective June 1, 1997; however, states may "opt-out" of the merger
and  purchase and  assumption  provisions  by enacting a law which  specifically
prohibits such interstate transactions.  States could, in the alternative, enact
legislation to allow interstate merger and purchase and assumption  transactions
prior to June 1, 1997.  States could also enact legislation to allow for de novo
interstate  branching of out-of-state banks. In July 1995,  Pennsylvania adopted
"opt-in" legislation which allows such transactions.


     Legislation and Regulatory Changes

     From  time  to  time,  legislation  is  enacted  which  has the  effect  of
increasing  the  cost of  doing  business,  limiting  or  expanding  permissible
activities  or  affecting  the  competitive  balance  between  banks  and  other
financial  institutions.  Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Bancorp and its subsidiary  bank.  Certain
changes  of  potential  significance  to  Bancorp  which  have been  enacted  or
promulgated,  as the case may be, by  Congress or various  regulatory  agencies,
respectively, are discussed below.
<PAGE>

     Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA")

     On August 9, 1989, major reform and financing  legislation,  i.e.,  FIRREA,
was  enacted  into law in order to  restructure  the  regulation  of the  thrift
industry,  to address the  financial  condition of the Federal  Savings and Loan
Insurance  Corporation and to enhance the supervisory and enforcement  powers of
the Federal bank and thrift regulatory  agencies.  The Office of the Comptroller
of the  Currency  ("OCC"),  as the primary  Federal  regulator  of the Bank,  is
primarily  responsible  for  supervision  of the Bank. The OCC and FDIC have far
greater  flexibility to impose  supervisory  agreements on an  institution  that
fails to comply with its regulatory  requirements,  particularly with respect to
the capital requirements. Possible enforcement actions include the imposition of
a capital  plan,  termination  of deposit  insurance  and  removal or  temporary
suspension of an officer, director or other institution-affiliated party.

     Under FIRREA,  civil  penalties  are  classified  into three  levels,  with
amounts  increasing with the severity of the violation.  The first tier provides
for  civil  penalties  of up to  $5,000  per  day for  any  violation  of law or
regulation.  A civil  penalty of up to $25,000  per day may be  assessed if more
than a minimal loss or a pattern of  misconduct  is involved.  Finally,  a civil
penalty  of up to  $1.0  million  per  day  may be  assessed  for  knowingly  or
recklessly  causing a substantial  loss to an  institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased  to $1.0  million per  violation,  up to $5.0  million for  continuing
violations or for the actual amount of gain or loss.  These  monetary  penalties
may be combined with prison sentences for up to five years.


     Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")

     General.  The FDICIA reformed a variety of bank regulatory laws. Certain of
these provisions are discussed below.

     Examinations  and  Audits.  Annual  full-scope,  on-site  examinations  are
required for all FDIC-insured  institutions with assets of $500 million or more.
For bank holding companies with $500 million or more in assets,  the independent
accountants  of such  companies  shall  attest to the  accuracy of  management=s
report.  Such  accountants  shall  also  monitor  management=s  compliance  with
governing  laws and  regulations.  Such companies are also required to select an
independent audit committee composed of outside directors who are independent of
management,  to review  with  management  and the  independent  accountants  the
reports that must be submitted to the appropriate bank regulatory  agencies.  If
the independent  accountants resign or are dismissed,  written notification must
be given to the FDIC and to the  appropriate  federal and state bank  regulatory
agency.


<PAGE>

     Prompt  Corrective  Action.  In  order  to  reduce  losses  to the  deposit
insurance  funds,  the  FDICIA  established  a format  to more  closely  monitor
FDIC-insured  institutions  and  to  enable  prompt  corrective  action  by  the
appropriate  federal  supervisory  agency if an institution begins to experience
any difficulty. The FDICIA established five ACapital@ categories.  They are: (1)
well-capitalized;   (2)  adequately  capitalized;   (3)  undercapitalized;   (4)
significantly undercapitalized; and (5) critically undercapitalized. The overall
goal of these new capital  measures is to impose more  scrutiny and  operational
restrictions on depository  institutions as they descend the capital  categories
from well capitalized to critically undercapitalized.

     The FDIC,  the OCC,  the  Federal  Reserve  Board and the  Office of Thrift
Supervision  have issued  jointly  final  regulations  relating to these capital
categories  and prompt  corrective  action.  These  capital  measures for prompt
corrective action are defined as follows:

     A "well-capitalized" institution would be one that has at least a 10% total
risk-based  capital ratio, a 6% or greater Tier I risk-based capital ratio, a 5%
or greater  Tier I leverage  capital  ratio,  and is not  subject to any written
order or final  directive  by the FDIC to meet and  maintain a specific  capital
level.

     An  "adequately  capitalized"  institution  would  be one  that  meets  the
required  minimum  capital  levels,  but  does  not  meet  the  definition  of a
Awell-capitalized@  institution.  The existing  capital rules generally  require
banks to  maintain a Tier I leverage  capital  ratio of at least 4% and an 8% or
greater total  risk-based  capital ratio.  Since the  risk-based  standards also
require at least half of the total risk-based  capital  requirement to be in the
form of Tier I capital,  this also will mean that an  institution  would need to
maintain at least a 4% Tier I risk-based  capital  ratio.  Thus, an  institution
would need to meet each of the required  minimum  capital  levels in order to be
deemed "adequately capitalized."

     An  "undercapitalized"  institution  would  fail to meet one or more of the
required minimum capital levels for an "adequately capitalized" institution.  An
"undercapitalized"  institution  must  file a  capital  restoration  plan and is
automatically  subject to restrictions  on dividends,  management fees and asset
growth.  In addition,  the institution is prohibited  from making  acquisitions,
opening new  branches  or  engaging  in new lines of business  without the prior
approval  of its  primary  federal  regulator.  A number of other  discretionary
restrictions  also  may  be  imposed  on  a  case-by-case   basis,  and  harsher
restrictions  that  otherwise  would apply to  "significantly  undercapitalized"
institutions may be imposed on an  "undercapitalized"  institution that fails to
file or implement an acceptable capital restoration plan.

     A  "significantly   undercapitalized"   institution   would  have  a  total
risk-based  capital ratio of less than 6%, a Tier I risk-based  capital ratio of
less than 3%, or a Tier I  leverage  capital  ratio of less than 3%, as the case
may be.  Institutions in this category would be subject to all the  restrictions
that  apply  to   "undercapitalized"   institutions.   Certain  other  mandatory
prohibitions  also would  apply,  such as  restrictions  against  the payment of
bonuses or raises to senior executive officers without the prior approval of the
institution=s  primary federal regulator.  A number of other restrictions may be
imposed.

     A "critically  undercapitalized"  institution  would be one with a tangible
equity  (Tier  I  capital)  ratio  of  2% or  less.  In  addition  to  the  same
restrictions   and   prohibitions   that   apply   to   "undercapitalized"   and
"significantly undercapitalized" institutions, the FDIC's rule implementing this
provision of FDICIA also addresses  certain other  provisions for which the FDIC
has been accorded responsibility as the insurer of depository institutions.

     At a minimum, any institution that becomes Acritically undercapitalized@ is
prohibited from taking the following  actions without the prior written approval
of its primary federal supervisory agency: engaging in any material transactions
other  than in the  usual  course  of  business;  extending  credit  for  highly
leveraged  transactions  ("HLTs");  amending  its charter or bylaws;  making any
material changes in accounting  methods;  engaging in certain  transactions with
affiliates;  paying  excessive  compensation or bonuses;  and paying interest on
liabilities  exceeding the prevailing rates in the institution's market area. In
addition, a "critically  undercapitalized" institution is prohibited from paying
interest or principal on its subordinated debt and is subject to being placed in
conservatorship  or  receivership  if its tangible  equity  capital level is not
increased within certain mandated time frames.

     At any time,  an  institution's  primary  federal  supervisory  agency  may
reclassify it into a lower capital  category.  All  institutions  are prohibited
from declaring any dividends, making any other capital distribution, or paying a
management  fee if it would  result in downward  movement  into any of the three
undercapitalized   categories.   The  FDICIA   provides  an  exception  to  this
requirement for stock redemptions that do not lower an institution's capital and
would improve its financial  condition,  if the appropriate  federal supervisory
agency has consulted with the FDIC and approved the redemption.

     The  regulation  requires  institutions  to notify the FDIC  following  any
material  event  that  would  cause  such  institution  to be  placed in a lower
category.  Additionally,  the FDIC monitors  capital levels through call reports
and examination reports.





<PAGE>

     Real Estate Lending  Standards.  Pursuant to the FDICIA,  the OCC and other
federal banking agencies adopted real estate lending  guidelines which would set
loan-to-value  ("LTV")  ratios for different  types of real estate loans.  A LTV
ratio is  generally  defined as the total loan amount  divided by the  appraised
value of the  property at the time the loan is  originated.  If the  institution
does not hold a first lien  position,  the total loan  amount  would be combined
with the amount of all senior liens when  calculating  the ratio. In addition to
establishing the LTV ratios,  the guidelines require all real estate loans to be
based upon proper loan documentation and a recent appraisal of the property.


     Bank  Enterprise  Act of 1991.  Within  the  overall  FDICIA is a  separate
subtitle called the "Bank Enterprise Act of 1991." The purpose of this Act is to
encourage  banking  institutions to establish  Abasic  transaction  services for
consumers@ or so-called Alifeline accounts.@ The FDIC assessment rate is reduced
for all lifeline  depository  accounts.  This Act  establishes  ten (10) factors
which are the minimum  requirements to qualify as a lifeline depository account.
Some of these factors  relate to minimum  opening and balance  amounts,  minimum
number of monthly withdrawals,  the absence of discriminatory  practices against
low-income  individuals  and minimum  service  charges and fees.  Moreover,  the
Housing  and  Community  Development  Act  of  1972  requires  that  the  FDIC's
risk-based  assessment system include provisions  regarding  life-line accounts.
Assessment rates applicable to life-line  accounts are to be established by FDIC
rule.

     Truth in Savings  Act.  The FDICIA also  contains  the Truth in Savings Act
("TSA").  The Federal Reserve Board has adopted  regulations  (ARegulation  DD@)
under the TSA. The purpose of TSA is to require the clear and uniform disclosure
of the rates of  interest  which are payable on deposit  accounts by  depository
institutions and the fees that are assessable against deposit accounts,  so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit  accounts and products.  In addition to disclosures to be
provided  when a  customer  establishes  a deposit  account,  TSA  requires  the
depository  institution  to  include,  in a clear and  conspicuous  manner,  the
following information with each periodic statement of a deposit account: (1) the
annual  percentage  yield  earned;  (2) the amount of interest  earned;  (3) the
amount  of any fees  and  charges  imposed;  and (4) the  number  of days in the
reporting period.  TSA allows for civil lawsuits to be initiated by customers if
the depository institution violates any provision or regulation under TSA.

<PAGE>

     FDIC Insurance Assessments


         The  FDIC has  implemented  a  risk-related  premium  schedule  for all
insured depository institutions that results in the assessment of premiums based
on capital and supervisory measures.

         Under the  risk-related  premium  schedule,  the FDIC,  on a semiannual
basis,   assigns  each   institution  to  one  of  three  capital  groups  (well
capitalized,  adequately  capitalized or under  capitalized) and further assigns
such institution to one of three subgroups within a capital group  corresponding
to the  FDIC's  judgment  of the  institution's  strength  based on  supervisory
evaluations,  including  examination  reports,  statistical  analysis  and other
information  relevant  to  gauging  the  risk  posed  by the  institution.  Only
institutions  with a total  capital to  risk-adjusted  assets  ratio of 10.0% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a
Tier 1 leverage ratio of 5.0% or greater,  are assigned to the  well-capitalized
group.
<PAGE>

         Over the last two years,  FDIC insurance  assessments have seen several
changes for both BIF and SAIF  institutions.  The most recent change occurred on
September 30, 1996, when the President signed into law a bill designed to remedy
the disparity between BIF and SAIF deposit premiums.  The first part of the bill
called  for the SAIF to be  capitalized  by a  one-time  assessment  on all SAIF
insured  deposits  held as of March 31, 1995.  This  assessment,  which was 65.7
cents per $100 in deposits,  raised approximately $4.7 billion to bring the SAIF
up to is required 1.25 reserve ratio. This special assessment,  paid on November
30, 1996,  had no effect on the Bank.  The second part of the bill  remedied the
future anticipated  shortfall with respect to the payment of FICO interest.  For
1997 through 1999, the banking industry will help pay the FICO interest payments
at an  assessment  rate that is  one-fifth  the rate paid by  thrifts.  The FICO
assessment on BIF insured deposits is 1.29 cents per $100 in deposits;  for SAIF
insured  deposits it is 6.44 cents per $100 in  deposits.  Beginning  January 1,
2000,  the FICO  interest  payments  will be paid  pro-rata by banks and thrifts
based on deposits.  At December 31, 1997, the FICO interest  assessment  paid by
the Bank was  approximately  $30,000.  The Bank has not been required to pay any
FDIC insurance  assessments since the fourth quarter of 1996 because BIF has met
its   statutorily   required  ratios  and  the  Bank  is  categorized  as  "well
capitalized."


                  Regulatory Capital Requirements

     The following  table  presents  Bancorp=s  consolidated  capital  ratios at
December 31, 1997.
                                                       (In Thousands)
Tier I Capital......................................          $35,232

Tier II Capital......................................           2,041
Total Capital........................................         $37,273

Adjusted Total Average Assets........................        $344,066
Total Adjusted Risk-Weighted Assets(1)...............        $205,743

Tier I Risk-Based Capital Ratio(2).....................         17.12%
Required Tier I Risk-Based Capital Ratio.............            4.00%
Excess Tier I Risk-Based Capital Ratio.................         13.12%

Total Risk-Based Capital Ratio(3)......................         18.12%
Required Total Risk-Based Capital Ratio................          8.00%
Excess Total Risk-Based Capital Ratio..................         10.12%

Tier I Leverage Ratio(4)...............................         10.26%
Required Tier I Leverage Ratio.........................          4.00%
Excess Tier I Leverage Ratio...........................          6.26%
------------------------------
(1)  Includes   off-balance  sheet  items  at   credit-equivalent   values  less
     intangible assets.
(2)  Tier I  Risk-Based  Capital  Ratio is  defined  as the ratio of Tier I
     Capital to Total Adjusted Risk-Weighted Assets.
(3)  Total  Risk-Based  Capital Ratio is defined as the ratio of Tier I and
     Tier II Capital to Total Adjusted Risk- Weighted Assets.
(4)  Tier I  Leverage  Ratio is  defined  as the ratio of Tier I Capital to
     Adjusted Total Average Assets.
<PAGE>

     Bancorp's   ability  to  maintain  the   required   levels  of  capital  is
substantially  dependent  upon the success of  Bancorp's  capital  and  business
plans;  the impact of future economic  events on Bancorp's loan  customers;  and
Bancorp's ability to manage its interest rate risk and investment  portfolio and
control its growth and other operating expenses.


     Effect of Government Monetary Policies

     The  earnings of Bancorp  are and will be  affected  by  domestic  economic
conditions and the monetary and fiscal policies of the United States  government
and its agencies.

     The  monetary  policies of the  Federal  Reserve  Board have had,  and will
likely  continue  to have,  an  important  impact on the  operating  results  of
commercial  banks  through its power to implement  national  monetary  policy in
order, among other things, to curb inflation or combat a recession.  The Federal
Reserve Board has a major effect upon the levels of bank loans,  investments and
deposits  through  its  open  market  operations  in  United  States  government
securities and through its regulations of, among other things, the discount rate
on borrowings of member banks and the reserve  requirements  against member bank
deposits.  It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.


 History and Business - Bank

     The  Bank's  legal  headquarters  are  located on Route  191,  Lake  Ariel,
Pennsylvania.

     As of December 31, 1997, the Bank had total assets of $368.1 million, total
shareholders'  equity of $35.8 million and total deposits and other  liabilities
of $332.3 million.

     The Bank engages in a full-service  commercial banking business,  including
accepting time and demand deposits,  and making secured and unsecured commercial
and consumer loans. The Bank=s business is not seasonal in nature.  Its deposits
are insured by the FDIC to the extent provided by law.

     At December 31, 1997, the Bank had 109 full-time employees and 39 part-time
employees. The Bank is not a party to any collective bargaining agreement.
<PAGE>


     Market Area

     The Bank competes actively with other area commercial banks and savings and
loan associations, many of which are larger than the Bank, as well as with major
regional  banking and financial  institutions  headquartered in Wilkes-Barre and
Scranton,  Pennsylvania. The Bank's major competitors in its market area are, in
alphabetical   order:   Community  Bank  &  Trust  Co.;   Corestates   Financial
Corporation, Philadelphia, Pennsylvania; Fidelity Deposit & Discount Bank; First
National Bank of Jermyn; First National Community Bank; First Union Corporation,
Charlotte,  North  Carolina;  NBO National  Bank;  Penn  Security Bank and Trust
Company;  Pioneer  American Bank, N.A.; PNC Bank, N.A.; and Wayne Bank. The Bank
is  generally  competitive  with all  competing  financial  institutions  in its
service area with respect to interest  rates paid on time and savings  deposits,
service charges on deposit accounts and interest rates charged on loans.


     Supervision and Regulation - Bank

     The  operations  of the Bank are  subject  to  federal  and state  statutes
applicable to banks  chartered  under the banking laws of the United States,  to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC.  Bank  operations  are also  subject to  regulations  of the OCC,  the
Federal Reserve Board and the FDIC.

     The primary  supervisory  authority of the Bank is the OCC, that  regularly
examines the Bank.  The OCC has the authority  under the Financial  Institutions
Supervisory Act to prevent a national bank from engaging in an unsafe or unsound
practice in conducting its business.

     Federal and state banking laws and regulations govern,  among other things,
the scope of a bank=s  business,  the  investments a bank may make, the reserves
against  deposits a bank must  maintain,  loans a bank makes and  collateral  it
takes, the activities of a bank with respect to mergers and  consolidations  and
the  establishment  of  branches.  All banks in  Pennsylvania  are  permitted to
maintain  branch offices in any county of the state.  Branches of national banks
may be established  only after approval by the OCC. The OCC is required to grant
approval  only  if it  finds  that  there  is a need  for  banking  services  or
facilities  such  as are  contemplated  by the  proposed  branch.  The  OCC  may
disapprove  the  application  if the bank does not have the  capital and surplus
deemed necessary by the OCC, or if the application  relates to the establishment
of a branch  in a county  contiguous  to the  county  in which  the  applicant=s
principal place of business is located, and another banking institution that has
its principal place of business in the county in which the proposed branch would
be located, has in good faith,  notified the OCC of its intention to establish a
branch in the same  municipal  location in which the  proposed  branch  would be
located.

     Multi-bank  holding companies are permitted in Pennsylvania  within certain
limitations.  See sections entitled  "Pennsylvania  Banking Law" and "Interstate
Banking and Branching."


<PAGE>


     A  subsidiary  bank  of a  bank  holding  company  is  subject  to  certain
restrictions  imposed by the Federal  Reserve Act on any extensions of credit to
the bank holding  company or its  subsidiaries,  on  investments in the stock or
other  securities of the bank holding company or its  subsidiaries and on taking
such stock or securities as collateral  for loans.  The Federal  Reserve Act and
Federal Reserve Board  regulations also place certain  limitations and reporting
requirements on extensions of credit by a bank to principal  shareholders of its
parent holding company, among others, and to related interests of such principal
shareholders. In addition, such legislation and regulations may affect the terms
upon which any person becoming a principal  shareholder of a holding company may
obtain  credit  from  banks  with  which  the   subsidiary   bank   maintains  a
correspondent relationship.

     Federal  law also  prohibits  acquisitions  of  control  of a bank  holding
company  without  prior notice to certain  federal bank  regulators.  Control is
defined for this purpose as the power, directly or indirectly,  to influence the
management  or  policies  of  the  bank  or  bank  holding  company  or to  vote
twenty-five  percent (25%) or more of any class of voting securities of the bank
holding company.

     From time to time, various types of federal and state legislation have been
proposed that could result in additional  regulations of, and  restrictions  on,
the business of the Bank.  It cannot be predicted  whether any such  legislation
will be adopted or how such  legislation  would affect the business of the Bank.
As a consequence of the extensive regulation of commercial banking activities in
the United  States,  the Bank=s  business is  particularly  susceptible to being
affected by federal  legislation and regulations  that may increase the costs of
doing business.
<PAGE>

     Under the Federal  Deposit  Insurance  Act, the OCC  possesses the power to
prohibit  institutions  regulated by it (such as the Bank) from  engaging in any
activity that would be an unsafe and unsound  banking  practice and in violation
of the law. Moreover,  the Financial  Institutions and Interest Rate Control Act
of 1987 ("FIRA")  generally  expands the  circumstances  under which officers or
directors  of a bank may be removed  by the  institution's  federal  supervisory
agency;  restricts  lending  by a bank  to its  executive  officers,  directors,
principal  shareholders  or  related  interests  thereof;  restricts  management
personnel of a bank from serving as directors in other management positions with
certain depository  institutions whose assets exceed a specified amount or which
have an office within a specified  geographic  area;  and  restricts  management
personnel  from  borrowing  from another  institution  that has a  correspondent
relationship  with their bank.  Additionally,  FIRA  requires that no person may
acquire control of a bank unless the appropriate  federal supervisory agency has
been given 60-days prior written notice and within that time has not disapproved
the acquisition or extended the period for disapproval.

     Under the Bank Secrecy Act  ("BSA"),  the Bank is required to report to the
Internal Revenue Service currency  transactions of more than $10,000 or multiple
transactions  of which the Bank is aware in any one day that aggregate in excess
of $10,000.  Civil and criminal penalties are provided under the BSA for failure
to file a required report, for failure to supply information required by the BSA
or for filing a false or fraudulent report.

     The Garn-St  Germain  Depository  Institutions  Act of 1982  ("1982  Act"),
removes  certain   restrictions  on  the  lending  powers  and  liberalizes  the
depository  abilities of the Bank.  The 1982 Act also amends FIRA (see above) by
eliminating  certain  statutory  limits on  lending  of a bank to its  executive
officers, directors,  principal shareholders or related interests thereof and by
relaxing certain reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank relationships
by management personnel.


     Community Reinvestment Act

     The Community  Reinvestment  Act of 1977,  as amended (the "CRA"),  and the
regulations promulgated to implement the CRA are designed to create a system for
bank  regulatory  agencies  to  evaluate a  depository  institution=s  record in
meeting  the  credit  needs of its  community.  Until  May  1995,  a  depository
institution was evaluated for CRA compliance based upon 12 assessment factors.

     The CRA regulations were completely revised as of May 4, 1995, to establish
new performance-based  standards for use in examining a depository institution=s
compliance  with  the CRA (the  "revised  CRA  regulations").  The  revised  CRA
regulations  establish new tests for evaluating both small and large  depository
institutions'  investment in the community.  A "small bank" is defined as a bank
which has total  assets of less than $250  million and is  independent  or is an
affiliate of a holding company with less than $1 billion in assets.  Pursuant to
the revised CRA  regulations,  a  depository  institution  which  qualifies as a
Asmall bank@ will be examined  under a streamlined  procedure  which  emphasizes
lending  activities.  The  streamlined  examination  procedures for a small bank
became effective on January 1, 1996.

     A large  retail  institution  is one which does not meet the  Asmall  bank@
definition,  above. A large retail institution can be evaluated under one of two
tests: (1) a three-part test evaluating the institution=s  lending,  service and
investment  performance;  or (2) a "strategic  plan" designed by the institution
with  community  involvement  and  approved  by  the  appropriate  federal  bank
regulator.  A large  institution  must choose one of these options prior to July
1997,  but may opt to be examined  under one of these two options  prior to that
time.  Effective  January 1, 1996,  a large retail  institution  that opts to be
examined  pursuant to a strategic plan may submit its strategic plan to the bank
regulators for approval.

     In addition,  the revised CRA regulations  include separate rules regarding
the  manner in which  Awholesale  banks@ and  Alimited  purpose  banks@  will be
evaluated for compliance.

     The new CRA regulations  were phased in over a two-year  period,  beginning
July 1, 1995, with a final effective date of July 1, 1997.  Until the applicable
test was phased in, institutions were examined under the prior CRA regulations.
<PAGE>

     On December 27, 1995, the federal banking  regulators  issued a joint final
rule   containing   technical   amendments  to  the  revised  CRA   regulations.
Specifically,  the recent  technical  amendments  clarify the various  effective
dates in the revised CRA regulations, correct certain cross references and state
that once an institution  becomes subject to the requirements of the revised CRA
regulations,  it must comply  with all  aspects of the revised CRA  regulations,
regardless  of the  effective  date of certain  provisions.  Similarly,  once an
institution is subject to the revised CRA regulations, the prior CRA regulations
do not apply to that institution.

     For the purposes of the revised CRA regulations, the Bank is deemed to be a
large depository  institution,  based upon financial  information as of December
31, 1997. In the future, the Bank will be evaluated for CRA compliance using the
three-part, performance-based test. The Bank had a CRA Compliance examination in
1996  and  received  a  "satisfactory"  rating.  The  Bank  did  not  have a CRA
compliance examination in 1997.


     Concentration


     Bancorp and the Bank are not  dependent  for  deposits  nor exposed by loan
concentrations to a single customer or to a small group of customers the loss of
any one or more of which would have a materially adverse effect on the financial
condition of Bancorp or the Bank.


     Business - LA Lease, Inc.

     The principal office of LA Lease, Inc. is located at Route 191, Lake Ariel,
Pennsylvania 18436 (the Lake Ariel branch of the Bank).

     As of December 31, 1997,  LA Lease,  Inc. had total assets of $3.2 million,
total  shareholders'  equity  of $100  thousand  and other  liabilities  of $3.1
million.

     LA Lease, Inc.  provides  financing to consumers and businesses in the form
of vehicle and equipment leases.  The business of LA Lease, Inc. is not seasonal
in nature.


     Business - Ariel Financial Services, Inc.

     The principal office of Ariel Financial Services,  Inc. is located at Route
191, Lake Ariel, Pennsylvania 18436 (the Lake Ariel branch of the Bank).

     This  subsidiary of LA Bank was  incorporated  on July 11, 1997, to deliver
non-depository  investment and annuity  products to the customers of LA Bank. As
of December 31, 1997, Ariel Financial  Services,  Inc. had no material assets or
liabilities.

<PAGE>

Item 2.           Properties

     Bancorp  owns or  leases  no  properties,  except  through  the  Bank.  The
following is selective information about the Bank's properties:

                                   Type of      Square
Property        Location           Ownership    Footage       Use

   1      Route 191                    Own      3,000  Banking services and
          Lake Ariel, PA                               Main Office

   2      Route 191                    Own      1,800  Greene-Dreher branch
          Newfoundland, PA

   3      Routes 191 and 590           Own      2,900  Hamlin Corners branch
          Hamlin, PA

   4      Routes 247 and 348           Own      2,400  Mt. Cobb branch
          Lake Ariel, PA

   5      Route 6                      Own      2,800  Eynon branch
          Scranton-Carbondale
          Highway

   6      Keyser Avenue                Own      3,000  Keyser Valley branch
          Scranton, PA

   7      The Mall at Steamtown        Lease    1,867  Steamtown branch
          Lackawanna Avenue
          Scranton, PA

   8      East Grove Street &          Own      3,000   Clarks Green branch
          South Abington Road
          Clarks Green, PA

   9      Route 6                      Lease    5,535   Carbondale branch
          Ames Shopping Plaza

  10      Routes 6 and 209             Own     11,000   Milford Township branch
          Milford, PA

  11      Route 739                    Lease    1,250   Lords Valley branch
          Lords Valley Shopping Plaza

  12      HC6 Box 6931                 Lease    2,600   Lake Wallenpaupack
          Hawley, PA                                     Branch

  13      214 W. Harford Street        Own     10,350   Milford Branch
          Milford, PA

  14      Route 390-Barrett Township   Own      3,700   Mountainhome Branch
          Mountainhome, PA

  15      409 Lackawanna Avenue        Lease      670   Scranton Branch
          Scranton, PA

  16      409 Lackawanna Avenue        Lease   20,800   Financial Center
          Suite 201
          Scranton, PA

  17      Keyser Avenue                Own      7,500   Commercial Rental Prop.
          Scranton, PA
<PAGE>


     For  information  with respect to obligations  for lease rentals,  refer to
Note 5 of the Notes to  Consolidated  Financial  Statements in Bancorp=s  Annual
Report  filed at  Exhibit  13 hereto  and is  incorporated  in its  entirety  by
reference.  The branches that are under lease have  customary  commercial  lease
options to extend the terms of the applicable lease.

     It is  management=s  opinion  that the  facilities  currently  utilized are
suitable and adequate for current and immediate future purposes.


Item 3.   Legal Proceedings

     General

     The nature of Bancorp=s and the Bank=s business  generates a certain amount
of  litigation  involving  matters  arising in the ordinary  course of business.
However,  in the opinion of  management  of Bancorp  and the Bank,  there are no
proceedings  pending to which Bancorp and the Bank are a party or to which their
property is subject,  which,  if  determined  adversely to Bancorp and the Bank,
would be material in relation to Bancorp=s and the Bank=s  undivided  profits or
financial  condition,  nor are there any proceedings pending other than ordinary
routine  litigation  incident  to the  business  of  Bancorp  and the  Bank.  In
addition,  no material  proceedings are pending or are known to be threatened or
contemplated against Bancorp and the Bank by government authorities or others.

     Environmental Issues

     There are several federal and state statutes that govern the obligations of
financial  institutions  with respect to  environmental  issues.  Besides  being
responsible  under such  statutes for its own  conduct,  a bank also may be held
liable  under  certain  circumstances  for actions of  borrowers  or other third
parties on properties that collateralize  loans held by the bank. Such potential
liability  may far  exceed  the  original  amount  of the loan made by the bank.
Currently,  the Bank is not a party to any pending legal  proceedings  under any
environmental  statue nor is the Bank aware of any  circumstances  that may give
rise to liability of them under any such statute.






<PAGE>




                                     Part II


Item 5.           Market for the Common Equity and Related Stockholder Matters

     The Company's  common stock has been listed on the Nasdaq  National  Market
since  November  21, 1997,  and was  previously  listed on the Nasdaq  Small-Cap
Market  since  December  9, 1993.  "The  Nasdaq  Stock  Market" or "Nasdaq" is a
highly-regulated  electronic  securities  market  comprised of competing  Market
Makers whose trading is supported by a  communications  network  linking them to
quotation  dissemination,  trade reporting,  and order execution  systems.  This
market  also  provides   specialized   automation   services  for   screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational  services  tailored  to  the  needs  of the  securities  industry,
investors and issuers.  The Nasdaq Stock Market  consists of two distinct market
tiers:  the Nasdaq  National  Market(R) and the Nasdaq SmallCap  MarketsSM.  The
Nasdaq Stock Market is operated by the Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National  Association of Securities  Dealers,  Inc. The Nasdaq
National Market symbol for the Company's common stock is "LABN." At December 31,
1997,   the  total  number  of  holders  of  record  of  the  common  stock  was
approximately 1200.

     The table  below  presents  the high and low bid  prices  reported  for the
Common  Stock  and the cash  dividends  declared  on such  Common  Stock for the
periods  indicated.  The range of high and low  prices is based on trade  prices
reported on the Nasdaq Small-Cap Market,  except for the fourth quarter of 1997.
Market quotations reflect inter-dealer prices, without retail mark-up, markdown,
or commission, and may not necessarily reflect actual transactions.  On December
31,  1997,  the closing  price of share of Common  Stock on the Nasdaq  National
Market was $17.75. All prices and dividends have been restated to reflect the 5%
stock dividends paid in October 1997 and 1996, and the  two-for-one  stock split
effective on November 10, 1997.

 Year     Quarter   High      Low       Dividends Declared

1997      4th     $ 22.00   $13.90    $0.13
          3rd       14.05     9.50     0.09
          2nd        9.75     9.50     0.08
          1st       11.30     9.75     0.08

1996      4th     $ 12.15  $  7.5    $ 0.11
          3rd        8.20     7.20     0.08
          2nd        7.60     6.45     0.08
          1st        7.70     6.70     0.08

1995      4th        6.80     6.70     0.09
          3rd        7.60     6.25     0.07
          2nd        7.50     7.15     0.06
          1st        7.95     7.40     0.06


     As of March 17,  1998,  Bancorp  had  approximately  1400  shareholders  of
record.

     Since 1983, Bancorp has paid cash dividends. It is the present intention of
Bancorp=s Board of Directors to continue the dividend  payment policy,  although
the payment of future dividends must necessarily depend upon earnings, financial
condition,  appropriate  restrictions  under  applicable  law and other  factors
relevant  at the time the  Board  of  Directors  considers  any  declaration  of
dividends.  Cash available for the payment of dividends must initially come from
dividends paid by the Bank to Bancorp. Therefore, the restrictions on the Bank=s
dividend payments are directly applicable to Bancorp.


     Dividend Restrictions on the Bank

     The OCC has issued  rules  governing  the payment of  dividends by national
banks.  Consequently,  the Bank  (which is subject  to these  rules) may not pay
dividends from capital  (unimpaired  common and preferred stock outstanding) but
only from retained earnings after deducting losses and bad debts therefrom. ABad
debts@ are  defined as matured  obligations  in which  interest  is past due and
unpaid for ninety (90) days, but do not include  well-secured  obligations  that
are in the process of collection.

     Previously, the Bank was permitted to add the balances in its allowance for
possible credit and lease losses in determining retained earnings, but the OCC=s
new regulations prohibit that practice. However, to the extent that (1) the Bank
has capital surplus in an amount in excess of common capital and (2) if the Bank
can prove that such surplus resulted from prior period earnings,  the Bank, upon
approval  of the OCC,  may  transfer  earned  surplus to retained  earnings  and
thereby increase its dividend paying capacity.

     If, however, the Bank has insufficient retained earnings to pay a dividend,
the OCC's  regulations allow the Bank to reduce its capital to a specified level
and to pay dividends  upon receipt of the approval of the OCC as well as that of
the holders of two thirds of the outstanding shares of the Common Stock.

     The Bank is allowed to pay  dividends no more  frequently  than  quarterly.
Moreover,  the Bank must obtain the OCC=s  approval  before paying a dividend if
the total of all  dividends  declared  by the Bank in any  calendar  year  would
exceed  the  total of (1) the  Bank=s  net  profits  for that  year plus (2) its
retained  net  profits  for the  immediately  preceding  two years  less (3) any
required transfers to surplus or a fund for the retirement of preferred stock.

     The Bank may not pay any  dividends on its capital  stock during the period
in which it may be in  default  in the  payment of its  assessment  for  deposit
insurance  premium due to the FDIC,  nor may it pay  dividends  on Common  Stock
until any cumulative  dividends on the Bank=s preferred stock (if any) have been
paid in  full.  The  Bank has  never  been in  default  in the  payments  of its
assessments to the FDIC; and,  moreover,  the Bank has no outstanding  preferred
stock. In addition, under the Federal Deposit Insurance Act, dividends cannot be
declared  and paid if the OCC  obtains a cease and  desist  order  because  such
payment would constitute an unsafe and unsound banking practice.  As of December
31,  1997,  there was $3.9  million in  unrestricted  retained  earnings and net
income  available at the Bank that could be paid as a dividend to Bancorp  under
the current OCC regulations.
<PAGE>


     Dividend Restrictions on Bancorp

     Under the  Pennsylvania  Business  Corporation Law of 1988, as amended (the
"BCL"),  Bancorp may not pay a dividend if, after giving effect thereto,  either
(a)  Bancorp  would be unable to pay its debts as they  become  due in the usual
course of business or (b)  Bancorp=s  total  assets would be less than its total
liabilities.  The  determination  of total assets and  liabilities  may be based
upon:  (i)  financial  statements  prepared on the basis of  generally  accepted
accounting principles;  (ii) financial statements that are prepared on the basis
of other  accounting  practices and  principles  that are  reasonable  under the
circumstances;  or (iii) a fair  valuation  or other  method that is  reasonable
under the circumstances.


Item 6.           Selected Financial Data

     The information  called for by this item is filed at Exhibit 99A hereto and
is incorporated in its entirety by reference under this Item 6.


Item 7.           Management's  Discussion  and Analysis of Financial  Condition
                  and Results of Operation

     The caption  "Management's  Discussion and Analysis"  contained in excerpts
from Bancorp=s Annual Report  (beginning at page 13 thereto) filed at Exhibit 13
hereto is incorporated in its entirety by reference under this Item 7.


<PAGE>

Item 7A.          Quantitative and Qualitative Disclosures About Market Risk

     The caption "Interest Rate Risk Management"  contained in the "Management's
Discussion and Analysis"  section of Bancorp's Annual Report  (beginning at page
24  thereto)  filed at  Exhibit 13 hereto is  incorporated  in its  entirety  by
reference under this Item 7A.


Item 8.                    Financial Statements and Supplementary Data

     Bancorp's  Consolidated Financial Statements and notes thereto contained in
excerpts from  Bancorp's  Annual Report  (beginning at page 38 thereto) filed at
Exhibit 13 hereto are  incorporated  in their  entirety by reference  under this
Item 8.

                                    Part III


Item 10.          Directors and Executive Officers of the Registrant

     The  following  table  contains  certain  information  with  respect to the
nominees and the directors  whose terms of office expire in 1998, 1999 and 2000,
respectively.

                              Principal Occupation               Director Since
Name                Age       for Past Five Years              Corporation/Bank

Class 1 Directors Whose Term Expires In 1998 And
Nominees For Class 1 Director Whose Term Expires in 2001

Donald E. Chapman   61       Self-employed insurance broker and  1983/1972
(1)(2)(4)(6)(7)               real estate developer

Paul D. Horger      60       Partner in the Law Firm of Oliver,  1998/1997
(3)(5)(7)                     Price & Rhodes

William C. Gumble   60       Retired Attorney-at-law             1985/1985
3)(4)(5)(6)(7)

Class 1 Director Whose Term Expires In 1998

Arthur M. Davis     70       President of the Lake Ariel         1983/1969
(3)(5)(8)                     Hardware & Supply Co., Inc.

Class 3 Directors Whose Term Expires In 1999

John G. Martines    51       President of the Bank and Chief     1983/1979
(1)(3)(5)(7)                  Executive Officer of the Corporation

Harry F. Schoenagel 62       Partner of Schoenagel and Schoenagel  1985/1985
(1)(2)(6)(7)                  (general civil engineering and surveying)

Class 2 Directors Whose Term Expires In 2000

Bruce D. Howe       66       President of John T. Howe, Inc.
 (3)(4)(5)                    (a company                         1983/1977
                              that operates local fuel and heating oil
                              companies, a motel and an interstate truck
                              stop) and President of Howe's Twin Rocks,
                              Inc. (a local restaurant).

Peter O. Clauss     68       Retired; Former President of C & D  1988/1988
(1)(2)                        Builders Inc. (construction of residential
                              and light commercial buildings)

--------------------
(1)      Member of the Loan Review Committee of the Bank. This committee reviews
         past due and classified loans and actions to be taken.  Moreover,  this
         committee  determines  the  adequacy  of the loan loss  reserve and the
         amount to be charged for the  provision of loan losses.  The  committee
         met four (4) times in 1997.
(2)      Member of the Audit Committee of the Bank.  This committee  reviews the
         reports of the auditors and the results of  examinations by the Federal
         Reserve System and  Comptroller of the Currency.  This committee  makes
         recommendations  to the Board  based upon a review of the  reports  and
         regulatory examinations. This committee met four (4) times in 1997.
(3)      Member of the  Asset/Liability  Management  Committee of the Bank. This
         committee reviews quarterly the  asset/liability  management report and
         the  investment   portfolio.   In  addition,   this  committee  reviews
         strategies  for GAP  analysis,  liquidity,  tax  position  and  various
         profitability  ratios.  Moreover,  this  committee  determines  product
         pricing and  development,  and  budgeting.  This committee met four (4)
         times in 1997.
(4)      Member of the Executive  Committee of the Bank. This committee  reviews
         annually  the profit  sharing and benefit  plans of the Bank as well as
         salaries and  promotions.  The committee makes  recommendations  to the
         Board of  Directors  of the Bank on  changes  in the  employee  benefit
         plans,  compensation,  promotions  and the  contribution  to the profit
         sharing plan. This committee also reviews non-personnel matters such as
         bank expansion and profitability. This committee met two (2) in 1997.
(5)      Member of the Loan  Committee  of the  Bank.  This  committee  meets to
         consider and  recommend  approval of loans in the  principal  amount of
         $100,000 or more.  Directors  receive no  additional  compensation  for
         attendance  at  meetings  of  this   committee.   This   committee  met
         twenty-four (24) times in 1997.
(6)      Member of  Benefit/Compensation  Committee of the Bank.  This committee
         meets to perform on annual  review of executive  salary  increases  and
         executive  stock option  grants.  This  committee  met two (2) times in
         1997.
(7)  Member of 401(k)  Committee  of the Bank.  This  committee  meets to review
     semi-annual  investment  results of plan funds, makes  recommendations  and
     changes  to  available  investment  options,  reviews  IRS  and  DOL  legal
     participation,  discrimination and other issues, and recommends annual Bank
     contributions to plan. This committee met two (2) times in 1997.
(8)  Mr. Davis has reached the mandatory  retirement age and will  automatically
     no longer be a member of the Board of Directors as of April 27, 1998.

     During  1997,  the  Board  of  Directors  of the  Corporation  held six (6)
meetings.  Directors  received no  additional  remuneration  for  attendance  at
meetings of the Board of Directors of the Corporation.




<PAGE>



     Each of the Directors attended at least 75% of the combined total number of
meetings  of  the  Corporation's  and  Bank's  Board  of  Directors  and  of the
committees on which they serve.

     The Board of  Directors  of the  Corporation  has at  present  no  standing
committees.  The Corporation does not have a nominating committee. A shareholder
who desires to propose an individual for consideration by the Board of Directors
as a nominee for director  should  submit a proposal in writing to the Secretary
of the Corporation in accordance with Section 202 of the Corporation's By-laws.

     On January 3, 1997, Mr. Martines  voluntarily entered into a consent decree
with respect to a complaint  filed by the SEC in connection with the purchase by
Mr. Martines of securities of First Eastern  Corporation ("First Eastern") prior
to the  announcement  by PNC Bank Corp.  ("PNC") that PNC would  purchase  First
Eastern. The complaint alleged that Mr. Martines purchased such securities based
upon information given to him by a director of First Eastern.  In order to avoid
the costs of pursuing a successful  defense and upon advice of his counsel,  Mr.
Martines  agreed to enter into such consent decree without  admitting or denying
any of the allegations in the SEC's complaint.

     The Board of  Directors  considered  this  matter and  concluded  that this
action by Mr. Martines had no effect on his ability to  successfully  manage the
Corporation  and the Bank and had no  detrimental  effect on the  short-term and
long-term prospects of the Corporation and the Bank.


     Principal Officers of the Corporation

     The following  table sets forth  selected  information  about the principal
officers of the Corporation,  each of whom is selected by the Board of Directors
and each of whom holds office at the discretion of the Board of Directors:


                                             Bank      Number    Age as of
                                   Held      Employee  of Shares March 17, 1998
Name                               Since     Since     Beneficially
                                                       Owned(1)
Bruce D. Howe, President            1983     (2)       376,428        66

John G. Martines, Chief             1983     (3)       199,984        51
Executive Officer

Donald E. Chapman, Secretary        1983     (2)       125,589        61

Louis M. Martarano, Vice            1989     (3)       81,938         47
President and Assistant Secretary

Joseph J. Earyes, Vice President    1995     (3)       40,427         41
and Treasurer

-------------------------
(1)  See notes under the caption  "Beneficial  Ownership by Officers,  Directors
     and Nominees" for shareholdings of these officers.
(2)  Messrs. Howe and Chapman are not employees of the Corporation.
(3)  Messrs. Martines, Martarano, and Earyes are full-time salaried employees of
     the Bank.

     Principal Officers of the Bank

     The following  table sets forth  selected  information  about the principal
officers of the Bank,  each of whom is elected by the Board of  Directors of the
Bank and each of whom holds office at the  discretion  of the Board of Directors
of the Bank:
<TABLE>
<CAPTION>

                                                                 Bank      Number        Age as of
                                                       Held     Employee   of Shares      March 17,
Name                     Office/Position with Bank     Since     Since     Owned          1998
<S>                      <C>                           <C>       <C>       <C>            <C>

Bruce D. Howe             Chairman of the Board          1986     (1)      376,428        66

John G. Martines          President and CEO              1986   1979       199,984        51

Louis M. Martarano        Executive Vice President and   1990   1981       81,938         47
                              Chief Operating Officer

Joseph J. Earyes          Executive Vice President and   1995   1995       40,427         41
                              Chief Financial Officer

Donald E. Chapman         Secretary                      1983     (1)      125,589        61
<FN>

----------------------------
(1)      Mr. Howe and Mr. Chapman are not  employees of the Bank.
(2)      See  notes  under  the  caption  "Beneficial   Ownership  by  Officers,
         Directors and Nominees" for shareholdings of these officers.
</FN>
</TABLE>


     Section  16(a)  of  the  Securities  Exchange  Act  of  1934  requires  the
Corporation=s officers and directors,  and persons who own more than ten percent
of a registered class of the  Corporation=s  equity securities (in this case the
Corporation=s  Common  Stock),  to file  reports  of  ownership  and  changes in
ownership  with  the SEC.  Officers,  directors  and  greater  than  ten-percent
shareholders  are required by SEC  regulation  to furnish the  Corporation  with
copies of all Section 16(a) forms that they file.

     Based  solely on its review of the copies of such forms  received by it, or
written  representations  from  certain  reporting  persons that no Forms 5 were
required for those persons,  the  Corporation  believes that,  during the period
January 1, 1997 through December 31, 1997, all filing requirements applicable to
its officers,  directors and greater than ten-percent shareholders were complied
with.


<PAGE>



Item 11.          Executive Compensation

     The following table sets forth the total  compensation  for services in all
capacities paid by the Corporation and the Bank during 1997,  1996, and 1995, to
the  Corporation's  Chief  Executive  Officer  and  the  Bank's  President,  the
Corporation's  Vice President and the Bank's  Executive Vice President and Chief
Operating  Officer,  the  Corporation's  Vice President and the Bank's Executive
Vice President and Chief Financial Officer.  No other executive officer's annual
salary and bonus exceeded  $100,000 for the years presented and therefore is not
required to be presented.

                           SUMMARY COMPENSATION TABLE

<TABLE>

<CAPTION>

                                                              Annual Compensation


Name and                           Fiscal                        Other Annual   Securities     All Other
Principal Position                 Year      Salary    Bonus     Compensation   Underlying   Compensation
                                             ($)       ($)       ($)            Options/         ($)
                                                                                SARs(#)
------------------------------------------------------------------------------------------------------------------
<S>                                 <C>       <C>      <C>     <C>           <C>              <C>

John G. Martines (President of the   1997   168,461   78,312   72,587            -             25,963(3)
Bank and Chief Executive Officer     1996   157,972   44,000   25,564            -             22,612(5)
of the Corporation)                  1995   138,007   35,000   26,108       88,200(2)          19,498(7)


Louis M. Martarano (Executive        1997   112,249   34,625   21,253            -             23,189(9)
Vice President and Chief             1996   109,056   20,000    4,260            -             19,602(11)
Operating Officer of the Bank and    1995    97,154   13,500    8,796       33,075(2)          15,013(13)
Vice President of the Corporation)

Joseph J. Earyes (Executive Vice
President and Chief Financial        1997    93,903   31,250   15,205            -             20,569(15)
Officer of the Bank and Vice         1996    87,521   16,000    6,147            -             16,225(17)
President and Treasurer of the       1995    70,207    6,500    4,345       22,050(2)          11,398(19)
Corporation)
<FN>


(1)      Includes  $4,606 paid on behalf of Mr. Martines for periodic club dues;
         $12,000 paid to Mr. Martines for directors' fees;  $3,986 paid pursuant
         to  the  Salary   Continuation  Plan;  $48,447  paid  pursuant  to  the
         Supplemental  Executive  Retirement  Plan and $3,548  representing  the
         personal use value of a company-owned automobile.
(2)      For further  information  on these stock  options,  see "Stock  Option
         Plan" below.
(3)      Of the $25,963 paid to Mr. Martines in 1997 as All Other  Compensation,
         $3,658  and  $4,755  was  for  life  and  medical  insurance  premiums,
         respectively;  and  $17,550  was  accrued  by the  Corporation  for the
         benefit of Mr.
         Martines pursuant to a profit-sharing retirement plan.
(4)      Includes  $6,825 paid on behalf of Mr. Martines for periodic club dues;
         $12,000 paid to Mr. Martines for directors' fees;  $3,440 paid pursuant
         to the Salary  Continuation Plan; and $3,299  representing the personal
         use value of a company-owned automobile.
(5)      Of the $22,612 paid to Mr. Martines in 1996 as All Other  Compensation,
         $2,632  and  $3,230  was  for  life  and  medical  insurance  premiums,
         respectively;  and  $16,750  was  accrued  by the  Corporation  for the
         benefit of Mr.
         Martines pursuant to a profit-sharing/401(k) plan.
(6)      Includes $6,148 paid on behalf of Mr. Martines for initial and periodic
         club dues;  $12,000 paid to Mr.  Martines for directors'  fees;  $4,791
         paid pursuant to the Salary  Continuation Plan; and $3,169 representing
         the personal use value of a company-owned automobile.
<PAGE>

(7)      Of the $19,498 paid to Mr. Martines in 1995 as All Other  Compensation,
         $2,098  and  $3,888  was  for  life  and  medical  insurance  premiums,
         respectively;  and  $13,512  was  accrued  by the  Corporation  for the
         benefit of Mr.
         Martines pursuant to a profit-sharing/401(k) plan.
(8)      Includes $1,640 paid on behalf of Mr. Martarano for periodic club dues;
         $17,171 paid pursuant to the  Supplemental  Executive  Retirement Plan;
         and  $2,442  representing  the  personal  use value of a  company-owned
         automobile.
(9)      Of the $23,189 paid to Mr. Martarano in 1997 as All Other Compensation,
         $1,987  and  $5,046  was  for  life  and  medical  insurance  premiums,
         respectively;  and  $16,156  was  accrued  by the  Corporation  for the
         benefit of Mr.
         Martarano pursuant to a profit-sharing retirement plan.
(10)     Includes $1,852 paid on behalf of Mr. Martarano for periodic club dues
         and $2,408  representing  the  personal  use value of a  company-owned
         automobile.
(11)     Of the $19,602 paid to Mr. Martarano in 1996 as All Other Compensation,
         $1,448  and  $3,886  was  for  life  and  medical  insurance  premiums,
         respectively;  and  $14,268  was  accrued  by the  Corporation  for the
         benefit of Mr. Martarano pursuant to a profit-sharing/401(k) plan.
(12)     Includes  $6,500  paid on  behalf of Mr.  Martarano  for  initial  and
         periodic club dues and $2,296 representing the personal use value of a
         company-owned automobile.
(13)     Of the $15,013 paid to Mr. Martarano in 1995 as All Other Compensation,
         $1,022  and  $4,281  was  for  life  and  medical  insurance  premiums,
         respectively; and $9,710 was accrued by the Corporation for the benefit
         of Mr. Martarano pursuant to a profit-sharing/401(k) plan.
(14)     Includes  $4,200 paid on behalf of Mr.  Earyes for periodic  club dues,
         $9,100 paid pursuant to the Supplemental Executive Retirement Plan; and
         $1,905   representing   the  personal  use  value  of  a  company-owned
         automobile.
(15)     Of the $20,569  paid to Mr.  Earyes in 1997 as All Other  Compensation,
         $1,757  and  $5,046  was  for  life  and  medical  insurance  premiums,
         respectively;  and  $13,766  was  accrued  by the  Corporation  for the
         benefit of Mr.
         Earyes pursuant to a profit-sharing/401(k) plan.
(16)     Includes  $4,317 paid on behalf of Mr.  Earyes for periodic  club dues
         and $1,830  representing  the  personal  use value of a  company-owned
         automobile.
(17)     Of the $16,225  paid to Mr.  Earyes in 1996 as All Other  Compensation,
         $747  and  $4,036  was  for  life  and  medical   insurance   premiums,
         respectively;  and  $11,442  was  accrued  by the  Corporation  for the
         benefit of Mr.
         Earyes pursuant to a profit-sharing/401(k) plan.
(18)     Includes  $3,580 paid on behalf of Mr.  Earyes for periodic  club dues
         and $765  representing  the  personal  use  value  of a  company-owned
         automobile.
(19)     Of the $11,398  paid to Mr.  Earyes in 1995 as All Other  Compensation,
         $406  and  $4,280  was  for  life  and  medical   insurance   premiums,
         respectively; and $6,712 was accrued by the Corporation for the benefit
         of Mr. Earyes pursuant to a profit-sharing/401(k) plan.
</FN>
</TABLE>


     Directors' Compensation

     During  1997,  the  Bank's  Board  of  Directors  met on a  monthly  basis;
Directors  received $1,000 per month and were allowed one paid absence per year;
and Bruce D. Howe,  the  Chairman,  received  $500 in  addition  to his  monthly
Directors= fee of $1,000 or $1,500 per month in the aggregate. Mr. Howe was also
allowed  one paid  absence  per  year  from a  meeting  of the  Bank=s  Board of
Directors.  During 1997, the Board of Directors of the Corporation  held six (6)
meetings.  Directors  received no remuneration for attendance at meetings of the
Board of Directors of the  Corporation  in excess of  remuneration  each of them
received for attendance at meetings of the Board of Directors of the Bank.








<PAGE>






Item 12.          Security Ownership of Certain Beneficial Owners and Management

                  Principal Beneficial Owners of the Corporation's Stock

                  Principal Owners

                  The following table sets forth, as of March 17, 1998, the name
and  address  of each  person who owns of record or who is known by the Board of
Directors  to be the  beneficial  owner of more  than five  percent  (5%) of the
Corporation's  outstanding Common Stock, the number of shares beneficially owned
by such person and the percentage of the Corporation's  outstanding Common Stock
so owned.


                                                  Percent of Outstanding
                         Shares Beneficially      Common Stock
Name and Address         Owned (1)                Beneficially Owned

Bruce D. Howe(2)         376,428                  8.3%
R.D. #6, Box 6332
Lake Ariel, PA 18436

-------------------------
(1)      The securities  "beneficially owned" by an individual are determined in
         accordance with the definitions of "beneficial  ownership" set forth in
         the  General  Rules and  Regulations  of the  Securities  and  Exchange
         Commission  ("SEC")  and may  include  securities  owned  by or for the
         individual's  spouse and minor  children and any other relative who has
         the same home,  as well as securities  to which the  individual  has or
         shares  voting  or  investment  power  or  has  the  right  to  acquire
         beneficial  ownership  within 60 days after March 17, 1998.  Beneficial
         ownership may be disclaimed as to certain of the securities.
(2)      Of the 376,428 shares  beneficially owned by Bruce D. Howe, 244,716 are
         owned by him  individually;  127,902 are owned jointly with his spouse;
         and 3,810 are owned individually by his spouse.


     Beneficial Ownership by Officers, Directors and Nominees

     The  following  table  sets  forth as of March 17,  1998,  the  amount  and
percentage  of the Common Stock of the  Corporation  beneficially  owned by each
director,  each nominee,  each executive officer, and all officers and directors
of the Corporation as a group.

<PAGE>


Name of Individual            Amount and Nature of               Percent
or Identity of Group          Beneficial Ownership(1)(2)         of Class
------------------------------------------------------------------------------
Donald E. Chapman(3)(4)             125,589                      2.8%
Peter O. Clauss(5)(6)                53,999                      1.2%
Arthur M. Davis (15)(16)             75,920                      1.7%
Joseph J. Earyes(8)                  40,427                      0.9%
William C. Gumble(3)(9)             113,702                      2.5%
Paul D. Horger(3)(7)                 10,044                      0.2%
Bruce D. Howe(5)(10)                376,428                      8.3%
Louis M. Martarano(11)               81,938                      1.8%
John G. Martines(12)(13)            199,984                      4.2%
Harry F. Schoenagel(12)(14)          87,052                      1.9%

All Officers and Directors
as a Group (7 directors,
5 officers, 9 persons in total)   1,165,083                      24.3%

----
(1)  See footnote (1) under the caption entitled "Principal Owners" for the
     definition of "beneficial ownership."
(2)  Information furnished by the directors and the Corporation.
(3)  Nominees  for Class 1  Director  Whose  Term  Will  Expire in 2001 and
     current Class 1 Directors Whose Term Expires in 1998.
(4)  Of the 125,589 shares  beneficially owned by Donald E. Chapman,  36,288
     are  owned by him  individually;  79,594  are  owned  jointly  with his
     spouse;  5,782  are held  individually  by his  spouse;  2,524 are held
     jointly with his son; and 1,401 shares are held individually by his son
     who has the same home.
(5)  A Class 2 Director Whose Term Expires in 2000.
(6)  Of the 53,999 shares beneficially owned by Peter O. Clauss, 19,231 are
     held by him individually;  27,188 are owned jointly with his wife; and
     7,580 are owned individually by his spouse.
(7)  All shares are held individually.
(8)  Of the 40,427 shares beneficially owned by Joseph J. Earyes, 13,117 are
     owned by him individually;  3,376 are held jointly with his spouse; and
     23,934  shares may be  acquired  at any time by the  exercise  of stock
     options.
(9)  All shares are held individually.
(10) See  footnote  (2) under the caption  entitled  "Principal  Owners" for the
     definition of  "beneficial  ownership."
(11) Of the 81,938 shares  beneficially  owned by Louis M. Martarano,  2,482 are
     owned by him  individually;  20,090 are owned jointly with his wife;  1,751
     shares held as custodian for his two sons;  237 shares as custodian for his
     daughter;  and 57,378 shares may be acquired at any time by the exercise of
     stock options.
(12) A Class 3 Director Whose Term Expires in 1999.
(13) Of the 199,984 shares  beneficially  owned by John G. Martines,  16,284 are
     owned by him individually;  23,600 are held jointly with his spouse; 13,430
     are held individually by his spouse;  and 146,670 shares may be acquired at
     any time by the exercise of stock options.
(14) Of the 87,052 shares beneficially owned by Harry F. Schoenagel,  33,681 are
     owned by him  individually;  6,614 are owned  jointly with his spouse;  and
     46,757 are owned by his spouse individually.
(15) A Class 1 Director whose term expires in 1998.
(16) Of the 75,920  shares  beneficially  owned by Arthur M.  Davis,  33,524 are
     owned by him  individually;  37,414 are owned jointly with his wife;  1,756
     are owned by his  spouse;  and 3,226 are  owned by Lake  Ariel  Hardware  &
     Supply Co., Inc., of which Mr. Davis is President.
<PAGE>

Item 13.          Certain Relationships and Related Transactions

     Paul D.  Horger is a  current  Class 1  director  and  nominee  for Class 1
director.  Mr. Horger is a partner in the law firm of Oliver,  Price & Rhodes of
Scranton, Pennsylvania.  During 1997, the Bank engaged Oliver, Price & Rhodes to
represent it on various legal matters.  In addition,  customers of the Bank paid
fees to Oliver,  Price & Rhodes in connection with commercial loan  transactions
and mortgage  foreclosures  involving the Bank. In 1997, Oliver,  Price & Rhodes
received $123,952.22 in fees on such matters involving the Bank. The Corporation
and the Bank intend,  during 1998, to continue to engage Oliver,  Price & Rhodes
in such legal matters as they arise.

     Except as described above,  there have been no material  transactions since
January 1, 1997, nor are any such transactions  currently proposed, to which the
Corporation  or the Bank was or is to be a party  and in which any  director  or
executive officer of the Corporation, or any beneficial owner of more than 5% of
the Common Stock of the  Corporation (or any associate  thereof,  respectively),
had or will have a material interest.  The Corporation and the Bank have had and
intend to continue to have banking and  financial  transactions  in the ordinary
course of business with directors and executive  officers of the Corporation and
the Bank and their  respective  associates on comparable  terms and with similar
interest rates as those  prevailing  from time to time for other  non-affiliated
customers of the  Corporation  and the Bank.  Total loans  outstanding  from the
Corporation  and the Bank,  at December 31, 1997, to the  Corporation's  and the
Bank's officers and directors as a group and members of their immediate families
and  companies  in  which  they  had an  ownership  interest  of 10% or more was
$996,000  million or 2.8% of the  Bank's  total  equity  capital  accounts.  The
largest amount of  indebtedness  outstanding at any time during fiscal year 1997
to the above  identified  group was $1.2  million  or 3.4% of the  Bank's  total
equity capital accounts.  Such loans do not involve more than the normal risk of
collectibility nor do they present other unfavorable features.






<PAGE>



Item 14.          Exhibits and Reports on Form 8-K

(a)  Exhibits required by Item 601 of Regulation S-K:

Exhibit Number
Referred to
Item 601 of
Regulation S-K   Description of Exhibit

     2    None.
     3A   Amended  Articles of  Incorporation  of Bancorp filed at Exhibit 3A on
          March 25, 1988 and March 24,  1993,  to Forms 10-K for the fiscal year
          ended December 31, 1987 (No. 2-85306), and 10-KSB for the period ended
          December 31, 1992 (No. 2-85306), respectively, and hereby incorporated
          by reference. Photocopy of the Articles of Amendment of Bancorp, dated
          August 18, 1993, to effect, among other things, a 3-for-1 stock split,
          filed at Exhibit 3A on September 3, 1993,  to Form S-1 (No.  33-68470)
          and hereby incorporated by reference.
     3B   Amended  By-laws of Bancorp filed on March 25, 1988, at Exhibit 3B, to
          Form 10-K for the fiscal year ended  December 31, 1987 (No.  2-85306),
          and hereby incorporated by reference.
     4    None.
     9    None.
     10A  Photocopy of the Executive  Employment  Agreement  dated  September 1,
          1993,  among  Bancorp,  the  Bank  and  John G.  Martines,  the  Chief
          Executive  Officer  of Bancorp  and  President  of the Bank,  filed at
          Exhibit 10A on  September 3, 1993,  to Form S-1 (No.  33- 68470),  and
          hereby incorporated by reference.
     10B  Photocopy of the Executive  Employment  Agreement  dated  September 1,
          1993, among Bancorp,  the Bank and Louis M. Martarano,  Vice President
          of Bancorp and Senior Vice President of the Bank, filed at Exhibit 10B
          on  September  3,  1993,  to  Form  S-1  (No.  33-68470),  and  hereby
          incorporated by reference.
     10C  Copy of the LA Bank, N.A. Salary Continuation  Agreement,  dated March
          11,  1997,  between  the Bank and John G.  Martines,  Chief  Executive
          Officer of the  Bancorp  and  President  of the Bank,  relating to the
          supplemental executive retirement plan of the Bank.
<PAGE>

     10D  Copy of the LA Bank, N.A. Salary Continuation  Agreement,  dated March
          11, 1997,  between the Bank and Louis M. Martarano,  Vice President of
          the Bancorp and Executive Vice President and Chief  Operating  Officer
          of the Bank, relating to the supplemental executive retirement plan of
          the Bank.
     10E  Copy of the LA Bank, N.A. Salary Continuation  Agreement,  dated March
          11, 1997,  between the Bank and Joseph J. Earyes,  CPA, Vice President
          and  Treasurer of the Bancorp and Executive  Vice  President and Chief
          Financial Officer of the Bank, relating to the supplemental  executive
          retirement plan of the Bank.
     11   None.
     12   None.
     13   Annual Report to Shareholders for Fiscal Year Ended December 31, 1997.
     16   None.
     18   None.
     21   List of Subsidiaries of Bancorp.
     22   None.
     23   None.
     24   None.
     27   Financial Data Schedule.
     28   None.
     99A  Selected 5-Year Financial Data and Selected Year- End Balances.


(b)  Reports on Form 8-K for quarter ended December 31, 1997.

-    Form 8-K was filed on December 30, 1997  reporting  the  completion  of and
     results  of the sale of  805,000  shares  of  common  stock  of Lake  Ariel
     Bancorp, Inc. through a secondary offering.

<PAGE>

                                   SIGNATURES


     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,  thereunto
duly authorized.

LAKE ARIEL BANCORP, INC.
         (Bancorp)


By:      /s/ John G. Martines
         John G. Martines
         Chief Executive Officer

Date:    March 18, 1998


     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.



By:      /s/ Bruce D. Howe
         Bruce D. Howe
         President and Director

Date:    March 18, 1998



By:      /s/ John G. Martines
         John G. Martines
         Chief Executive Officer
           and Director
         (Chief Executive Officer)

Date:    March 18, 1998



By:      /s/ Peter O. Clauss
         Peter O. Clauss
         Director

Date:    March 18, 1998



By:      /s/ Donald E. Chapman
         Donald E. Chapman
         Secretary and Director

Date:    March 18, 1998



By:      /s/ Arthur M. Davis
         Arthur M. Davis
         Director

Date:    March 18, 1998



By:      /s/ Harry F. Schoenagel
         Harry F. Schoenagel
         Director

Date:    March 18, 1998



By:      /s/ William C. Gumble
         William C. Gumble
         Director

Date:    March 18, 1998



By:      /s/ Paul D. Horger
         Paul D. Horger
         Director

Date:    March 18, 1998



By:      /s/ Louis M. Martarano
         Louis M. Martarano
         Vice President and Assistant
          Secretary

Date:    March 18, 1998


By:      /s/ Joseph J. Earyes
         Joseph J. Earyes, CPA
         Vice President and Treasurer
         (Principal Financial and
          Accounting Officer)

Date:    March 18, 1998








<PAGE>



                                INDEX TO EXHIBITS


Item Number                Description                                Page

10C                        Copy of the LA Bank, N.A. Salary
                            Continuation Agreement, dated
                            March 11, 1997, between the Bank
                            and John G. Martines, Chief Executive
                            Officer of the Bancorp and President
                            of the Bank, relating to the supple-
                            mental executive retirement plan of
                            the Bank................................    42
10D                        Copy of the LA Bank, N.A. Salary
                            Continuation Agreement, dated
                            March 11, 1997, between the Bank
                            and Louis M. Martarano, Vice
                            President of the Bancorp and Executive
                            Vice President and Chief Operating
                            Officer of the Bank, relating to the
                            supplemental executive retirement plan
                            of the Bank...............................  54
10E                        Copy of the LA Bank, N.A. Salary
                            Continuation Agreement, dated
                            March 11, 1997, between the Bank
                            and Joseph J. Earyes, CPA, Vice President
                            and Treasurer of the Bancorp and Executive
                            Vice President and Chief Financial Officer
                            of the Bank, relating to the supplemental
                            executive retirement plan of the Bank.....  66
13                         Annual Report to Shareholder
                            for the Fiscal Year Ended
                            December 31, 1997.......................    78
21                         List of Subsidiaries of Bancorp..............79
99A                        Selected 5-Year Financial Data and
                           Selected Year-End Balances.................  80
27                         Financial Data Schedule....................  82