2007
                                                                 NORWOOD
                                                                 FINANCIAL CORP

                                                                 ANNUAL REPORT
                                                                 TO SHAREHOLDERS



<PAGE>

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

NORWOOD
FINANCIAL CORP
SUMMARY OF SELECTED FINANCIAL DATA



(dollars in thousands, except per share data)


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<CAPTION>
  For the years ended December 31,              2007       2006      2005       2004        2003
  --------------------------------------------------------------------------------------------------
<S>                                         <C>       <C>       <C>         <C>         <C>
  Net interest income                        $ 17,272   $ 16,183    $ 15,263    $ 14,012    $ 13,322
  Provision for loan losses                       315        220         350         455         660

  Other income                                  3,507      3,517       3,506       3,088       2,801
  Net realized gains on sales of securities        17         66          42         458         692

  Other expense                                11,341     10,957      10,623      10,090       9,808
  Income before income taxes                    9,140      8,589       7,838       7,013       6,347
  Income tax expense                            2,629      2,679       2,341       2,003       1,694
  NET INCOME                                 $  6,511   $  5,910    $  5,497    $  5,010    $  4,653

  Net income per share-Basic                 $   2.34   $   2.11    $   1.96    $   1.80    $   1.70
  Net income per share-Diluted                   2.30       2.07        1.92        1.77        1.67
  Cash dividends declared                        0.94       0.85        0.71        0.66        0.62
  Dividend pay-out ratio                        40.17%     40.28%      36.41%      36.51%      36.31%

  Return on average assets                       1.39%      1.33%       1.31%       1.27%       1.22%
  Return on average equity                      12.10%     11.85%      11.72%      11.39%      11.24%

  BALANCES AT YEAR-END
  Total assets                               $480,610   $454,356    $433,556    $411,626    $387,483
  Loans receivable                            331,296    315,567     290,890     254,757     233,733
  Allowance for loan losses                     4,081      3,828       3,669       3,448       3,267
  Total deposits                              370,000    358,103     340,603     318,645     306,669
  Shareholders' equity                         55,819     52,231      48,108      45,685      42,831
  Trust assets under management               101,714     96,879      86,972      83,397      73,991

  Book value per share                       $  20.27   $  18.67    $  17.07    $  16.14    $  15.20

  Tier 1 Capital to risk-adjusted assets        16.26%     15.67%      15.29%      15.91%      15.58%
  Total Capital to risk-adjusted assets         17.60%     16.99%      16.63%      17.34%      17.09%
  Allowance for loan losses to total loans       1.23%      1.21%       1.26%       1.35%       1.40%
  Non-performing assets to total assets          0.03%      0.09%       0.08%       0.02%       0.04%
  --------------------------------------------------------------------------------------------------
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                                 NORWOOD
                                 -------
                                 FINANCIAL CORP



                                                          PRESIDENT'S LETTER
                                                          PAGES 2-7

                                                          BOARD OF DIRECTORS
                                                          PAGES 6-7

                                                          BRANCH LOCATIONS
                                                          PAGE 8

                                                          FINANCIAL REPORT INDEX
                                                          PAGE 9


<PAGE>

2007
NORWOOD
FINANCIAL CORP

ANNUAL REPORT
TO SHAREHOLDERS

MOVING FORWARD WITH CONFIDENCE,
WHILE ALWAYS BEING GUIDED BY OUR PAST,

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<S>                                          <C>                                   <C>
It is truly a pleasure to report to             million, deposits of $370.0             with full collection of principal,
you that your Company had a                     million and shareholders' equity        interest and fees.  We would also
very strong financial performance               of $55.8 million.  Total assets         like to note that Norwood never
in 2007.  We had record earnings                increased $26.3 million from            participated in the Subprime
for the year ended December 31,                 December 31, 2006.                      mortgage market.  The Company
2007 of $6,511,000 which                                                                had net charge-offs of $62,000
represented an increase of                      Loans receivable increased $15.7        for the year-ended December
$601,000, or 10.2% over the                     million, or 5.0% from the prior         31, 2007 representing only .02%
$5,910,000 earned in 2006.                      year.  The increase in loans was        of average loans.  Though loan
Earnings per share on a fully                   centered in residential mortgage        quality indicators remain strong,
diluted basis were $2.30 for the                activity, including home equity         we felt it was prudent to increase
current year compared to $2.07                  lending and to a lesser extent, in      the provision for loan losses to
in 2006.  The Company declared                  the commercial real estate loan         $315,000 for the year ended
cash dividends totaling $.94 per                portfolio.  The majority of the loan    December 31, 2007, from
share in 2007, an increase of $.09              growth was funded with an $11.9         $220,000 for the similar period
per share, or 10.6%, over the $.85              million increase in deposits,           in 2006, as we do recognize the
per share declared in 2006.  This               principally in money market             stress on the local and national
marks the sixteenth consecutive                 accounts and non-interest bearing       economy.  The allowance for loan
year of increased cash dividends                checking accounts.                      losses increased $253,000 from
for our shareholders.  The return                                                       December 31, 2006 to $4,081,000
on average assets for the year was              Non-performing loans totaled            and represented 1.23% of total
1.39% with a return on average                  $163,000 and represented .05%           loans as of December 31, 2007.
equity of 12.10%.  Both of these                of total loans as of December 31,
peformed measures improved                      2007 compared to $409,000, or           For the year, net interest income
over the prior year.                            .13%, as of December 31, 2006.          (fully taxable equivalent) totaled
                                                Our improvement over the prior          $17,811,000 with a net interest
Total assets as of December 31,                 year was the result of resolving        margin (fte) of 3.98% compared
2007 were $480.6 million with                   our largest non-performing loan         to $16,708,000, and a net
loans receivable of $331.3                      during the third quarter of 2007        interest margin (fte) of 3.96% in
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                                                               [PICTURE OMITTED]
                                                           WILLIAM W. DAVIS, JR.
                                           President and Chief Executive Officer

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<S>                                          <C>                                   <C>

2006.  The slight increase in net               due to costs associated with the            NET INCOME ($000)
interest margin for the year was                Tannersville Office which opened            [Bar graph with following data points]
principally due to an increase in               in December 2006.                           $4,653  $5,010  $5,497  $5,910  $6,511
the yield on the investment                                                                 2003    2004    2005    2006    2007
securities portfolio and an                     WE STRONGLY ENCOURAGE
increased amount of loans on the                YOU TO READ THE
balance sheet.  These increases                 FINANCIAL SECTION OF
were partially offset by an increase            THIS ANNUAL REPORT FOR
in the cost of deposits, principally            A MORE DETAILED ANALYSIS
higher costing time deposits                    OF OUR RESULTS.

For the year, other income                      Wayne Bank's primary market               TOTAL DEPOSITS * LOANS o (IN MILLIONS)
totaled $3,524,000 compared to                  area consists of three of the fastest     [Bar graph with following data points]
$3,583,000 in the prior year.  The              growing counties in Pennsylvania          * $306.7    $318.6  $340.6  $358.1  $370.0
decrease was principally due to a               - Wayne, Pike and Monroe.                 o $233.7    $254.8  $290.9  $315.6  $331.3
lower level of gains on the sales               This tri-county region serves as a           2003      2004    2005    2006    2007
of mortgage loans which totaled                 haven for people in neighboring
$23,000 in 2007 and $147,000                    states as the area provides great
in the prior year, which included               relief from larger congested areas
$110,000 gain on the sale of                    such as Philadelphia and New
mortgage servicing rights.  This                York.  They travel to the region
decrease was partially offset by a              to take advantage of the natural
$68,000 increase in Wealth                      beauty of the mountains, pristine           NET INTEREST INCOME (FTE %$ IN 000)
Management/Trust revenues.                      lakes and waterfalls and wooded             [Bar graph with following data points]
                                                areas.  The amenities are many              $13,945 $14,653 $15,589 $16,708 $17,811
For the year, other expenses                    with ski resorts, craft shops, art          2003    2004    2005    2006    2007
totaled $11,341,000, an increase                galleries, golf courses, museums,
of $384,000 or 3.5% over the prior              an indoor water park, resorts,
year.  The increase was principally             and most recently the advent of a

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<CAPTION>
<S>                                         <C>                                          <C>
casino in Monroe County.  With                  services allow the Bank to meet               Checking account to cultivate
tourism being high on the list of               all of our customers needs.                   more business relationships.  To
major industries, it is no wonder                                                             strengthen our business
that many of these visitors decide                                                            relationships even more, Wayne
to purchase a home in the area.                                                               Bank will introduce a new product
We have worked diligently to                    DILUTED EARNINGS (PER SHARE)                  branded "Business Link" in 2008.
position Wayne Bank as the first                [Bar graph with following data points]        The service is Remote Deposit
choice in banking for those new                 $1.67  $1.77  $1.92  $2.07  $2.30             Capture that allows a business to
to the region.  Wayne Bank offers                 03     04     05     06     07              virtually deposit their checks via
land loans, a terrific construction                                                           the Internet without having to
mortgage program, tiered loan                                                                 go to the bank, again saving time.
rates, Jumbo loans for the more                                                               We believe this service will retain
expensive homes and home equity                                                               our current business accounts and
products to suit the needs of the                                                             help us expand Wayne Bank's
growing populace.  Wayne Bank                                                                 footprint without the additional
did not enter into the Subprime                                                               investment in branch locations.
lending arena, which generated                  The Internet has become more
significant loan volume for some                popular with our customers and                Technology is top-of-mind at
financial institutions, but was                 Wayne Bank's team works to                    Wayne Bank as we look to ways
based on weak underwriting.                     make our services more conve-                 to streamline processes within
Our mortgage lending programs.                  nient, accessible and user-friendly.          our organization that add
are built on solid credit                       Along those lines, we are                     efficiencies.  We recently converted
fundamentals that are best for                  constantly updating and                       to a digital image filing system
both the customer and the Bank.                 adding more information to                    which enables us to respond timely
                                                Wayne Bank's website                          to the needs of our customers
We also play a significant role in              (waynebank.com) and now feature               who request copies of documents,
the commercial development of                   a short, online loan application.             transaction histories or other
our market area.  The Bank is                   These services are in addition                information.  Additionally, Wayne
involved in many of the major                   to Direct Link, Free Internet                 Bank is in the planning stage of
projects throughout Wayne,                      Banking with Free Bill Pay that is            implementing a branch capture
Pike and Monroe Counties.                       available for both businesses and             device, so that our branch network
We provide commercial financing                 consumers alike.  The Bank will               will be able to make their check
to a wide range of businesses which             continue to improve our website's             deposits virtually to our corporate
support the regional economy;                   capabilities to keep up with the              headquarters eliminating the need
including the hotel industry, retail            demands of our customers for                  for couriers and increasing our
shopping areas, local resorts,                  this marketing channel.  Many                 deposit cut-off times to provide
summer camps, building                          customers are using Direct Link,              better customer service.
contractors, and residential                    Wayne Bank's Internet banking
property owner associations.                    service to handle some or all of              Wayne Bank's success is due to
                                                their banking transactions and we             the talent and dedication of our
The Wealth Management and                       expect this trend to continue.                employees as they focus, each and
Trust Services Division provides                                                              everyday, to serve our customers
our clients with a level of service             An ongoing focus is to grow our               in a positive, effective and efficient
second to none.  Our investment                 small business customer base, and             manner.  During the past year, we
management products, trust                      to that end we launched a very                recognized the achievements and
administration and executor                     attractive FREE Business                      accordingly promoted a number

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<S>                                           <C>                                          <C>
[PICTURE OMITTED]

SENIOR MANAGEMENT TEAM
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EDWARD C. KASPER / WAYNE D. WILCHA / WILLIAM W. DAVIS, JR. / JOSEPH A. KNELLER / LEWIS J. CRITELLI / JOHN H. SANDERS
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of employees to Vice President.                 the Shohola Community Office                    in Monroe county.  He is also
Those recipients include Linda                  Manager was named the Teller                    extremely involved with tourism
Moran, Karyn Vashlishan and                     Training Officer.                               and hospitality trade associations
Kelley Lalley.  In addition, Sandy                                                              in the Pocono region.
Halas was promoted to Assistant                 In 2007, we were extremely pleased
Vice President, as well as the new              to have Andrew Forte join the                   Since its founding in 1871, Wayne
appointments of Gary Sipe, Vice                 Board of Directors of Wayne Bank                Bank has been a leader in
President, Wealth Management                    and Norwood Financial Corp.                     community involvement.  We
Investment Officer; Neicy Ramos,                Andy has strong financial                       are a notable presence in the
Business Development Officer                    management background, is a                     communities we serve and that is
in Monroe County and Wendy                      CPA and is pursuing his doctorate               due in part to the volunteerism
Davis, Assistant Community                      at pace University.  He currently               and support our reemployees
Officer Manager in Shohola.  In                 is President of Forte, Inc. which               contribute to the local area.  The
addition, Karen Verbeke formerly                operates the Stroudsmoor Inn                    Senior Management team leads

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<S>                                         <C>                                              <C>
[PICTURES OMITTED]

NORWOOD FINANCIAL 2007 BOARD OF DIRECTORS

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(FROM LEFT TO RIGHT) WILLIAM W. DAVIS, JR. / JOHN E. MARSHALL / GARY P. RICKARD / DANIEL J. O'NEILL
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the way by serving as Directors                 Sanctuary and the Dorflinger-                   nonprofit organizations through
or board members for many                       Suydam Wildlife Sanctuary are                   volunteering and financial support
organizations such as the Wayne                 notable in our support as they                  such as the American Cancer
County YMCA, Wayne County                       provide natural history,                        Society's Relay for Life, The
Memorial Hospital, Wayne                        conservation, culture and                       American Red Cross and the
County Builders Association,                    education to the area through                   United Way, just to mention a few.
the Wayne County Chamber of                     their programs.  In addition,                   We are proud to support the local
Commerce, the Wayne County                      Wayne Bank supports the Pike                    area and are committed to making
Historical Society, the Greater                 County Chamber of Commerce,                     our community a better place to
Honesdale Partnership and the                   Pocono Builders Association and                 live and work.
Wayne Economic Development                      the Pocono Mountain Chamber
Corporation.  Conservation                      of Commerce.  Additionally,                     We marked another milestone in
groups such as Lacawac                          employees support many                          2007, as Russell L. Ridd retired as

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[PICTURES OMITTED]

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DR. KENNETH A. PHILLIPS / RALPH A. MATERGIA, ESQ. / ANDREW A. FORTE / SUSAN GUMBLE-COTTELL / RICHARD L. SNYDER
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our Chairman of the Board.  Russell             At the Annual Reorganizational                  needs.  We truly appreciate your
had a 44 year career with the Bank.             Meeting in April, John E.                       support and confidence and look
He joined the Bank in 1963, was                 Marshall was appointed                          forward to hearing any of your
appointed President and Director                Chairman of the Board of                        comments and suggestions!
in 1980 and Chairman in 1993.                   Directors of Norwood and Wayne
During Russell's career, the Bank               Bank.  John brings many years of                Sincerely yours,
grew from $10 million in assets                 experience to the position having
to $460 million.  The Board                     served as a Director since 1983.
passed a resolution designating                                                                 /s/ William W. Davis, Jr.
Russell, Director Emeritus of                   We look forward to another year                 William W. Davis, Jr.
Norwood Financial Corp and                      of innovation and achievement                   President & Chief Executive Officer
Wayne Bank.  We sincerely wish                  in 2008.  Please think of Wayne
Russell well in his retirement.                 Bank first, for all you financial

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[MAP OMITTED]

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BRANCH LOCATIONS AND SERVICE AREA COVERED
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Administrative Office:                          Route 6 East                                    Route 611 & Stroud Mall
717 Main Street                                 Hawley, PA 18428                                Stroudsburg, PA 18360
P.O. Box 269
Honesdale, PA 18431                             111 West Harford Street                         637 Route 739
                                                Milford, PA 18337                               Lords Valley Shopping Plaza
Community Offices:                                                                              Lords Valley, PA 18428
717 Main Street                                 Weis Market, Route 590
Honesdale, PA 18431                             Hamlin, PA 18427                                Route 209, 5165 Milford Road
                                                                                                Marshalls Creek, PA 18335
245 Willow Avenue                               107 Richardson Avenue
Honesdale, PA 18431                             Shohola, PA 18458                               Route 611, Fountain Springs East II
                                                                                                Tannersville, PA 18372
Belmont & Water Streets                         Route 370 & Lake Como Road
Waymart, PA 18472                               Lakewood, PA 18439                              Online at: waynebank.com

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                                    NORWOOD
                                    -------
                                 FINANCIAL CORP



                                      2007
                         CONSOLIDATED FINANCIAL REPORT
                         -----------------------------

MANAGEMENT'S DISCUSSION & ANALYSIS                                         10-27

MANAGEMENT'S REPORT ON CONTROL OVER FINANCIAL REPORTING                       28

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                      29

CONSOLIDATED BALANCE SHEETS                                                   31

CONSOLIDATED STATEMENTS OF INCOME                                             32

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                               33

CONSOLIDATED STATEMENTS OF CASH FLOWS                                         34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 35-55

INVESTOR INFORMATION                                                          56

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

INTRODUCTION
         This  Management's  Discussion and Analysis and related  financial data
are  presented to assist in the  understanding  and  evaluation of the financial
condition and results of operations for Norwood Financial Corp (The Company) and
its  subsidiary  Wayne Bank (the Bank) as of December  31, 2007 and 2006 and for
the years ended  December  31,  2007,  2006,  and 2005.  All share and per share
amounts  have been  adjusted  to  reflect  the  effect of the 5% stock  dividend
distributed  to  shareholders  on May 26, 2006.  This section  should be read in
conjunction with the consolidated financial statements and related footnotes.

FORWARD-LOOKING STATEMENTS
         The Private  Securities  Litigation  Reform Act of 1995  contains  safe
harbor  provisions  regarding  forward-looking  statements.  When  used  in this
discussion, the words believes, anticipates,  contemplates, expects, and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest  rates,  risks  associated  with the effect of opening a new
branch,  the ability to control costs and  expenses,  demand for real estate and
general economic  conditions.  The Company  undertakes no obligation to publicly
release the results of any revisions to those  forward-looking  statements which
may be made to  reflect  events or  circumstances  after  the date  hereof or to
reflect the occurrence of unanticipated events.

CRITICAL ACCOUNTING POLICIES
         Note 2 to the Company's consolidated financial statements (incorporated
by reference in Item 8 of the form 10-K) lists significant  accounting  policies
used in the  development  and  presentation  of its financial  statements.  This
discussion  and  analysis,   the  significant  accounting  policies,  and  other
financial  statement  disclosures  identify and address key  variables and other
qualitative and quantitative factors that are necessary for an understanding and
evaluation of the Company and its results of operations.

         Material  estimates  that are  particularly  susceptible to significant
change in the near term relate to the  determination  of the  allowance for loan
losses,  accounting for stock options,  the valuation of deferred tax assets and
the  determination  of  other-than-temporary  impairment  losses on  securities.
Please refer to the  discussion  of the  allowance  for loan losses  calculation
under  "Non-performing  Assets and Allowance for Loan Losses" in the  "Financial
Condition" section.

         For periods ending prior to January 1, 2006, the Company  accounted for
stock option  plans under the  recognition  and  measurement  principles  of APB
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees",  and  related
interpretations.  Under APB Opinion No. 25, no stock-based employee compensation
was reflected in net income,  as all options granted had an exercise price equal
to the  market  value of the  underlying  common  stock on the grant  date.  The
Company adopted SFAS No. 123(R),  "Share-Based  Payment", as of January 1, 2006,
using the modified  prospective  transition method.  Under this method companies
are required to record compensation expense,  based on the fair value of options
over  the  vesting  period.  See  Note  2  for  additional  discussion  of  this
pronouncement's impact on the Company's consolidated financial statements.

10

<PAGE>

         The  deferred  income  taxes  reflect  temporary   differences  in  the
recognition  of the  revenue  and  expenses  for  tax  reporting  and  financial
statement  purposes,   principally  because  certain  items  are  recognized  in
different  periods for  financial  reporting and tax return  purposes.  Although
realization is not assured, the Company believes it is more likely than not that
all deferred tax assets will be realized.

         In estimating other-than-temporary impairment losses on securities, the
Company  considers  1) the length of time and extent to which the fair value has
been less than cost 2) the  financial  condition of the issuer and 3) the intent
and ability of the Company to hold the  security to allow for a recovery to fair
value. The Company believes that the unrealized losses, at December 31, 2007 and
2006 represent temporary impairment of the securities.

RESULTS OF OPERATION - SUMMARY
         Net income for the Company for the year ended December 31, 2007 totaled
$6,511,000, an increase of $601,000 or 10.2% over the $5,910,000 earned in 2006.
Basic  and  diluted  earnings  per  share  were  $2.34  and  $2.30  respectively
increasing  from $2.11 and $2.07,  respectively  in 2006.  The return on average
assets (ROA) for the year ended December 31, 2007 was 1.39% improving from 1.33%
for 2006.  Return on average  equity  (ROE)  increased to 12.10% for the current
year from 11.85% in 2006.

         The increase in earnings was principally attributable to an increase in
net interest  income which totaled  $17,811,000  on a fully  taxable  equivalent
(fte) basis in 2007 compared to $16,708,000  (fte) in 2006.  This  represents an
increase of $1,103,000, or 6.6%. Net interest income was favorably impacted by a
$21.9 million, or 7.3% increase in average loans receivable for 2007 compared to
average  loans  receivable  in  2006.  The  yield  on the  securities  portfolio
increased  76 basis points which also  favorably  impacted net interest  income.
These two items were  partially  offset by a 59 basis point increase in the cost
of interest bearing deposits, principally short-term time deposits.

         Loans receivable  increased $15.7 million to total $331.3 million as of
December 31, 2007.  The increase in loans was centered in  residential  mortgage
activity and to a lesser extent,  in the commercial real estate  portfolio.  The
majority  of the loan  growth  was  funded  with an $11.9  million  increase  in
deposits,   principally  in  money  market  accounts  and  non-interest  bearing
checking.

         The Company's loan quality metrics remained strong with  non-performing
loans decreasing to .05% of total loans at December 31, 2007 from .13% as of the
prior year end.  Net  charge-offs  were only  $62,000  for the year,  or .02% of
average loans.  Loan loss provision  expense increased to $315,000 in 2007, from
$220,000  in 2006 as the  Company  recognizes  a general  slow down in the local
economy.

         Other  income for 2007 totaled  $3,524,000  compared to  $3,583,000  in
2006. The decrease was principally due to a lower level of gains on the sales of
mortgage  loans which  totaled  $23,000 in 2007 and  $147,000 in the prior year,
which  included  $110,000 gain on the sale of a portfolio of mortgage  servicing
rights.  Other expenses totaled  $11,341,000 in 2007, an increase of $384,000 or
3.5% over the prior year. The increase was principally  due to costs  associated
with the Tannersville Office which opened in December 2006.

                                                                              11

<PAGE>

         The following table sets forth changes in net income (in thousands):

         Net income for 2006                                            $ 5,910

         Net interest income                                              1,089
         Provision for loan losses                                          (95)
         Gain on sale of mortgage loans                                    (124)
         Other income                                                        65
         Salaries and employee benefits                                    (170)
         Occupancy                                                         (119)
         Other expense                                                      (95)
         Income tax expense                                                  50
                                                                        -------
         Net income for 2007                                            $ 6,511
                                                                        =======

         Net income for the Company for the year ended December 31, 2006 totaled
$5,910,000, an increase of $413,000 or 7.5% over the $5,497,000 earned for 2005.
Basic and diluted earnings per share for 2006 were $2.11 and $2.07 respectively,
increasing  from $1.96 and $1.92,  respectively  in 2005.  The return on average
assets (ROA) for the year ended December 31, 2006 was 1.33% improving from 1.31%
for 2005.  Return on average  equity also showed  improvement  at 11.85% in 2006
compared to 11.72% in 2005.

         The increase in earnings was principally attributable to an increase in
net interest income and a lower level of provision for loan losses. Net interest
income on a fully taxable  equivalent  basis (fte) totaled  $16,708,000 in 2006,
compared to $15,889,000 in 2005, an increase of $819,000, or 5.2%.

         Net interest income was favorably impacted by $27.5 million,  or 10.0%,
increase  in  average  loans  receivable  for 2006  compared  to  average  loans
receivable  in 2005.  The  Company  reduced  its  provision  for loan  losses to
$220,000  for the year ended  December  31,  2006 from  $350,000  for 2005.  The
decrease was principally  due to a lower level of  charge-offs,  $61,000 in 2006
declining from $129,000 in 2005.

         Loans receivable increased $24.7 million, to total $315.6 million as of
December 31, 2006. The Company had balanced growth  throughout the year with the
commercial loan portfolio,  including  commercial real estate,  increasing $12.7
million and loans secured by residential real estate growing $13.1 million.  The
majority  of the  loan  growth  was  funded  with a $17.5  million  increase  in
deposits, principally short-term time deposits.

         Other income for 2006 totaled  $3,583,000  compared to  $3,548,000  for
2005. The increase was principally due to $147,000 of gains on sales of mortgage
loans and servicing rights in 2006 compared to $64,000 in similar gains in 2005.
Other expenses totaled $10,957,000, an increase of $334,000 or 3.1% over 2005.
The increase was primarily due to rising salary and employee  benefit costs. The
resulting efficiency ratio for 2006 was 54.0% improving from 54.7% in 2005.

12

<PAGE>

         The following table sets forth changes in net income (in thousands):


         Net income for 2005                                             $5,497

         Net interest income                                                920
         Provision for loan losses                                          130
         Gains on sales of mortgage loans                                    83
         Other income                                                       (48)
         Salaries and employee benefits                                    (245)
         Professional fees                                                  104
         All other expenses                                                (193)
         Income tax expense                                                (338)
                                                                         ------
         Net income for 2006                                             $5,910
                                                                         ======

FINANCIAL CONDITION

Total Assets
         Total assets as of December 31, 2007,  were $480.6 million  compared to
$454.4 million as of year-end 2006, an increase of $26.2 million or 5.8%.

Loans Receivable
         As of December  31,  2007,  loans  receivable  totaled  $331.3  million
compared to $315.6 million as of
year-end 2006, an increase of $15.7 million, or 5.0%. Loan growth in residential
and commercial real estate was partially  offset by lower  commercial term loans
and lines of credit and a net run-off in indirect automobile financing, which is
included in consumer loans to individuals.

         Residential  real estate,  which includes home equity lending,  totaled
$129.9  million  as of  December  31,  2007,  compared  to $113.8  million as of
year-end 2006. The increase of $16.1 million is net of prepayments,  refinancing
activity  and sales of  mortgage  loans into the  secondary  market.  Fixed rate
mortgage  products were preferred by the Bank's  customers and accounted for the
majority of the activity.  The Company does not  originate  any  non-traditional
mortgage  products  such  as  interest-only  loans  or  option  adjustable  rate
mortgages and has no sub-prime mortgage exposure. The Company evaluates sales of
its long-term  fixed rate  residential  loan  production  for interest rate risk
management,  with  $1.1  million  of 30 year  fixed  rate  loans  sold  into the
secondary  market  during 2007.  The Company  held in portfolio  the majority of
fixed rate residential  mortgage production in 2007. The Company also had growth
in home equity  lending in 2007 through its branch  system.  Total  outstandings
increased $3.0 million to $52.6 million as of December 31, 2007.

         Commercial loans consist  principally of loans made to small businesses
within the  Company's  market and are  usually  secured by real  estate or other
assets of the borrower.  Commercial  real estate loans totaled $133.6 million as
of December 31, 2007, increasing from $127.6 million as of December 31, 2006, an
increase  of $6.0  million or 4.7%.  The terms for  commercial  real  estate are
typically 15 to 20 years,  with adjustable  rates based on a spread to the prime
rate. The majority of the Company's  commercial  real estate  portfolio is owner
occupied and includes the personal  guarantees of the principals.  The growth in
commercial real estate lending was

                                                                              13

<PAGE>

centered in the Pike and Monroe County market areas. Commercial loans consisting
principally  of lines of credit and term loans  secured  by  equipment  or other
assets  decreased  $4.9 million to $29.2  million as of December  31, 2007.  The
decrease was  principally  due to pay-offs in equipment loans and lower usage on
lines of credit.

         The Company's indirect lending portfolio (included in consumer loans to
individuals) declined $2.4 million to $11.6 million as of December 31, 2007. The
Company has de-emphasized  indirect  automobile lending due to increased pricing
competition offered by automotive industry finance companies.

NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
         Non-performing  assets consist of non-performing  loans and real estate
acquired  through  foreclosure,  which is held for  sale.  Loans  are  placed on
non-accrual  status  when  management  believes  that  a  borrower's   financial
condition is such that  collection of interest is doubtful.  Commercial and real
estate  related loans are generally  placed on  non-accrual  when interest is 90
days delinquent.  When loans are placed on non-accrual,  accrued interest income
is reversed from current earnings.

         As of December  31, 2007,  non-performing  loans  totaled  $163,000 and
represented .05% of total loans  receivable  compared to $409,000 and .13% as of
year-end 2006. The Company resolved its largest  non-performing loan during 2007
with full  collection  of  principal,  interest and fees.  Total  non-performing
assets,  which includes  foreclosed real estate totaled $163,000 and represented
..03% of total assets,  compared to $409,000 and .09% as of December 31, 2006. As
of December 31, 2007 and 2006, the Company had no foreclosed real estate.

         The  allowance  for loan losses  totaled  $4,081,000 as of December 31,
2007 and represented 1.23% of total loans receivable  compared to $3,828,000 and
1.21% of total loans as of year-end 2006. Net charge-offs for 2007 were $62,000,
consisting  principally of losses on the sale of repossessed  automobiles  and a
loss on one  residential  mortgage,  compared to net  charge-offs  of $61,000 in
2006. The provision for loan losses for 2007 was $315,000,  compared to $220,000
in 2006.

         The  Company's  loan  review  process  assesses  the  adequacy  of  the
allowance for loan losses on a quarterly basis. The process includes a review of
the risks  inherent in the loan  portfolio.  It includes an analysis of impaired
loans and a  historical  review  of  losses.  Other  factors  considered  in the
analysis  include;  concentrations  of  credit  in  specific  industries  in the
commercial  portfolio;  the local and regional  economic  conditions;  trends in
delinquencies,  internal risk rating classification,  large dollar loans of over
$2 million and growth in the  portfolio.  As of December 31,  2007,  the Company
considered its concentration of credit risk profile to be acceptable. The local,
regional and national  economy  weakened in 2007 as energy prices  increased and
the  real  estate  market  slowed.  Local  unemployment  rates  showed  a modest
increase.  The Company has  modestly  increased  its number of large  commercial
credits and saw a slow down in growth in commercial  real estate  related loans.
As a result of its analysis, after applying these factors,  management considers
the  allowance  as of December  31,  2007,  adequate.  However,  there can be no
assurance  that  the  allowance  for  loan  losses  will be  adequate  to  cover
significant losses, if any that might be incurred in the future.

14

<PAGE>

         The  following  table  sets  forth  information  with  respect  to  the
Company's allowance for loan losses at the dates indicated:

<TABLE>
<CAPTION>

                                                              Year-ended December 31,
                                             -------------------------------------------------------
                                                              (dollars in thousands)
                                               2007        2006        2005        2004        2003
                                             -------------------------------------------------------
<S>                                          <C>         <C>         <C>         <C>         <C>
Allowance balance at beginning of year       $ 3,828     $ 3,669     $ 3,448     $ 3,267     $ 3,146
Charge-offs:
  Commercial and all other                         -           -          (4)        (19)       (121)
  Real Estate                                     (4)          -          (6)        (10)          -
  Consumer                                      (117)       (150)       (200)       (342)       (478)
  Lease Financing                                  -           -           -         (11)        (36)
                                             -------     -------     -------     -------     -------
Total                                           (121)       (150)       (210)       (382)       (635)
Recoveries:
  Commercial and all other                         -          18          12          13           5
  Real Estate                                      2           2          18           8          24
  Consumer                                        54          65          46          78          64
  Lease Financing                                  3           4           5           9           3
                                             -------     -------     -------     -------     -------
Total                                             59          89          81         108          96
Provision expense                                315         220         350         455         660
                                             -------     -------     -------     -------     -------
Allowance balance at end of year             $ 4,081     $ 3,828     $ 3,669     $ 3,448     $ 3,267
                                             =======     =======     =======     =======     =======
Allowance for loan losses as a percent
  of total loans outstanding                    1.23%       1.21%       1.26%       1.35%       1.40%
Net loans charged off as a percent of
  average loans outstanding                      .02%        .02%        .05%        .11%        .24%
Allowance coverage of non-performing loans      25.0x        9.4x       10.4x       51.5x       22.8x
</TABLE>


         The following  table sets forth  information  regarding  non-performing
assets. The Bank had no troubled debt  restructurings as defined in FAS No. 114.
As of December  31, 2007,  the Company had  $3,208,000  impaired and  collateral
dependent  loans compared to $290,000 at year-end 2006.  This increase is due to
two related credits with no required allowance.

<TABLE>
<CAPTION>
                                                                      December 31,
                                             -------------------------------------------------------
                                                                 (dollars in thousands)
                                               2007        2006        2005        2004        2003
                                             -------------------------------------------------------
<S>                                         <C>         <C>         <C>         <C>         <C>
Non-accrual loans:
  Commercial and all other                   $     -     $     -     $     -     $     -     $     -
  Real estate                                    109         392         330          32         125
  Consumer                                         2          17          11           8           -
                                             -------     -------     -------     -------     -------
Total                                            111         409         341          40         125

Accruing loans which are contractually
  past due 90 days or more                        52           -          12          27          18
                                             -------     -------     -------     -------     -------

Total non-performing loans                       163         409         353          67         143
                                             -------     -------     -------     -------     -------

Foreclosed real estate                             -           -           -       -       -

Total non-performing assets                  $   163     $   409     $   353     $    67     $   143
                                             =======================================================

Non-performing loans to total loans              .05%        .13%        .12%       .03%        .06%

Non-performing loans to total assets             .03%        .09%        .08%       .02%        .04%

Non-performing assets to total assets            .03%        .09%        .08%       .02%        .04%
</TABLE>

                                                                              15

<PAGE>

SECURITIES
         The  securities  portfolio  consists  principally  of  issues of United
States Government  agencies,  including  mortgage-backed  securities,  municipal
obligations,  and corporate debt. In accordance with FAS No.115  "Accounting for
Certain  Investments in Debt and Equity  Securities" the Company  classifies its
investments  into two categories:  held to maturity (HTM) and available for sale
(AFS). The Company does not have a trading account. Securities classified as HTM
are  those in which  the  Company  has the  ability  and the  intent to hold the
security until contractual  maturity. As of December 31, 2007, the HTM portfolio
totaled  $705,000 and consisted  entirely of municipal  obligations.  Securities
classified  as AFS are  eligible to be sold due to  liquidity  needs or interest
rate risk management. These securities are adjusted to and carried at their fair
market value with any unrealized gains or losses,  net of deferred income taxes,
recorded as an adjustment  to capital and reported in the equity  section of the
balance sheet as accumulated other  comprehensive  income (loss). As of December
31, 2007,  $124.0  million in securities  were  classified as AFS and carried at
their  fair  market  value,  with  unrealized  appreciation,   net  of  tax,  of
$1,054,000,  included in accumulated other comprehensive income in stockholders'
equity.

         As of December 31,  2007,  the average  life of the  portfolio  was 2.2
years.  The  Company has  maintained  a  relatively  short  average  life in the
portfolio in order to generate  cash flow to support loan growth.  Purchases for
the year totaled $62.0 million with securities called,  maturities and cash flow
of $52.4 million and proceeds from sales of $74,000.  The purchases  were funded
principally  by cash flow from the  portfolio.  As of December  31, the carrying
value of the Company's securities portfolio (HTM and AFS) totaled $124.7 million
with the mix as follows:

<TABLE>
<CAPTION>
                                            2007                     2006
                                   --------------------------------------------------
                                               (dollars in thousands)
                                    Carrying                  Carrying
                                     Value   % of portfolio    Value   % of portfolio
                                   --------------------------------------------------
<S>                             <C>           <C>         <C>           <C>
US Government agencies             $ 41,508      33.4%       $ 47,581      41.9%
States  & political subdivisions     22,622      18.1          17,419      15.3
Corporate obligations                 4,994       4.0           8,439       7.4
Mortgage-backed securities           54,082      43.3          38,652      33.8
Equity securities                     1,486       1.2           1,775       1.6
                                   --------     -----        --------     -----
Total                              $124,692     100.0%       $113,866     100.0%
                                   ========     =====        ========     =====
</TABLE>

         The  portfolio   had  $19.1  million  of  floating  rate   instruments,
principally  adjustable rate mortgage backed  securities as of December 31, 2007
compared  to  $17.7  million  at year  end  2006.  The  portfolio  contained  no
structured  notes,  step-up bonds and no off-balance  sheet  derivatives were in
use. The U.S. Government agency portfolio consists principally of callable notes
with final  maturities of generally  less than five years.  The mortgage  backed
securities are pass-through bonds with the Federal National Mortgage Association
(FNMA),  Federal Home Loan Mortgage Corp (Freddie Mac), and Guaranteed  National
Mortgage Association (GNMA).  During 2007, the Company increased its holdings of
mortgage-backed  securities with the  expectation  that these bonds will provide
regular cash flow, provide liquidity and support loan growth.

DEPOSITS
         The Company,  through the twelve branches of the Bank,  provides a full
range of deposit products to its retail and business  customers.  These products
include   interest-bearing  and  non-interest   bearing  transaction   accounts,
statement   savings  and  money  market  accounts.   Time  deposits  consist  of
certificates  of  deposit  (CDs)  with  terms of up to five  years  and  include
Individual Retirement Accounts.  The Bank participates in the Jumbo CD ($100,000
and over)  markets with local  municipalities  and school  districts,  which are
typically awarded on a competitive bid basis.

16

<PAGE>

         Total  deposits  as  of  December  31,  2007,  totaled  $370.0  million
increasing from $358.1 million as of year-end 2006, an increase of $11.9 million
or 3.3%.  The  increase  was  principally  due to  growth  in money  market  and
non-interest   bearing   demand   accounts,   $7.9   million  and  $6.2  million
respectively,  as compared to December 31, 2006. This was partially  offset by a
decline in savings and interest-bearing demand accounts of $2.2 million and $4.2
million respectively, as compared to December 31, 2006.

         Time  deposits  over  $100,000,  which  consist  principally  of school
district and other public funds,  with maturities  generally less than one year,
totaled  $62.3  million as of December  31, 2007,  compared to $56.7  million at
year-end 2006. The increase was  principally  due to a higher level of jumbo CDs
with local school  districts.  These deposits are subject to competitive bid and
the Company bases its bid on current  interest  rates,  loan demand,  investment
portfolio structure and the relative cost of other funding sources.

         As of December 31, 2007,  non-interest  bearing demand deposits totaled
$60.1 million,  increasing $6.2 million or 11.5% from the prior  year-end.  This
growth is partially  attributable  to an increase in commercial  deposits,  as a
result of the Bank's  promotion  of a  free-business  checking  account in 2007.
Interest  bearing demand accounts  totaled $32.4 million as of December 31, 2007
compared to $36.6 million at year end 2006. The decrease is  principally  due to
certain  municipal  accounts  converting  to  cash  management  accounts.   Cash
management accounts included in short-term borrowings,  totaled $24.0 million at
year end 2007 compared to $20.7 million as of December 31, 2006.  These balances
represent  commercial  and  municipal  customers'  funds  invested in  overnight
securities. The Company considers these accounts as a source of core funding.

MARKET RISK
         Interest rate sensitivity and the repricing  characteristics  of assets
and  liabilities  are managed by the Asset and  Liability  Management  Committee
(ALCO).  The  principal  objective of ALCO is to maximize  net  interest  income
within acceptable levels of risk, which are established by policy. Interest rate
risk is monitored and managed by using financial modeling  techniques to measure
the impact of changes in interest rates.

         Net  interest  income,  which is the  primary  source of the  Company's
earnings,  is  impacted  by changes in interest  rates and the  relationship  of
different interest rates. To manage the impact of the rate changes,  the balance
sheet should be structured so that repricing opportunities exist for both assets
and liabilities at approximately  the same time intervals.  The Company uses net
interest  simulation  to assist in interest  rate risk  management.  The process
includes  simulating  various interest rate environments and their impact on net
interest  income.  As of December 31, 2007, the level of net interest  income at
risk in a 200 basis points increase or decrease was within the Company's  policy
limits, of a decline less than 8% of net interest income.

         Imbalance in repricing  opportunities  at a given point in time reflect
interest-sensitivity  gaps  measured as the  difference  between  rate-sensitive
assets and rate-sensitive liabilities. These are static gap measurements that do
not take into account any future  activity,  and as such are principally used as
early indications of potential interest rate exposures over specific intervals.

         At  December  31,  2007,  the  Bank  had a  positive  90  day  interest
sensitivity  gap of $6.0  million  or 1.3%  of  total  assets.  A  positive  gap
indicates  that the  balance  sheet has more  rate-sensitive  assets  (RSA) than
rate-sensitive  liabilities at the time interval.  This would indicate that in a
rising rate  environment,  the yield on  interest-earning  assets would increase
faster than the cost of  interest-bearing  liabilities in the 90

                                                                              17

<PAGE>

day time  frame.  The level of RSA and RSL for an  interval  is  managed by ALCO
strategies,  including  adjusting the average life of the  investment  portfolio
through  purchase and sales,  pricing of deposit  liabilities  to attract longer
term time  deposits,  loan  pricing to  encourage  variable  rate  products  and
evaluation of loan sales of long term fixed rate mortgages.

         The Company analyzes and measures the time periods in which RSA and RSL
will  mature  or  reprice  in  accordance  with  their   contractual  terms  and
assumptions.  Management believes that the assumptions used are reasonable.  The
interest rate sensitivity of assets and liabilities could vary  substantially if
differing  assumptions  were  used or if  actual  experience  differs  from  the
assumptions  used in the  analysis.  For example,  although  certain  assets and
liabilities may have similar maturities or periods to repricing,  they may react
in differing  degrees to changes in market interest rates. The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market  interest  rates,  while  interest  rates on other  types may lag  behind
changes in market rates.  Interest rates may change at different  rates changing
the shape of the yield curve.  During 2007,  short-term  interests declined more
than long-term interests. For example, the Federal Funds rate declined 100 basis
points while the 10 year treasury  rate dropped 60 basis points.  This created a
positive  shaped  yield curve as of December  31,  2007.  In 2006 as the Federal
Funds rate  increased  100 basis points while the two to ten year  treasury bond
yields increased about 40 basis points. As a result the yield curve was inverted
for most of 2006.  Further,  in the event of a  significant  change in  interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from  those  assumed.  Finally,  the  ability  of  borrowers  to  service  their
adjustable-rate debt may decrease in the event of an interest rate increase.  It
should be noted that the  operating  results of the  Company  are not subject to
foreign currency exchange or commodity price risk.

         The following  table displays  interest-sensitivity  as of December 31,
2007 (dollars in thousands):

<TABLE>
<CAPTION>
December 31, 2007
Rate Sensitivity Table                    3 Months    3-12 Months
                                           or Less       Months     1-3 Years       3 Years      Total
                                         ----------------------------------------------------------------
<S>                                     <C>          <C>           <C>           <C>          <C>
Federal Funds Sold and
  interest bearing deposits              $      50    $       -     $       -     $       -    $      50
Securities                                  20,487       26,455        40,609        37,141      124,692
Loans Receivable                            90,225       47,769        84,664       108,638      331,296
                                         ----------------------------------------------------------------
Total Rate Sensitive Assets (RSA)        $ 110,762    $  74,224     $ 125,273     $ 145,779    $ 456,038
                                         ================================================================

Non-maturity interest bearing deposits   $  21,046    $  23,353     $  61,873     $  27,086    $ 133,358
Time Deposits                               73,576       71,406        20,280        11,319      176,581
Other                                       10,144       13,434        26,108             -       49,686
                                         ----------------------------------------------------------------
Total Rate Sensitive Liabilities (RSL)   $ 104,766    $ 108,193     $ 108,261     $  38,405    $ 359,625
                                         ================================================================

Interest Sensitivity Gap                 $   5,996    $ (33,969)    $  17,012     $ 107,374    $  96,413
Cumulative gap                               5,996      (27,973)      (10,961)       96,413
RSA/RSL-cumulative                           105.7%        86.9%         96.6%        126.8%

December 31, 2006

Interest Sensitivity Gap                 $  23,962    $ (34,427)    $   8,813     $  91,169    $  89,517
Cumulative gap                              23,962      (10,465)       (1,652)       89,517
RSA/RSL-cumulative                           126.5%        94.9%         99.5%        126.3%
</TABLE>

18

<PAGE>

LIQUIDITY
         Liquidity is the ability to fund  customers'  borrowing needs and their
deposit withdrawal requests while supporting asset growth. The Company's primary
sources of liquidity include deposit generation, asset maturities, and cash flow
from payments on loans and securities.

         As of December 31, 2007,  the Company had cash and cash  equivalents of
$9.1 million in the form of cash, due from banks,  and short-term  deposits with
other institutions.  In addition, the Company had total securities available for
sale of $124.0  million,  which could be used for liquidity  needs.  This totals
$133.1 million and represents  27.7% of total assets  compared to $122.4 million
and 26.9% of total assets as of December 31,  2006.  The change was  principally
due to a higher level of securities  available for sale as of December 31, 2007.
The Company also monitors other liquidity measures, all of which were within the
Company's policy  guidelines as of December 31, 2007. Based upon these measures,
the Company believes its liquidity position is adequate.

         The Company maintains established lines of credit with the Federal Home
Loan Bank of Pittsburgh  (FHLB),  the Atlantic  Central  Bankers Bank (ACBB) and
other  correspondent  banks,  which support liquidity needs. The total available
under all the lines was $41 million,  with $800,000  outstanding at December 31,
2007.  The  maximum  borrowing  capacity  from FHLB was  $240.2  million.  As of
December 31, 2007, the Company had $23 million in term borrowings from the FHLB,
increasing  from $13 million in similar  borrowings from the FHLB as of December
31,  2006.  The growth of $10  million  was used to fund an  increase in earning
assets in 2007.

OFF-BALANCE SHEET ARRANGEMENTS
         The Company's  financial  statements do not reflect various commitments
that are made in the normal course of business, which may involve some liquidity
risk. These  commitments  consist mainly of unfunded loans and letters of credit
made  under  the  same  standards  as  on-balance  sheet   instruments.   Unused
commitments,  as of December 31, 2007 totaled $47.3  million.  They consisted of
$16.1  million in commercial  real estate,  construction  and land  developments
loans,  $10.9  million in home equity  lines of credit,  $2.3 million in standby
letters of credit  and $18.0  million in other  unused  commitments  principally
commercial lines of credit.  Because these instruments have fixed maturity dates
and because  many of them will  expire  without  being  drawn upon,  they do not
represent any significant liquidity risk.

         Management  believes that any amounts actually drawn upon can be funded
in the  normal  course  of  operations.  The  Company  has no  investment  in or
financial  relationship  with any  unconsolidated  entities that are  reasonably
likely to have a material  effect on  liquidity or the  availability  of capital
resources.

CONTRACTUAL OBLIGATIONS
         The  following  table  represents  the  aggregate of on and off balance
sheet contractual obligations to make future payments (in thousands):

<TABLE>
<CAPTION>

                `                                 December 31, 2007
                        ----------------------------------------------------------------
                          Total    Less than 1 year   1-3 years   4-5 years Over 5 years
                        ----------------------------------------------------------------
<S>                    <C>        <C>                <C>         <C>          <C>
Time deposits           $176,581       $144,982       $ 20,280    $ 11,319     $      -
Long-term debt            23,000          5,000              -       8,000       10,000
Operating leases           3,813            279            494         487        2,553
                        ----------------------------------------------------------------
                        $203,394       $150,261       $ 20,774    $ 19,806     $ 12,553
                        ================================================================
</TABLE>
                                                                              19

<PAGE>

RESULTS OF OPERATIONS

NET INTEREST INCOME
         The  following   analysis  should  be  read  in  conjunction  with  the
"Consolidated  Average  Balance  Sheets with  Resultant  Interest and Rates" and
"Rate/Volume Analysis" tables.

         Net interest income is the most  significant  source of revenue for the
Company and  represented  83.0% of total revenue for the year ended December 31,
2007. Net interest income (fte) totaled  $17,811,000 for the year ended December
31, 2007 compared to $16,708,000 for 2006, an increase of $1,103,000, or 6.6%.
The  resulting  fte net interest  spread and net interest  margin were 3.27% and
3.98% respectively in 2007 compared to 3.36% and 3.96% respectively, in 2006.

         Interest  income  (fte) for the year ended  December  31, 2007  totaled
$29,794,000,  an increase of $3,320,000 over $26,474,000 earned in 2006. The fte
yield on average earning assets for 2007 was 6.66%,  increasing 39 basis points,
from 6.27% in 2006.  The  increase in  interest  income was  principally  due to
higher yields on the securities  available for sale portfolio and loan portfolio
and a higher  percentage of loans on the balance sheet.  The prime interest rate
was flat at 8.25% from January to  mid-September  2007 and decreased to 7.25% by
December  31, 2007.  This  decline in  short-term  rates  impacts the  Company's
floating rate loans,  principally  commercial  real estate,  commercial and home
equity  lines of credit  which are tied to the prime rate.  As of  December  31,
2007,  $69.1  million of loans were  immediately  repriceable.  Average  earning
assets for 2007 totaled  $447.4  million,  an increase of $25.4 million over the
average for 2006. The mix of earning  assets also improved with higher  yielding
loans  representing  72.3% of average  earning  assets  compared to 71.2% during
2006.

         Interest income (fte) earned on loans totaled  $23,876,000 for the year
ended  December  31,  2007  with a  resulting  fte  yield of 7.38%  compared  to
$21,600,000  with a yield (fte) of 7.16% in 2006. The increase was due to growth
in average  volume of loans of $21.9 million and a higher average prime interest
rate in 2007 than average in 2006.

         The  securities  available for sale portfolio  averaged  $118.7 million
during 2007 with interest  income (fte) of  $5,623,000  and yield (fte) of 4.74%
compared to $116.6  million with interest  income (fte) of $4,637,000  and yield
(fte) of 3.98% in 2006.  The  increase in yield was due to the  reinvestment  of
cash flow and maturities from the portfolio into higher yielding instruments.

         Interest   expense  for  the  year  ended  December  31,  2007  totaled
$11,983,000  with cost of  interest-bearing  liabilities  of 3.39%  compared  to
interest  expense  of  $9,766,000  at an  average  cost of 2.91% for  2006.  The
increase  was  principally  due to a  more  expensive  mix  of  interest-bearing
liabilities  with a higher  percentage of average time  deposits in 2007,  50.7%
compared to 43.6% on average in 2006.  In  addition,  the cost of time  deposits
increased on average to 4.57% in 2007 as compared to 3.96% in 2006. The increase
was principally due to higher average short-term rates in 2007 and a competitive
market for these deposits.

         Net interest  income  represented  81.9% of total  revenue for the year
ended December 31, 2006 and totaled $16,708,000.  This represents an increase of
$819,000,  or 5.2% over the  $15,889,000  earned in 2005.  The resulting fte net
interest spread and fte net interest  margin were 3.36% and 3.96%,  respectively
in 2006 compared to 3.58% and 3.99% respectively in 2005.

         Interest  income  (fte) for the year ended  December  31, 2006  totaled
$26,474,000 an increase of $4,080,000 over $22,394,000 in 2005. The fte yield on
average  earning  assets for 2006 was 6.27%  increasing  from 5.62% in 2005. The
increase in interest  income was  principally  due to higher yields on loans and
investments,  growth in average earning assets and a higher  percentage of loans
on the balance sheet. The prime rate of

20

<PAGE>

interest and other  short-term  interest rates  reflected a steady increase from
June 2004 to June 2006.  During that period the prime rate  increased from 4.00%
to 8.25%.  This has improved  the yield on the  Company's  floating  rate loans,
principally  commercial  real estate and commercial  lines of credit,  which are
tied to the prime rate.  As of December  31, 2006,  $78.8  million of loans were
immediately repricable.  Average earning assets for 2006 totaled $422.0 million,
an increase  of $23.9  million  over the  average  for 2005.  The mix of earning
assets also  improved  with higher  yield  loans  representing  71.2% of average
earning assets in 2006 compared to 68.8% in 2005.

         Interest income (fte) earned on loans totaled  $21,600,000 for the year
ended  December  31,  2006  with a  resulting  fte  yield of 7.16%  compared  to
$17,727,000 with an fte yield of 6.47% in 2005. Rising short-term interest rates
and an increase in average volume of $27.4 million,  or 10.0%,  were responsible
for the improvement in income and yield.

         The  securities  available for sale portfolio  averaged  $116.6 million
during 2006,  with fte interest  income of  $4,637,000  and a fte yield of 3.98%
compared to $116.6  million with fte  interest  income of  $4,139,000  and a fte
yield of 3.55% in 2005. The increase in yield was due to  re-investment  of cash
flows from the portfolio into higher yielding  instruments,  due to the increase
in short-term interest rates.

         Interest   expense  for  the  year  ended  December  31,  2006  totaled
$9,766,000,  an increase of $3,261,000 over $6,505,000 in 2005. The increase was
principally due to higher short-term  interest rates and a more expensive mix of
interest-bearing liabilities in 2006. The Company incurred higher costs for time
deposits,  in 2006 at 3.96% compared to 2.82% in 2005. The cost of time deposits
was influenced by competitive  pressures,  and higher short-term  rates.  Higher
interest  rates also impacted the cost of money market  accounts and  short-term
borrowings.  The mix of  average  interest-bearing  liabilities  was  also  more
expensive  in  2006,  with  average  time  deposits  and  short-term  borrowings
representing 49.3% of the total compared to 45.4% on average in 2005.

OTHER INCOME
         Other income  totaled  $3,524,000  for the year ended December 31, 2007
compared to $3,583,000 in 2006.  Service  charges and fees increased  $54,000 to
$2,509,000  in 2007.  The increase  was due to an $87,000  increase in overdraft
(NSF) fees to  $1,347,000  partially  offset by a $39,000  decrease  in business
account  analysis fees as the bank now offers a free business  checking  account
with no analysis fees. Income from fiduciary activities totaled $423,000 in 2007
increasing  $68,000 from 2006. The increase was due to new business and a higher
level of estate fees.  Assets under management  increased $4.8 million to $101.7
million.  Gains on sales of mortgage loans and servicing  rights totaled $23,000
for the 2007 period  compared to $147,000 in 2006.  The  decrease was due to the
gain in 2006 on the sale of $13.7 million of mortgage  servicing rights on loans
previously sold in the secondary market.

         Other income  totaled  $3,583,000  for the year ended December 31, 2006
compared to $3,548,000 in 2005.  Service  charges and fees decreased  $52,000 to
$2,455,000.  The  decrease  was  partially  due to a $26,000  decline in service
charges on deposit accounts reflecting growth in the Bank's free retail checking
products.  Loan related  services  decreased  $79,000 due in part to no-fee loan
promotions  conducted in 2006. Income from fiduciary activities totaled $355,000
in 2006  increasing  $12,000 from 2005. The increase was principally due to $9.9
million  growth in assets under  management  which  totaled  $96.9 million as of
December 31, 2006.

         Gains on sales of  mortgage  loans and  servicing  rights,  included in
Other,  totaled  $147,000 in 2006 compared to $64,000 in 2005.  The increase was
due to the gain on sale of $13.7 million of mortgage  servicing  rights on loans
previously sold in the secondary market to FNMA.

                                                                              21

<PAGE>


Other Income (dollars in thousands)
For the year-ended December 31
                                              2007          2006          2005
                                            ------------------------------------
Service charges on deposit accounts         $  226        $  296        $  322
ATM Fees                                       241           224           215
NSF Fees                                     1,347         1,260         1,265
Safe Deposit Box Rental                         55            55            56
Loan related service fees                      236           271           350
Debit Card                                     328           282           253
Fiduciary activities                           423           355           343
Commissions on mutual funds & annuities        120           131           150
Gain on sales of mortgage loans                 23           147            64
Earnings on bank-owned life insurance          333           309           296
Other income                                   175           187           192
                                            ------------------------------------
                                             3,507         3,517         3,506
Net realized gains on sales of securities       17            66            42
                                            ------------------------------------

Total                                       $3,524        $3,583        $3,548
                                            ====================================

OTHER EXPENSES
         Other   expenses   for  the  year  ended   December  31,  2007  totaled
$11,341,000, an increase of $384,000, or 3.50% over the $10,957,000 in 2006.

         Salaries and employee benefits expense which represented 51.4% of total
other  expenses,  increased  $170,000 or 3.0% to $5,825,000 in 2007. The Company
incurred  $251,000  of expense  related to stock  options in 2007,  compared  to
$136,000 in 2006 with the  increase  related to the timing of grants  awarded in
2006.  The  Company  had  expense  of  $444,000  related to its  Employee  Stock
Ownership Plan (ESOP) in 2006 with no similar  expense in 2007 as the plan had a
ten year life and was fully allocated as of September 30, 2006. This decrease in
expense  was  partially  offset by higher  401k Plan  expense  of  $220,000  and
incentives of $62,000.

         Occupancy  expenses  increased  $119,000  to  $1,087,000  in 2007  with
$71,000 of the  increase  related to the  Tannersville  branch  which  opened in
December 2006. Furniture and equipment expense increased $74,000 to $553,000 due
to maintenance expense on imaging equipment and $31,000 of costs associated with
Tannersville.  The  efficiency  ratio,  which  is  total  other  expenses  as  a
percentage of net interest  income (fte) plus other  income,  for the year ended
December 31, 2007 was 53.2% improving from 54.0% for 2006.

         Other   expenses   for  the  year  ended   December  31,  2006  totaled
$10,957,000, an increase of $334,000 or 3.15% over $10,623,000 in 2005. Salaries
and  employee  benefits  expense,  which  represented  51.6% of  total  expense,
increased  $245,000 or 4.5% to $5,655,000 in 2006. The cost of health  insurance
premiums paid by the Company for its employees  increased  $105,000 in 2006. The
Company incurred $136,000 of expense related to stock options granted in 2006 as
a result of adopting FASB  Statement  No. 123 (R),  "Share Based  Payment".  The
Company had expense of $444,000  related to its employee  stock  ownership  plan
(ESOP) in 2006  compared to  $588,000 in 2005.  The ESOP had a ten year life and
was fully funded as of September 30, 2006.

22

<PAGE>

         Furniture and equipment  expense  decreased $96,000 to $479,000 in 2006
principally due to lower maintenance expense. Data processing related operations
totaled  $700,000 in 2006 compared to $625,000 in 2005.  The increase was due to
enhancement to the Bank's on-line banking product and implementation of software
related to image based check processing.  Advertising  expense increased $65,000
to $224,000 in 2006 reflecting increased use of radio advertising.  Professional
fees  decreased  $104,000  due to  lower  level  of  corporate  legal  fees  and
accounting services.

INCOME TAXES
         Income  tax  expense  for the year  ended  December  31,  2007  totaled
$2,629,000  for an  effective  tax  rate of  28.8%  compared  to an  expense  of
$2,679,000  and an  effective  tax rate of 31.2% in 2006.  The  decrease  in the
effective tax rate is partially  due to a higher level of  tax-exempt  income in
2007.

         Income  tax  expense  for the year  ended  December  31,  2006  totaled
$2,679,000  for an  effective  tax  rate of  31.2%  compared  to an  expense  of
$2,341,000 and an effective tax rate of 29.9% for 2005. The higher effective tax
rate was  principally due to a lower level of tax exempt interest income and the
tax effect of compensation expense related to stock options.

CAPITAL AND DIVIDENDS
         Total stockholders'  equity as of December 31, 2007, was $55.8 million,
compared to $52.2 million as of year-end 2006. The increase was  principally due
to  retention  of  earnings  of  $3,905,000  after cash  dividends  declared  of
$2,606,000.  Accumulated other comprehensive  income increased $1,098,000 due to
an  increase  in  the  fair  value  of  securities  in the  Company's  portfolio
principally as a result of a change in interest  rates.  As of December 31, 2007
the Company had a leverage capital ratio of 11.38%, Tier 1 risk-based capital of
16.26% and total  risk-based  capital of 17.60% compared to, 11.43%,  15.67% and
16.99%, respectively, in 2006.

         The  Company's  stock is traded on The Nasdaq  Global  Market under the
symbol,  NWFL. As of December 31, 2007, there were approximately  1,500 recorded
beneficial shareholders based on transfer agent mailings.

         The  following  table  sets  forth the price  range and cash  dividends
declared per share regarding the common stock for the periods indicated:

                                Closing Price Range
                           -----------------------------        Cash dividends
                               High               Low         declared per share
                           -----------------------------------------------------

Year 2006
---------
First Quarter              $   31.16          $   29.59          $   .20
Second Quarter                 33.75              30.24              .21
Third Quarter                  32.00              31.07              .21
Fourth Quarter                 31.68              30.22              .23

Year 2007
---------
First Quarter              $   33.75          $   30.55          $   .23
Second Quarter                 33.35              31.48              .23
Third Quarter                  32.75              30.05              .23
Fourth Quarter                 32.50              29.90              .25

         The book value per share of the common  stock was $20.27 as of December
31, 2007  compared to $18.67 as of December 31, 2007. As of year-end  2007,  the
stock price was $31.25, compared to $31.50 as of December 31, 2006.

                                                                              23

<PAGE>

STOCK PERFORMANCE GRAPH
         Set forth below is a stock  performance  graph comparing the cumulative
total  shareholder  return on the  Common  Stock with (a) the  cumulative  total
stockholder  return on stocks  included in the Nasdaq Stock Market index and (b)
the cumulative  total  stockholder  return on stocks included in the Nasdaq Bank
index,  as prepared for Nasdaq by the Center for Research in  Securities  Prices
("CRSP") at the University of Chicago.  All three investment  comparisons assume
the  investment  of $100 at the  market  close  on  December  31,  2002  and the
reinvestment  of dividends  paid. The graph provides  comparison at December 31,
2002 and each fiscal year through December 31, 2007.

                       [STOCK PERFORMANCE GRAPH OMITTED]

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                     Legend
                                       12/2002   12/2003  12/2004   12/2005   12/2006   12/2007
<S>                                    <C>       <C>      <C>       <C>       <C>       <C>
Norwood Finanical Corp                  100.0     136.9    187.4     174.9     184.2     193.0
Nasdaq Stock Market (US Companies)      100.0     149.5    162.7     166.2     182.6     198.0
Nasdaq Bank Stocks                      100.0     128.6    147.2     143.8     161.4     127.9
SIC 6020-6029,6710-6719 US & Foreign
-----------------------------------------------------------------------------------------------
</TABLE>


         There can be no assurance that the Company's  future stock  performance
will be the same or similar  to the  historical  performance  shown in the above
graph.  The Company  neither  makes nor  endorses  any  predictions  as to stock
performance.

24

<PAGE>

NORWOOD FINANCIAL CORP.
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
2007
                                         December 31   September 30   June 30     March 31
                                         -------------------------------------------------
<S>                                        <C>          <C>          <C>          <C>
Interest income                             $7,473       $7,457       $7,246       $7,079
Interest expense                             3,070        2,965        2,960        2,988
                                         -------------------------------------------------
  Net interest income                        4,403        4,492        4,286        4,091
Provision for loan losses                      120           90           55           50
Other income                                   858          913          842          894
Net realized gains on sales of securities        2            -           15            -
Other expense                                2,846        2,787        2,847        2,861
                                         -------------------------------------------------

Income before income taxes                   2,297        2,528        2,241        2,074
Income tax expense                             625          722          671          611
                                         -------------------------------------------------
NET INCOME                                  $1,672       $1,806       $1,570       $1,463
                                         =================================================

Basic earnings per share                    $ 0.61       $ 0.65       $ 0.56       $ 0.52
                                         =================================================

Diluted earnings per share                  $ 0.60       $ 0.64       $ 0.55       $ 0.51
                                         =================================================
</TABLE>

<TABLE>
<CAPTION>

2006
                                         December 31   September 30   June 30     March 31
                                         -------------------------------------------------
<S>                                        <C>          <C>          <C>          <C>
Interest income                             $6,956       $6,647       $6,350       $5,996
Interest expense                             2,830        2,545        2,321        2,070
                                         -------------------------------------------------
  Net interest income                        4,126        4,102        4,029        3,926
Provision for loan losses                       50           45           55           70
Other income                                   862          849          989          817
Net realized gains on sales of securities        -           45           14            7
Other expense                                2,620        2,730        2,841        2,766
                                         -------------------------------------------------

Income before income taxes                   2,318        2,221        2,136        1,914
Income tax expense                             739          699          660          581
                                         -------------------------------------------------
NET INCOME                                  $1,579       $1,522       $1,476       $1,333
                                         =================================================

Basic earnings per share                    $ 0.56       $ 0.54       $ 0.53       $ 0.48
                                         =================================================

Diluted earnings per share                  $ 0.55       $ 0.53       $ 0.52       $ 0.47
                                         =================================================
</TABLE>

                                                                              25

<PAGE>

NORWOOD FINANCIAL CORP.
CONSOLIDATED AVERAGE BALANCE SHEETS
WITH RESULTANT INTEREST AND RATES
(Tax-Equivalent Basis, dollars in thousands)

<TABLE>
<CAPTION>
Year Ended December 31                             2007                            2006                            2005
                                      ----------------------------------------------------------------------------------------------
                                      Average                 Ave    Average                  Ave     Average                   Ave
                                      Balance(2) Interest (1) Rate   Balance(2)  Interest (1) Rate    Balance(2)  Interest (1)  Rate
                                      ----------------------------------------------------------------------------------------------
<S>                                <C>         <C>         <C>      <C>         <C>         <C>      <C>         <C>         <C>
ASSETS
Interest Earning Assets:
  Federal funds sold                 $  3,895    $   195     5.01%    $  2,778    $   142     5.11%    $  3,730    $   129     3.46%
  Interest bearing deposits
    with banks                            483         26     5.38           98          5     5.10          123          3     2.44
  Securities held to maturity             830         74     8.92          981         90     9.17        3,608        396    10.98
  Securities available for sale
    Taxable                            99,399      4,571     4.60       99,571      3,712     3.73       98,038      3,116     3.18
    Tax-exempt                         19,320      1,052     5.45       17,070        925     5.42       18,602      1,023     5.50
                                     -------------------              -------------------              -------------------
      Total  securities
        available for sale            118,719      5,623     4.74      116,641      4,637     3.98      116,640      4,139     3.55
Loans receivable (3,4)                323,444     23,876     7.38      301,533     21,600     7.16      274,053     17,727     6.47
                                     -------------------              -------------------              -------------------
    Total interest
      earning assets                  447,371     29,794     6.66      422,031     26,474     6.27      398,154     22,394     5.62
Non-interest earning assets:
  Cash and due from banks               8,128                            8,857                            8,569
  Allowance for loan losses            (3,925)                          (3,785)                          (3,597)
  Other assets                         17,318                           16,976                           16,049
                                     --------                         --------                         --------
    Total non-interest
      earning assets                   21,521                           22,048                           21,021
                                     --------                         --------                         --------
TOTAL ASSETS                         $468,892                         $444,079                         $419,175
                                     ========                         ========                         ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Liablities:
  Interest-bearing demand
    and money market                 $ 90,392      1,852     2.05     $ 96,882      1,688     1.74     $ 93,747    $   969     1.03
      Savings                          45,858        215     0.47       49,937        232     0.46       57,128        268     0.47
      Time                            172,986      7,900     4.57      146,344      5,798     3.96      128,704      3,634     2.82
                                     -------------------              -------------------              -------------------
        Total interest-bearing
          deposits                    309,236      9,967     3.22      293,163      7,718     2.63      279,579      4,871     1.74
Short-term borrowings                  22,443        932     4.15       19,284        823     4.27       15,783        416     2.64
Long-term debt                         22,315      1,084     4.86       23,419      1,225     5.23       23,000      1,218     5.30
                                     -------------------              -------------------              -------------------
  Total interest bearing
    liabilities                       353,994     11,983     3.39      335,866      9,766     2.91      318,362      6,505     2.04
                                                 -------                          -------                          -------
Non-interest bearing liabilities:
Non-interest bearing
  demand deposits                      56,523                           54,798                           52,109
Other liabilities                       4,545                            3,526                            1,804
                                     --------                         --------                         --------
  Total non-interest
    bearing liabilities                61,068                           58,324                           53,913
                                     --------                         --------                         --------
Stockholders' equity                   53,830                           49,889                           46,900
                                     --------                         --------                         --------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY               $468,892                         $444,079                         $419,175
                                     ========                         ========                         ========
Net interest income
  (tax-equivalent basis)                          17,811     3.27%                 16,708     3.36%                 15,889     3.58%
Tax-equivalent basis adjustment                     (539)    ====                    (525)    ====                    (626)    ====
                                                 -------                          -------                          -------
  Net Interest Income                            $17,272                          $16,183                          $15,263
                                                 =======                          =======                          =======
Net Interest margin
  (tax-equivalent basis)                                     3.98%                            3.96%                            3.99%
                                                             ====                             ====                             ====
</TABLE>

1.   Interest  and  yields  are  presented  on a  tax-equivalent  basis  using a
     marginal tax rate of 34%.
2.   Average balances have been calculated based on daily balances.
3.   Loan balances include non-accrual loans and are net of unearned income.
4.   Loan yields  include  the effect of  amortization  of deferred  fees net of
     costs.

26

<PAGE>

RATE/VOLUME ANALYSIS
         The  following  table  shows the  fully  taxable  equivalent  effect of
changes in volumes and rates on interest income and interest expense.

<TABLE>
<CAPTION>
                                                               Increase/(Decrease)
                                         ---------------------------------------------------------------
(dollars in thousands)                        2007 compared to 2006           2006 compared to 2005
                                         ---------------------------------------------------------------
                                                  Variance due to                Variance due to
                                         ---------------------------------------------------------------
                                          Volume      Rate        Net      Volume      Rate       Net
                                         ---------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>        <C>        <C>
INTEREST EARNING ASSETS:
--------------------------------------------------------------------------------------------------------
Federal funds sold                       $    56    $    (3)   $    53    $   (38)   $    51    $    13
Interest bearing deposits
  with banks                                  21          -         21         (1)         3          2
Securities held to maturity                  (14)        (2)       (16)      (250)       (56)      (306)
Securities available for sale
  Taxable                                     (6)       865        859         49        547        596
  Tax-exempt                                 122          5        127        (83)       (15)       (98)
                                         ---------------------------------------------------------------
    Total  securities available
      for sale                               116        870        986        (34)       532        498
Loans receivable                           1,603        673      2,276      1,870      2,003      3,873
                                         ---------------------------------------------------------------
    Total interest earning assets          1,783      1,537      3,320      1,547      2,533      4,080
                                         ---------------------------------------------------------------

INTEREST BEARING LIABILITIES:
--------------------------------------------------------------------------------------------------------
Interest-bearing demand
  and money market                          (119)       283        164         33        686        719
Savings                                      (19)         2        (17)       (33)        (3)       (36)
Time                                       1,143        959      2,102        549      1,615      2,164
                                         ---------------------------------------------------------------
    Total interest-bearing deposits        1,006      1,243      2,249        549      2,298      2,847
Short-term borrowings                        132        (23)       109        107        300        407
 Long-term debt                              (56)       (85)      (141)        22        (15)         7
                                         ---------------------------------------------------------------
    Total interest bearing liabilities     1,081      1,136      2,217        678      2,583      3,261
                                         ---------------------------------------------------------------
Net interest income
  (tax-equivalent basis)                 $   701    $   401    $ 1,103    $   869    $   (50)   $   819
                                         ===============================================================
</TABLE>

         Changes  in  net  interest   income  that  could  not  be  specifically
identified as either a rate or volume change were allocated  proportionately  to
changes in volume and changes in rate.

                                                                              27

<PAGE>

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

TO THE SHAREHOLDERS OF NORWOOD FINANCIAL CORP.

         Management of Norwood  Financial Corp. and its subsidiary  (Norwood) is
responsible for  establishing  and maintaining  adequate  internal  control over
financial  reporting  as  defined in Rules  13a-15(f)  and  15d-15(f)  under the
Securities  Exchange Act of 1934.  Norwood's  internal  control  over  financial
reporting is designed to provide reasonable  assurance regarding the reliability
of  financial  reporting  and  the  preparation  of the  consolidated  financial
statements  for  external  purposes in  accordance  with  accounting  principles
generally accepted in the United States of America.

         Norwood's  internal  control over  financial  reporting  includes those
policies and procedures  that (1) pertain to the maintenance of records that, in
reasonable   detail,   accurately  and  fairly  reflect  the   transactions  and
dispositions  of the assets of Norwood;  (2) provide  reasonable  assurance that
transactions  are  recorded as  necessary  to permit  preparation  of  financial
statements in accordance with generally accepted accounting principles, and that
our  receipts  and   expenditures   are  being  made  only  in  accordance  with
authorizations of Norwood's management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized  acquisition,
use or disposition of Norwood's  assets that could have a material effect on the
consolidated financial statements.

         Because of its inherent  limitations,  internal  control over financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

         Management  assessed the  effectiveness  of Norwood's  internal control
over  financial  reporting as of December 31, 2007.  In making this  assessment,
management   used  the  criteria  set  forth  by  the  Committee  of  Sponsoring
Organizations  of the  Treadway  Commission  in  "Internal  Control - Integrated
Framework."  Based on our assessment and those criteria,  management  determined
that Norwood maintained  effective internal control over financial  reporting as
of December 31, 2007.

         Norwood's  independent  registered certified public accounting firm has
audited  the   effectiveness  of  Norwood's   internal  control  over  financial
reporting. Their report appears on page 30.

28

<PAGE>

[LOGO] bmc


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Norwood Financial Corp.
Honesdale, Pennsylvania

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Norwood
Financial  Corp.  and its  subsidiary as of December 31, 2007 and 2006,  and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2007.  Norwood
Financial  Corp.  and its  subsidiary's  management  is  responsible  for  these
consolidated  financial statements.  Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Norwood Financial
Corp.  and its  subsidiary as of December 31, 2007 and 2006,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  December  31,  2007  in  conformity  with  accounting  principles
generally accepted in the United States of America.

As discussed in Note 2 to the  consolidated  financial  statements,  the Company
changed its method of accounting for share-based payments in 2006.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board (United  States),  Norwood  Financial Corp. and its
subsidiary's  internal control over financial reporting as of December 31, 2007,
based on criteria  established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring  Organizations of the Treadway Commission (COSO),
and our report dated March 11, 2008 expressed an unqualified opinion.


                                                     /s/Beard Miller Company LLP


Beard Miller Company LLP
Lancaster, Pennsylvania
March 11, 2008

                                                                              29

<PAGE>

[LOGO] bmc


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Norwood Financial Corp.
Honesdale, Pennsylvania

         We have audited Norwood  Financial Corp. and its subsidiary's  internal
control over  financial  reporting  as of December  31, 2007,  based on criteria
established in Internal  Control - Integrated  Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Norwood Financial
Corp. and its subsidiary's  Management is responsible for maintaining  effective
internal  control  over  financial  reporting  and  for  its  assessment  of the
effectiveness  of internal  control  over  financial  reporting  included in the
accompanying  Management's Report On Internal Control Over Financial  Reporting.
Our  responsibility  is to express an opinion on the company's  internal control
over financial reporting based on our audit.

         We conducted our audit in  accordance  with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit of  internal  control  over  financial  reporting
included   obtaining  an   understanding  of  internal  control  over  financial
reporting,  assessing the risk that a material weakness exists,  and testing and
evaluating the design and operating  effectiveness  of internal control based on
the assessed risk. Our audit also included  performing such other  procedures as
we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.

         A company's  internal  control  over  financial  reporting is a process
designed to provide reasonable  assurance regarding the reliability of financial
reporting and the preparation of financial  statements for external  purposes in
accordance with generally accepted accounting  principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the  transactions  and dispositions of the assets of the company;
(2) provide reasonable  assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

         Because of its inherent  limitations,  internal  control over financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

         In our opinion,  Norwood Financial Corp. and its subsidiary maintained,
in all material respects, effective internal control over financial reporting as
of December  31,  2007,  based on  criteria  established  in Internal  Control -
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
Treadway Commission (COSO).

         We have also audited,  in  accordance  with the standards of the Public
Company  Accounting  Oversight Board (United States),  the consolidated  balance
sheets and the related statements of income, stockholders' equity and cash flows
of Norwood  Financial Corp. and its  subsidiary,  and our report dated March 11,
2008 expressed an unqualified opinion.


                                                    /s/Beard Miller Company, LLP


Beard Miller Company, LLP
Lancaster, Pennsylvania
March 11, 2008

30

<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                              ----------------------
                                                                                  2007       2006
                                                                              ----------------------
                                                                                   (In Thousands,
                                                                                 Except Share Data)
<S>                                                                         <C>          <C>
                                     ASSETS
Cash and due from banks                                                       $   9,014    $   9,450
Interest bearing deposits with banks                                                 50           67
                                                                              ----------------------

     Cash and Cash Equivalents                                                    9,064        9,517

Securities available for sale                                                   123,987      112,912
Securities held to maturity, fair value 2007 $721; 2006 $971                        705          954
Loans receivable, net of allowance for loan losses 2007 $4,081; 2006 $3,828     327,215      311,739
Investment in FHLB stock, at cost                                                 2,072        1,687
Bank premises and equipment, net                                                  5,742        6,020
Bank owned life insurance                                                         7,767        7,479
Accrued interest receivable                                                       2,343        2,129
Other assets                                                                      1,715        1,919
                                                                              ----------------------

         Total Assets                                                         $ 480,610    $ 454,356
                                                                              ======================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
  Deposits:
    Non-interest bearing demand                                               $  60,061    $  53,856
    Interest-bearing demand                                                      32,426       36,600
    Money market deposit accounts                                                57,970       50,048
    Savings                                                                      42,962       45,144
    Time                                                                        176,581      172,455
                                                                              ----------------------

         Total Deposits                                                         370,000      358,103

  Short-term borrowings                                                          26,686       22,736
  Long-term debt                                                                 23,000       13,000
  Accrued interest payable                                                        3,198        2,894
  Other liabilities                                                               1,907        5,392
                                                                              ----------------------

         Total Liabilities                                                      424,791      402,125
                                                                              ----------------------

STOCKHOLDERS' EQUITY
  Common stock, par value $.10 per share; authorized 10,000,000 shares;
    issued 2,840,872 shares                                                         284          284
  Surplus                                                                        10,159       10,149
  Retained earnings                                                              47,030       43,125
  Treasury stock, at cost 2007 87,256 shares; 2006 43,721 shares                 (2,708)      (1,283)
  Accumulated other comprehensive income (loss)                                   1,054          (44)
                                                                              ----------------------

         Total Stockholders' Equity                                              55,819       52,231
                                                                              ----------------------

         Total Liabilities and Stockholders' Equity                           $ 480,610    $ 454,356
                                                                              ======================
</TABLE>

See notes to consolidated financial statements.

                                                                              31

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                        ---------------------------
                                                          2007      2006      2005
                                                        ---------------------------
                                                   (In Thousands, Except per Share Data)
<S>                                                    <C>       <C>       <C>
INTEREST INCOME
  Loans receivable, including fees                      $23,720   $21,422   $17,583
  Securities:
    Taxable                                               4,571     3,712     3,116
    Tax-exempt                                              743       668       937
  Other                                                     221       147       132
                                                        ---------------------------
        Total Interest Income                            29,255    25,949    21,768
                                                        ---------------------------
INTEREST EXPENSE
  Deposits                                                9,967     7,718     4,871
  Short-term borrowings                                     932       823       416
  Long-term debt                                          1,084     1,225     1,218
                                                        ---------------------------
        Total Interest Expense                           11,983     9,766     6,505
                                                        ---------------------------
        Net Interest Income                              17,272    16,183    15,263
PROVISION FOR LOAN LOSSES                                   315       220       350
                                                        ---------------------------
  Net Interest Income after Provision for Loan Losses    16,957    15,963    14,913
                                                        ---------------------------
OTHER INCOME
  Service charges and fees                                2,509     2,455     2,507
  Income from fiduciary activities                          423       355       343
  Net realized gains on sales of securities                  17        66        42
  Earnings on life insurance policies                       333       309       296
  Other                                                     242       398       360
                                                        ---------------------------
        Total Other Income                                3,524     3,583     3,548
                                                        ---------------------------
OTHER EXPENSES
  Salaries and employee benefits                          5,825     5,655     5,410
  Occupancy                                               1,087       968       928
  Furniture and equipment                                   553       479       575
  Data processing related operations                        690       700       625
  Advertising                                               235       224       159
  Professional fees                                         349       340       444
  Postage and telephone                                     491       471       470
  Taxes, other than income                                  414       354       334
  Amortization of intangible assets                          52        52        52
  Other                                                   1,645     1,714     1,626
                                                        ---------------------------
        Total Other Expenses                             11,341    10,957    10,623
                                                        ---------------------------
        Income before Income Taxes                        9,140     8,589     7,838
INCOME TAX EXPENSE                                        2,629     2,679     2,341
                                                        ---------------------------
        Net Income                                      $ 6,511   $ 5,910   $ 5,497
                                                        ===========================
EARNINGS PER SHARE
Basic                                                   $  2.34   $  2.11   $  1.96
                                                        ===========================
Diluted                                                 $  2.30   $  2.07   $  1.92
                                                        ===========================

</TABLE>

See notes to consolidated financial statements.

32

<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                 Years Ended December 31, 2007, 2006 and 2005
                                                 ----------------------------------------------------------------------------------
                                                                                                       Accumulated
                                                  Number of                                              Other      Unearned
                                                    Shares     Common             Retained   Treasury Comprehensive  ESOP
                                                    Issued     Stock    Surplus   Earnings    Stock   Income (Loss) Shares    Total
                                                 ----------------------------------------------------------------------------------
                                                                    (Dollars in Thousands, Except Per Share Data)
<S>                                             <C>         <C>       <C>        <C>        <C>        <C>        <C>      <C>

BALANCE - DECEMBER 31, 2004                      2,705,715   $   270   $ 5,336    $40,222    $  (149)   $   333    $(327)   $45,685
Comprehensive income:                                    -         -         -          -          -          -        -    -------
  Net income                                                                        5,497                                     5,497
  Change in unrealized gains (losses) on
    securities available for sale,
    net of reclassification
    adjustment and tax effects                           -         -         -          -          -     (1,105)       -     (1,105)
                                                                                                                            -------
        Total Comprehensive Income                                                                                            4,392
                                                                                                                            -------

  Cash dividends declared, $0.71 per share               -         -         -     (1,997)         -          -        -     (1,997)
  Stock options exercised (9,239 shs)                    -         -       (78)         -        228          -        -        150
  Tax benefit of stock options exercised                 -         -        18          -          -          -        -         18
  Acquisition of treasury stock (25,201 shs)             -         -         -          -       (819)         -        -       (819)
  Sale of treasury stock for ESOP (3,686 shs)            -         -         7          -        107          -        -        114
  Release of earned ESOP shares, net                     -         -       365          -          -          -      200        565
                                                 ----------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2005                      2,705,715       270     5,648     43,722       (633)      (772)    (127)    48,108
Comprehensive income:                                    *
  Net income                                             -         -         -      5,910          -          -        -      5,910
  Change in unrealized gains (losses) on
    securities available for sale,
    net of reclassification
    adjustment and tax effects                           -         -         -          -          -        728        -        728
                                                                                                                            -------
        Total Comprehensive Income                                                                                            6,638
                                                                                                                            -------
  Cash dividends declared, $0.85 per share               -         -         -     (2,368)         -          -        -     (2,368)
  5% stock dividend at $30.59 per share            135,157        14     4,121     (4,139)         -          -        -         (4)
  Treasury stock effect of 5% stock dividend
    (1,933 shs)                                          -         -         -          -          -          -        -          -
  Acquisition of treasury stock (28,746 shs)            --         -         -          -       (890)         -        -       (890)
  Stock options exercised (4,331 shs)                    -         -       (68)         -        128          -        -         60
  Tax benefit of stock options exercised                 -         -        10          -          -          -        -         10
  Sale of treasury stock for ESOP (3,816 shs)            -         -         8          -        112          -        -        120
  Compensation expense related to stock
    options                                              -         -       136          -          -          -        -        136
  Release of earned ESOP shares, net                     -         -       294          -          -          -      127        421
                                                 -----------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 2006                      2,840,872       284    10,149     43,125     (1,283)       (44)       -     52,231
Comprehensive income:                                    -         -         -          -          -          -        -          -
  Net income                                             -         -         -      6,511          -          -        -      6,511
  Change in unrealized gains (losses) on
    securities available for sale,
    net of reclassification
    adjustment and tax effects                           -         -         -          -          -      1,098        -      1,098
                                                                                                                            -------
        Total Comprehensive Income                       -         -         -          -          -          -        -      7,609
                                                                                                                            -------
  Cash dividends declared, $0.94 per share               -         -         -     (2,606)         -          -        -     (2,606)
  Acquisition of treasury stock (72,875 shs)             -         -         -          -     (2,313)         -        -     (2,313)
  Stock options exercised (24,720 shs)                   -         -      (404)         -        745          -        -        341
  Tax benefit of stock options exercised                 -         -       162          -          -          -        -        162
  Sale of treasury stock for ESOP (4,620 shs)            -         -         1          -        143          -        -        144
  Compensation expense related to stock
    options                                              -         -       251          -          -          -        -        251
                                                 -----------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2007                      2,840,872   $   284   $10,159    $47,030    $(2,708)   $ 1,054    $   -    $55,819
                                                 ==================================================================================
</TABLE>

See notes to consolidated financial statements.

                                                                              33

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                                    ------------------------------------
                                                                                       2007        2006            2005
                                                                                    ------------------------------------
                                                                                              (In Thousands)
<S>                                                                               <C>         <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                          $  6,511    $  5,910        $  5,497
Adjustments to reconcile net income to net cash provided by operating activities:
    Provision for loan losses                                                            315         220             350
    Depreciation                                                                         566         503             535
    Amortization of intangible assets                                                     52          52              52
    Deferred income taxes                                                               (151)       (108)            (37)
    Net amortization (accretion)?of securities premiums and discounts                    113         301             431
    Net realized gains on sales of securities                                            (17)        (66)
    Net increase in investment in life insurance                                        (288)       (266)           (254)
    Gain on sale of bank premises and equipment and
             foreclosed real estate                                                       (1)        (12)             (5)
    Gain on sale of mortgage loans                                                       (23)       (147)            (64)
    Mortgage loans originated for sale                                                  (794)     (2,065)         (6,650)
    Proceeds from sale of mortgage loans                                                 817       2,212           6,714
    Tax benefit of stock options exercised                                                 -           -              18
    Release of ESOP shares                                                                 -         421             565
    Compensation expense related to stock options                                        251         136               -
    Decrease (increase) in accrued interest receivable and
      other assets                                                                      (414)      1,137          (1,725)
    Increase (decrease) in accrued interest payable and other liabilities             (3,228)      4,543           1,575
                                                                                    ------------------------------------
        Net Cash Provided by Operating Activities                                      3,709      12,771           6,960
                                                                                    ------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Securities available for sale:
    Proceeds from sales                                                                   74          96           6,073
    Proceeds from maturities and principal reductions on
      mortgage-backed securities                                                      52,408      35,962          11,799
    Purchases                                                                        (62,005)    (32,291)        (18,878)
  Securities held to maturity, proceeds from maturities                                  250         505           4,330
  (Increase) decrease in investment in FHLB stock                                       (385)        (67)            605
  Net  increase in loans                                                             (15,839)    (24,892)        (36,374)
  Purchase of bank premises and equipment                                               (288)     (1,130)           (446)
  Proceeds from sales of premises and equipment and foreclosed real estate                 1          64              12
                                                                                    ------------------------------------
        Net Cash Used in Investing Activities                                        (25,784)    (21,753)        (32,879)
                                                                                    ------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase in deposits                                                            11,897      17,500          21,958
  Net increase (decrease) in short-term borrowings                                     3,950       4,172          (4,418)
  Proceeds from long-term debt                                                        15,000           -           5,000
  Repayments of long-term debt                                                        (5,000)    (10,000)         (5,000)
  Stock options exercised                                                                341          60             150
  Tax benefit of stock options exercised                                                 162          10               -
  Purchase of ESOP shares from treasury stock                                            144         120             114
  Acquisition of treasury stock                                                       (2,313)       (890)           (819)
  Cash dividends paid                                                                 (2,559)     (2,289)         (1,916)
                                                                                    ------------------------------------
        Net Cash Provided by Financing Activities                                     21,622       8,683          15,069
                                                                                    ------------------------------------
        Net Decrease in Cash and Cash Equivalents                                       (453)       (299)        (10,850)
CASH AND CASH EQUIVALENTS - BEGINNING                                                  9,517       9,816          20,666
                                                                                    ------------------------------------
CASH AND CASH EQUIVALENTS - ENDING                                                  $  9,064    $  9,517        $  9,816
                                                                                    ====================================
</TABLE>

See notes to consolidated financial statements.

34

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS
         Norwood Financial Corp. (Company) is a one bank holding company.  Wayne
Bank  (Bank)  is a  wholly-owned  subsidiary  of  the  Company.  The  Bank  is a
state-chartered  bank located in Honesdale,  Pennsylvania.  The Company  derives
substantially  all of its income from the bank related  services  which  include
interest  earnings on commercial  mortgages,  residential real estate mortgages,
commercial  and  consumer  loans,  as well as interest  earnings  on  investment
securities  and fees from  deposit  services  to its  customers.  The Company is
subject to regulation  and  supervision  by the Federal  Reserve Board while the
Bank is subject to regulation and supervision by the Federal  Deposit  Insurance
Corporation and the Pennsylvania Department of Banking.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
         The  consolidated  financial  statements  include  the  accounts of the
Company and its wholly-owned  subsidiary,  the Bank, and the Bank's wholly-owned
subsidiaries,  WCB Realty Corp.,  Norwood  Investment Corp. and WTRO Properties.
All   intercompany   accounts  and   transactions   have  been   eliminated   in
consolidation.

Estimates
         The  preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.  Material estimates that are particularly  susceptible to significant
change in the near term relate to the  determination  of the  allowance for loan
losses  and the  valuation  of  deferred  tax assets  and the  determination  of
other-than-temporary impairment on securities.

Significant Group Concentrations of Credit Risk
         Most of the Company's  activities  are with  customers  located  within
northeastern  Pennsylvania.  Note 3 discusses the types of  securities  that the
Company  invests  in.  Note 4  discusses  the types of lending  that the Company
engages in. The Company does not have any significant  concentrations to any one
industry or customer.

Concentrations of Credit Risk
         The  Bank  operates  primarily  in  Wayne,  Pike and  Monroe  Counties,
Pennsylvania  and,  accordingly,  has extended  credit  primarily to  commercial
entities and  individuals in this area whose ability to honor their contracts is
influenced  by the  region's  economy.  These  customers  are also  the  primary
depositors of the Bank. The Bank is limited in extending credit by legal lending
limits to any single borrower or group of borrowers.

Securities
         Securities  classified as available for sale are those  securities that
the Company intends to hold for an indefinite period of time but not necessarily
to maturity.  Any decision to sell a security  classified  as available for sale
would be based on various factors,  including  significant  movement in interest
rates,  changes  in  maturity  mix  of the  Company's  assets  and  liabilities,
liquidity needs,  regulatory  capital  considerations and other similar factors.
Securities  available for sale are carried at fair value.  Unrealized  gains and
losses are reported in other  comprehensive  income, net of the related deferred
tax effect. Realized gains or losses, determined on the basis of the cost of the
specific  securities sold, are included in earnings.  Premiums and discounts are
recognized  in interest  income using a method which  approximates  the interest
method over the term of the security.

         Bonds,  notes and  debentures  for which the Company  has the  positive
intent and  ability to hold to  maturity  are  reported  at cost,  adjusted  for
premiums and discounts that are recognized in interest income using the interest
method over the term of the security.

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

         Declines in the fair value of held to maturity and  available  for sale
securities  below  their  cost that are deemed to be other  than  temporary  are
reflected in earnings as realized  losses.  In  estimating  other-than-temporary
impairment losses, management considers (1) the length of time and the extent to
which the fair value has been less than cost,  (2) the  financial  condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time  sufficient to allow
for any anticipated recovery in fair value.

                                                                              35

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         Federal law requires a member institution of the Federal Home Loan Bank
system to hold  stock of its  district  Federal  Home Loan Bank  according  to a
predetermined formula. This restricted stock is carried at cost.

Loans Receivable
         Loans receivable that management has the intent and ability to hold for
the  foreseeable  future  or  until  maturity  or  payoff  are  stated  at their
outstanding unpaid principal  balances,  net of an allowance for loan losses and
any deferred fees.  Interest income is accrued on the unpaid principal  balance.
Loan  origination fees are deferred and recognized as an adjustment of the yield
(interest  income) of the related  loans.  The Company is  generally  amortizing
these amounts over the contractual life of the loan.

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

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

         The  allowance  for loan  losses is  maintained  at a level  considered
adequate to provide for losses that can be reasonably anticipated.  Management's
periodic  evaluation  of the adequacy of the allowance is based on the Company's
past loan loss  experience,  known and inherent risks in the portfolio,  adverse
situations that may affect the borrower's  ability to repay, the estimated value
of any  underlying  collateral,  composition  of  the  loan  portfolio,  current
economic  conditions and other relevant  factors.  This evaluation is inherently
subjective  as it  requires  material  estimates  that  may  be  susceptible  to
significant revision as more information becomes available.

         The allowance consists of specific, general and unallocated components.
The specific  component relates to loans that are classified as either doubtful,
substandard  or special  mention.  For such loans  that are also  classified  as
impaired,  an  allowance  is  established  when the  discounted  cash  flows (or
collateral value or observable  market price) of the impaired loan is lower than
the carrying value of that loan.  The general  component  covers  non-classified
loans  and is based on  historical  loss  experience  adjusted  for  qualitative
factors.  An  unallocated  component is maintained to cover  uncertainties  that
could affect management's estimate of probable losses. The unallocated component
of the allowance  reflects the margin of imprecision  inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.

         A loan is considered  impaired when,  based on current  information and
events,  it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement.  Factors considered by management in determining  impairment
include  payment  status,  collateral  value and the  probability  of collecting
scheduled  principal  and  interest  payments  when due.  Loans that  experience
insignificant payment delays and payment shortfalls generally are not classified
as  impaired.  Management  determines  the  significance  of payment  delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay,  the reasons for the delay,  the borrower's  prior payment record and the
amount  of the  shortfall  in  relation  to the  principal  and  interest  owed.
Impairment is measured on a loan by loan basis for commercial  and  construction
loans by either the present  value of expected  future cash flows  discounted at
the loan's effective  interest rate, the loan's  obtainable  market price or the
fair value of the collateral if the loan is collateral dependent.

36

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         Large  groups of smaller  balance  homogeneous  loans are  collectively
evaluated for impairment.  Accordingly, the Company does not separately identify
individual   consumer  and   residential   real  estate  loans  for   impairment
disclosures, unless such loans are the subject of a restructuring agreement.

Premises and Equipment
         Premises   and   equipment   are   stated  at  cost  less   accumulated
depreciation.   Depreciation   expense   is   calculated   principally   on  the
straight-line  method  over the  respective  assets  estimated  useful  lives as
follows:
                                                                          Years
                                                                          -----
            Buildings and improvements                                   10 - 40
            Furniture and equipment                                       3 - 10

Transfers of Financial Assets
         Transfers of financial  assets,  including loan and loan  participation
sales,  are  accounted  for as sales,  when  control  over the  assets  has been
surrendered.  Control over  transferred  assets is deemed to be surrendered when
(1) the assets have been isolated from the Company,  (2) the transferee  obtains
the right (free of conditions  that  constrain it from taking  advantage of that
right) to pledge or exchange the transferred assets and (3) the Company does not
maintain  effective control over the transferred  assets through an agreement to
repurchase them before their maturity.

Foreclosed Real Estate
         Real  estate  properties   acquired  through,   or  in  lieu  of,  loan
foreclosure are to be sold and are initially recorded at fair value less cost to
sell  at  the  date  of  foreclosure   establishing  a  new  cost  basis.  After
foreclosure,  valuations are  periodically  performed by management and the real
estate is carried at the lower of its carrying amount or fair value less cost to
sell.  Revenue  and  expenses  from  operations  and  changes  in the  valuation
allowance are included in other expenses.  Foreclosed real estate is included in
other assets.

Bank Owned Life Insurance
         The Company  invests in bank owned life insurance  ("BOLI") as a source
of funding for employee benefit  expenses.  BOLI involves the purchasing of life
insurance by the Bank on a chosen group of  employees.  The Company is the owner
and  beneficiary of the policies.  This life insurance  investment is carried at
the cash surrender value of the underlying policies. Income from the increase in
cash  surrender  value of the policies is included in other income on the income
statement.

Intangible Assets
         Intangible  assets  represent   goodwill  arising  from   acquisitions.
Goodwill represents the excess cost of an acquisition over the fair value of the
net assets acquired. On January 1, 2002, the Company adopted SFAS 142, "Goodwill
and Other Intangible Assets," and SFAS 147, "Accounting for Certain Acquisitions
of Banking and Thrift  Institutions." At December 31, 2007 and 2006, the Company
had  intangible  assets of $169,000 and  $221,000,  which is net of  accumulated
amortization of $611,000 and $559,000, which are included in other assets. These
intangible  assets will continue to be amortized on a  straight-line  basis over
fifteen  years  under  the  provisions  of SFAS 142 and SFAS  147.  Amortization
expense  related to  intangible  assets was  $52,000 for each of the years ended
December 31, 2007, 2006 and 2005. The  amortization  expense will be $52,000 for
each of the years ended  December  31,  2008,  2009 and 2010 and $13,000 for the
year ended December 31, 2011.

Income Taxes
         Deferred income tax assets and liabilities are determined  based on the
differences  between financial  statement  carrying amounts and the tax basis of
existing assets and liabilities.  These  differences are measured at the enacted
tax rates that will be in effect when these  differences  reverse.  Deferred tax
assets are reduced by a valuation  allowance when, in the opinion of management,
it is more likely than not that some portion of the deferred tax assets will not
be realized.  As changes in tax laws or rates are  enacted,  deferred tax assets
and liabilities are adjusted through the provision for income taxes. The Company
and its subsidiary file a consolidated federal income tax return.

Advertising Costs
         The Company  follows the policy of charging the costs of advertising to
expense as incurred.

                                                                              37

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share
         On April 11, 2006,  the Company  declared a 5% stock dividend on common
stock  outstanding  payable  May 26, 2006 to  shareholders  of record on May 12,
2006. The stock dividend  resulted in the issuance of 135,157  additional common
shares.  All share  amounts and per share data have been adjusted for the effect
of the stock dividend.

         Basic  earnings  per  share  represents   income  available  to  common
stockholders divided by the weighted average number of common shares outstanding
during the period.  Diluted earnings per share reflects additional common shares
that would have been  outstanding if dilutive  potential  common shares had been
issued,  as well as any  adjustment to income that would result from the assumed
issuance.  Potential  common  shares  that may be issued by the  Company  relate
solely to outstanding  stock options and are determined using the treasury stock
method.

Stock Option Plans
         In December 2004, the Financial Acounting Standards Board (FASB) issued
Statement  No. 123 (R),  "Share-Based  Payment."  Statement No. 123 (R) replaces
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25,  "Accounting  for Stock Issued to Employees."  Statement No. 123
(R) requires the fair value of share-based payment transactions to be recognized
as  compensation  costs in the  financial  statements  over the  period  that an
employee  provides  service in  exchange  for the  award.  The fair value of the
share-based payments is estimated using the Black-Scholes  option-pricing model.
The Company adopted  Statement No. 123 (R) effective  January 1, 2006, using the
modified-prospective  transition method. Under the modified-prospective  method,
companies are required to record  compensation  cost for new and modified awards
over the  related  vesting  period of such awards and record  compensation  cost
prospectively for the unvested portion,  at the date of adoption,  of previously
issued and outstanding  awards over the remaining vesting period of such awards.
No change to prior periods presented is permitted under the modified-prospective
method.

         For the year ended  December 31, 2005,  the Company  accounted  for its
stock option  plans under the  recognition  and  measurement  principles  of APB
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees,"  and  related
Interpretations.  No stock-based employee  compensation cost is reflected in net
income,  as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant.

The following table  illustrates the effect on net income and earnings per share
if the  Company  had  applied  the fair  value  recognition  provisions  of FASB
Statement No. 123,  "Accounting  for Stock-Based  Compensation,"  to stock-based
employee compensation.

                                                      Year Ended December 31,
                                                  ------------------------------
                                                                          2005
                                                  ------------------------------
                                              (Thousands, Except per Share Data)

         Net income, as reported                                        $ 5,497
           Total stock-based employee compensation
           expense determined under fair value based
           method for all awards, net of related taxes                     (194)
                                                                        -------
         Pro forma net income                                           $ 5,303
                                                                        =======

         Earnings per share (basic):
           As reported                                                  $  1.96
           Pro forma                                                    $  1.89

         Earnings per share (assuming dilution):
           As reported                                                  $  1.92
           Pro forma                                                    $  1.85

38

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Flow Information
         For the purposes of  reporting  cash flows,  cash and cash  equivalents
include cash on hand,  amounts due from banks,  interest-bearing  deposits  with
banks and federal funds sold, all of which mature within 90 days.

         Cash payments for interest for the years ended December 31, 2007,  2006
and 2005  were  $11,679,000,  $8,563,000,  and  $6,014,000,  respectively.  Cash
payments for income taxes for the years ended  December 31, 2007,  2006 and 2005
were $2,845,000,  $2,677,000, and $2,449,000,  respectively.  Non-cash investing
activities  for  2007,  2006  and  2005  included   foreclosed   mortgage  loans
transferred  to  foreclosed  real  estate and  repossession  of other  assets of
$48,000, $154,000, and $112,000, respectively.

Off-Balance Sheet Financial Instruments
         In the  ordinary  course of  business,  the Company  has  entered  into
off-balance  sheet  financial  instruments  consisting of  commitments to extend
credit,  letters  of  credit  and  commitments  to sell  loans.  Such  financial
instruments  are recorded in the balance  sheets when they become  receivable or
payable.

Trust Assets
         Assets held by the Company in a fiduciary  capacity for  customers  are
not included in the financial  statements since such items are not assets of the
Company. Trust income is reported on the accrual method.

Comprehensive Income
         Accounting  principles  generally  accepted  in the  United  States  of
America require that recognized revenue,  expenses, gains and losses be included
in net  income.  Although  certain  changes in assets and  liabilities,  such as
unrealized gains and losses on available for sale securities,  are reported as a
separate component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income.

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

<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                                    ------------------------------
                                                                       2007      2006        2005
                                                                    ------------------------------
                                                                            (In Thousands)
<S>                                                                <C>        <C>        <C>
Unrealized holding gains/(losses) on available for sale securities  $ 1,665    $ 1,173    $ (1,636)
Reclassification adjustment for gains realized in income                 17         66          42
                                                                    ------------------------------

  Net Unrealized Gains/(Losses)                                       1,648      1,107      (1,678)

Income tax expense (benefit)                                            550        379        (573)
                                                                    ------------------------------

  Net of Tax Amount                                                 $ 1,098    $   728    $ (1,105)
                                                                    ==============================
</TABLE>

Segment Reporting
         The Company acts as an independent community financial service provider
and offers  traditional  banking and related  financial  services to individual,
business  and  government  customers.  Through its branch and  automated  teller
machine  network,  the  Company  offers a full  array of  commercial  and retail
financial  services,  including the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage loans; and the providing of safe
deposit services.  The Company also performs  personal,  corporate,  pension and
fiduciary services through its Trust Department.  Management does not separately
allocate  expenses,  including  the  cost of  funding  loan  demand,  among  the
commercial,  retail,  mortgage banking and trust  operations of the Company.  As
such,  discrete  information is not available and segment reporting would not be
meaningful.

                                                                              39

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards
         In September  2006, the FASB's Emerging Issues Task Force (EITF) issued
EITF Issue No. 06-4,  "Accounting for Deferred  Compensation and  Postretirement
Benefit Aspects of Endorsement Split Dollar Life Insurance  Arrangements"  (EITF
06-4).  EITF  06-4  requires  the  recognition  of a  liability  related  to the
postretirement  benefits covered by an endorsement  split-dollar  life insurance
arrangement.  The  consensus  highlights  that  the  employer  (who is also  the
policyholder)  has a liability  for the benefit it is providing to its employee.
As such,  if the  policyholder  has agreed to maintain the  insurance  policy in
force  for  the  employee's  benefit  during  his or her  retirement,  then  the
liability recognized during the employee's active service period should be based
on the future cost of insurance to be incurred during the employee's retirement.
Alternatively,  if the  policyholder  has agreed to provide the employee  with a
death  benefit,  then the  liability  for the  future  death  benefit  should be
recognized by following  the guidance in SFAS No. 106 or  Accounting  Principles
Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose
to apply the guidance  using either the  following  approaches:  (a) a change in
accounting principle through retrospective  application to all periods presented
or (b) a change in accounting  principle through a cumulative-effect  adjustment
to the balance in retained  earnings at the  beginning  of the year of adoption.
The EITF is effective for fiscal years  beginning  after December 15, 2007, with
early adoption permitted. The Company has chosen approach (b) and is expected to
record a cumulative  effect  adjustment  as of January 1, 2008 to the balance of
retained  earnings of  $520,000,  with  $90,000 of Net  Periodic  Postretirement
Benefit expense for the year ended December 31, 2008.

         On September 7, 2006, the Task Force reached a conclusion on EITF Issue
No. 06-5,  "Accounting  for Purchases of Life Insurance - Determining the Amount
that Could Be Realized in  Accordance  with FASB  Technical  Bulletin  No. 85-4,
Accounting for Purchases of Life Insurance" (EITF 06-5"). The Scope of EITF 06-5
consists of six  separate  issues  relating  to  accounting  for life  insurance
policies purchased by entities  protecting against the loss of key persons.  The
six issues are  clarifications  of previously  issued guidance on FASB Technical
Bulletin  No.  85-4 EITF 06-5 is  effective  for fiscal  years  beginning  after
December 15, 2006.  The adoption of EITF 06-5 did not have a material  impact on
the Company's consolidated financial statements.

         In September  2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurements",  which defines fair value,  establishes a framework for measuring
fair value under GAAP, and expands  disclosures  about fair value  measurements.
FASB  Statement  157 applies to all  accounting  pronouncements  that require or
permit fair value  measurements.  The new  guidance is effective  for  financial
statements  issued for fiscal years  beginning  after November 15, 2007, and for
interim  periods  within those fiscal  years.  We are currently  evaluating  the
potential  impact,  if any,  of the  adoption of FASB  Statement  No. 157 on our
consolidated financial position, results of operations and cash flows.

         In December  2007,  the FASB issued  proposed FASB Staff Position (FSP)
157-b,  "Effective Date of FASB Statement No. 157," that would permit a one-year
deferral  in  applying  the  measurement  provisions  of  Statement  No.  157 to
non-financial assets and non-financial  liabilities  (non-financial  items) that
are  not  recognized  or  disclosed  at  fair  value  in an  entity's  financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply,  however,  to an entity that applies Statement 157
in  interim  or  annual  financial  statements  before  proposed  FSP  157-b  is
finalized.  The Company is currently  evaluating  the impact,  if any,  that the
adoption  of FSP  157-b  will  have  on  the  Company's  consolidated  financial
statements.

         In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial  Assets and Financial  Liabilities-including  an amendment of FASB
Statement  No.  115".  SFAS No. 159 permits  entities to choose to measure  many
financial  instruments and certain other items at fair value.  Unrealized  gains
and losses on items for which the fair value  option  has been  elected  will be
recognized  in  earnings  at each  subsequent  reporting  date.  SFAS No. 159 is
effective for our Company  January 1, 2008. The Company is evaluating the impact
that the  adoption  of SFAS  No.  159 will  have on our  consolidated  financial
statements.

40

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         FASB  Statement  No.  141 (R)  "Business  Combinations"  was  issued in
December of 2007. This Statement establishes principles and requirements for how
the acquirer of a business  recognizes and measures in its financial  statements
the   identifiable   assets   acquired,   the  liabilities   assumed,   and  any
noncontrolling  interest in the acquiree.  The Statement also provides  guidance
for recognizing and measuring the goodwill acquired in the business  combination
and  determines  what  information  to disclose to enable users of the financial
statements  to  evaluate  the  nature  and  financial  effects  of the  business
combination.  The  guidance  will  become  effective  as of the  beginning  of a
company's fiscal year beginning after December 15, 2008. This new  pronouncement
will impact the Company's accounting for business combinations beginning January
1, 2009.

         FASB  Statement  No.  160  "Noncontrolling  Interests  in  Consolidated
Financial  Statements--an  amendment  of ARB No. 51" was issued in  December  of
2007.  This Statement  establishes  accounting  and reporting  standards for the
noncontrolling  interest  in a  subsidiary  and  for  the  deconsolidation  of a
subsidiary.  The  guidance  will  become  effective  as of  the  beginning  of a
company's  fiscal year beginning  after December 15, 2008. The Company  believes
that this new  pronouncement  will have an  immaterial  impact on the  Company's
consolidated financial statements in future periods.

         Staff  Accounting  Bulletin  No.  110 (SAB  110)  amends  and  replaces
Question  6 of  Section  D.2 of Topic 14,  "Share-Based  Payment,"  of the Staff
Accounting Bulletin series.  Question 6 of Section D.2 of Topic 14 expresses the
views of the staff regarding the use of the "simplified" method in developing an
estimate of expected term of "plain  vanilla"  share options and allows usage of
the "simplified"  method for share option grants prior to December 31, 2007. SAB
110 allows public companies which do not have historically sufficient experience
to provide a reasonable  estimate to continue use of the "simplified" method for
estimating  the  expected  term of "plain  vanilla"  share  option  grants after
December 31, 2007. SAB 110 is effective January 1, 2008.

         Staff Accounting  Bulletin No. 109 (SAB 109), "Written Loan Commitments
Recorded  at Fair  Value  Through  Earnings"  expresses  the  views of the staff
regarding  written loan commitments that are accounted for at fair value through
earnings under generally  accepted  accounting  principles.  To make the staff's
views consistent with current authoritative accounting guidance, the SAB revises
and rescinds portions of SAB No. 105,  "Application of Accounting  Principles to
Loan  Commitments."  Specifically,  the SAB  revises  the SEC  staff's  views on
incorporating   expected  net  future  cash  flows  related  to  loan  servicing
activities in the fair value measurement of a written loan commitment.
The SAB retains  the staff's  views on  incorporating  expected  net future cash
flows  related  to  internally-developed  intangible  assets  in the fair  value
measurement of a written loan commitment. The staff expects registrants to apply
the views in Question 1 of SAB 109 on a  prospective  basis to  derivative  loan
commitments  issued or modified in fiscal quarters  beginning after December 15,
2007.  The  Company  does not expect  SAB 109 to have a  material  impact on its
consolidated financial statements.

         In June 2007, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No.  06-11,  "Accounting  for  Income  Tax  Benefits  of  Dividends  on
Share-Based  Payment  Awards" ("EITF  06-11").  EITF 06-11 states that an entity
should  recognize a realized tax benefit  associated with dividends on nonvested
equity shares, nonvested equity share units and outstanding equity share options
charged to retained earnings as an increase in additional paid in capital.
The amount  recognized in additional  paid in capital  should be included in the
pool  of  excess  tax  benefits   available  to  absorb   potential  future  tax
deficiencies  on  share-based  payment  awards.  EITF  06-11  should be  applied
prospectively   to  income  tax  benefits  of  dividends  on   equity-classified
share-based  payment  awards that are declared in fiscal years  beginning  after
December 15, 2007.  The Company  expects that EITF 06-11 will not have an impact
on its consolidated financial statements.

         Effective  January 1, 2007, the Company  adopted  Financial  Accounting
Standards Board (FASB) Statement No. 156, "Accounting for Servicing of Financial
Assets - An  Amendment of FASB  Statement No 140" (SFAS 156).  SFAS 156 requires
that all separately  recognized  servicing  assets and servicing  liabilities be
initially  measured at fair value, if practicable.  The statement  permits,  but
does not require,  the subsequent  measurement of servicing assets and servicing
liabilities  at fair value.  The adoption of SFAS 156 did not have a significant
effect on the consolidated financial statements.

                                                                              41

<PAGE>

NOTE 3 - SECURITIES

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

<TABLE>
<CAPTION>
                                                       December 31, 2007
                                      ------------------------------------------------
                                                     Gross                     Gross
                                       Amortized   Unrealized    Unrealized    Fair
                                          Cost       Gains         Losses      Value
                                      ------------------------------------------------
                                                     (In Thousands)
<S>                                  <C>         <C>          <C>          <C>
AVAILABLE FOR SALE:
  U.S. Government agencies            $  41,110   $     435    $     (37)   $  41,508
  States and political subdivisions      21,765         196          (44)      21,917
  Corporate obligations                   5,078           -          (84)       4,994
  Mortgage-backed securities             53,846         458         (222)      54,082
                                      ------------------------------------------------
                                        121,799       1,089         (387)     122,501
  Equity securities                         585         941          (40)       1,486
                                      ------------------------------------------------
                                      $ 122,384   $   2,030    $    (427)   $ 123,987
                                      ================================================
HELD TO MATURITY:
  States and political subdivisions   $     705   $      16    $       -    $     721
                                      ================================================
</TABLE>

<TABLE>
<CAPTION>
                                                       December 31, 2006
                                      ------------------------------------------------
                                                     Gross                     Gross
                                       Amortized   Unrealized    Unrealized    Fair
                                          Cost       Gains         Losses      Value
                                      ------------------------------------------------
                                                     (In Thousands)
<S>                                  <C>         <C>          <C>          <C>
AVAILABLE FOR SALE:
  U.S. Government agencies            $  48,117   $      10    $    (546)   $  47,581
  States and political subdivisions      16,572          73         (180)      16,465
  Corporate obligations                   8,552           -         (113)       8,439
  Mortgage-backed securities             39,123          98         (569)      38,652
                                      ------------------------------------------------
                                        112,364         181       (1,408)     111,137
  Equity securities                         593       1,182            -        1,775
                                      ------------------------------------------------
                                      $ 112,957   $   1,363    $  (1,408)  $  112,912
                                      ================================================
HELD TO MATURITY:
  States and political subdivisions   $     954   $      17    $       -    $     971
                                      ================================================
</TABLE>

         The following tables show the Company's  investments'  gross unrealized
losses and fair value  aggregated by length of time that  individual  securities
have been in a continuous unrealized loss position:

<TABLE>
<CAPTION>
                                                              December 31, 2007
                                    --------------------------------------------------------------------
                                      Less than 12 Months     12 Months or More            Total
                                    --------------------------------------------------------------------
                                       Fair    Unrealized      Fair     Unrealized     Fair   Unrealized
                                       Value     Losses        Value      Losses       Value    Losses
                                    --------------------------------------------------------------------
                                                               (In Thousands)
<S>                                <C>         <C>         <C>         <C>         <C>         <C>
U.S. Government agencies            $      -    $      -    $  9,461    $    (37)   $  9,461    $    (37)
States and political subdivisions        344          (1)      5,401         (43)      5,745         (44)
Corporate obligations                  3,006         (67)      1,988         (17)      4,994         (84)
Mortgage-backed securities             8,095         (19)     10,854        (203)     18,949        (222)
Equity securities                        178         (40)          -           -         178         (40)
                                    --------------------------------------------------------------------
                                    $ 11,623    $   (127)   $ 27,704    $   (300)   $ 39,327    $   (427)
                                    ====================================================================
</TABLE>

42

<PAGE>

NOTE 3 - SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
                                                              December 31, 2006
                                    --------------------------------------------------------------------
                                     Less than 12 Months      12 Months or More            Total
                                    --------------------------------------------------------------------
                                       Fair     Unrealized    Fair      Unrealized    Fair    Unrealized
                                       Value      Losses      Value      Losses       Value     Losses
                                    --------------------------------------------------------------------
                                                               (In Thousands)
<S>                                <C>         <C>         <C>         <C>         <C>         <C>
U.S. Government agencies            $  9,966    $    (32)   $ 34,605    $   (514)   $ 44,571    $   (546)
States and political subdivisions      3,104          (8)      8,064        (172)     11,168        (180)
Corporate obligations                      -           -       7,440        (113)      7,440        (113)
Mortgage-backed securities             4,952         (35)     21,419        (534)     26,371        (569)
                                    --------------------------------------------------------------------
                                    $ 18,022    $    (75)   $ 71,528    $ (1,333)   $ 89,550    $ (1,408)
                                    ====================================================================
</TABLE>

         The Company has 12  securities  in the less than twelve month  category
and 46  securities  in the  twelve  months  or more  category.  In  management's
opinion,  the unrealized  losses reflect changes in interest rates subsequent to
the acquisition of specific securities.  Management believes that the unrealized
losses represent temporary impairment of the securities,  as the Company has the
intent and ability to hold these  investments  until  maturity  or market  price
recovery.

         The amortized cost and fair value of debt securities as of December 31,
2007 by contractual  maturity,  are shown below.  Expected maturities may differ
from  contractual  maturities  because  borrowers  may have the  right to prepay
obligations with or without call or prepayment penalties.

                                          Available for Sale  Held to Maturity
                                          --------------------------------------
                                            Amortized  Fair   Amortized   Fair
                                              Cost     Value    Cost      Value
                                          --------------------------------------
                                                      (In Thousands)

Due in one year or less                     $ 9,125  $  9,104   $   -   $     -
Due after one year through five years        28,497    28,533       -         -
Due after five years through ten years       21,560    21,925     705       721
Due after ten years                           8,771     8,857       -         -
                                          --------------------------------------
                                             67,953    68,419     705       721
Mortgage-backed securities                   53,846    54,082       -         -
                                          --------------------------------------
                                           $121,799  $122,501 $   705   $   721
                                          ======================================

         Gross realized  gains and gross realized  losses on sales of securities
available for sale were $40,000 and $23,000,  respectively, in 2007, $66,000 and
$-0-, respectively, in 2006, $107,000 and $65,000, respectively, in 2005.

         Securities  with a carrying  value of  $56,398,000  and  $50,677,000 at
December  31,  2007 and  2006,  respectively,  were  pledged  to  secure  public
deposits,  U.S.  Treasury  demand  notes,  securities  sold under  agreements to
repurchase and for other purposes as required or permitted by law.

                                                                              41

<PAGE>

NOTE 4 - LOANS  RECEIVABLE  AND ALLOWANCE FOR LOAN LOSSES

         The components of loans receivable at December 31 were as follows:

                                                               2007       2006
                                                            -------------------
                                                               (In Thousands)
         Real estate:
           Residential                                      $129,888   $113,783
           Commercial                                        133,593    127,640
           Construction                                       20,404     18,955
         Commercial, financial and agricultural               29,159     34,019
         Consumer loans to individuals                        18,526     21,520
                                                            -------------------
                                                             331,570    315,917
         Unearned income and deferred fees                      (274)      (350)
         Allowance for loan losses                            (4,081)    (3,828)
                                                            -------------------
                                                            $327,215   $311,739
                                                            ===================

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

                                                       Years Ended December 31,
                                                      -------------------------
                                                       2007     2006      2005
                                                      -------------------------
                                                           (In Thousands)

         Balance, beginning                           $3,828   $3,669    $3,448
           Provision for loan losses                     315      220       350
           Recoveries                                     59       89        81
           Loans charged off                            (121)    (150)     (210)
                                                      -------------------------
         Balance, ending                              $4,081   $3,828    $3,669
                                                      =========================

         The recorded  investment in impaired loans,  not requiring an allowance
for loan losses was  $3,208,000  and  $290,000  at  December  31, 2007 and 2006,
respectively.  The recorded  investment in impaired loans requiring an allowance
for loan  losses was $-0- at  December  31,  2007 and 2006.  For the years ended
December 31,  2007,  2006 and 2005,  the average  recorded  investment  in these
impaired loans was $3,127,000,  $286,000,  and $316,000, and the interest income
recognized  on  these  impaired  loans  was  $290,000,   $1,000,   and  $11,000,
respectively.

         Loans on which the accrual of interest has been  discontinued  amounted
to  $111,000  and  $409,000 at December  31, 2007 and 2006,  respectively.  Loan
balances  past  due 90 days or more  and  still  accruing  interest,  but  which
management expects will eventually be paid in full, amounted to $52,000 and $-0-
at December 31, 2007 and 2006, respectively.

NOTE 5 - PREMISES AND EQUIPMENT
         Components of premises and equipment at December 31 are as follows:


                                                          2007            2006
                                                        -----------------------
                                                             (In Thousands)
         Land and improvements                          $   925         $   925
         Buildings and improvements                       7,875           7,766
         Furniture and equipment                          4,798           4,638
                                                        -----------------------
                                                         13,598          13,329
         Accumulated depreciation                        (7,856)         (7,309)
                                                        -----------------------
                                                        $ 5,742         $ 6,020
                                                        =======================

44

<PAGE>

NOTE 5 - PREMISES AND EQUIPMENT (CONTINUED)
         Certain  facilities are leased under various operating  leases.  Rental
expense for these leases was $283,000,  $222,000,  and  $203,000,  for the years
ended December 31, 2007, 2006 and 2005. Future minimum rental  commitments under
noncancellable leases as of December 31, 2007 were as follows (in thousands):

                                                       2008             $   279
                                                       2009                 266
                                                       2010                 228
                                                       2011                 239
                                                       2012                 248
                                                       Thereafter         2,553
                                                                        -------
                                                                        $ 3,813
                                                                        =======
NOTE 6 - DEPOSITS
         Aggregate  time  deposits  in  denominations  of  $100,000 or more were
$62,263,000 and $56,736,000 at December 31, 2007 and 2006, respectively.

         At December 31, 2007, the scheduled  maturities of time deposits are as
follows (in thousands):

                                                       2008             $144,982
                                                       2009               15,778
                                                       2010                4,502
                                                       2011                4,748
                                                       2012                6,571
                                                                        --------
                                                                        $176,581
                                                                        ========
NOTE 7 - BORROWINGS
         Short-term borrowings at December 31 consist of the following:

                                                                2007      2006
                                                              ------------------
                                                                 (In Thousands)

         Securities sold under agreements to repurchase       $24,885    $21,736
         Federal funds purchased                                  800          -
         U.S. Treasury demand notes                             1,001      1,000
                                                              ------------------
                                                              $26,686    $22,736
                                                              ==================

         The  outstanding   balances  and  related   information  of  short-term
borrowings are summarized as follows:

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                                   -------------------------------
                                                                     2007        2006       2005
                                                                   -------------------------------
                                                                       (Dollars In Thousands)
<S>                                                              <C>         <C>        <C>
         Average balance during the year                           $22,443     $22,209    $15,059
         Average interest rate during the year                        4.15%       4.39%      2.76%
         Maximum month-end balance during the year                 $33,024     $29,677    $24,956
         Weighted average interest rate at the end of the year        3.60%       4.20%      3.76%
</TABLE>

         Securities sold under agreements to repurchase  generally mature within
one day to one year from the transaction date. Securities with an amortized cost
and fair value of $27,127,000 and $27,410,000, respectively at December 31, 2007
and $24,535,000 and $24,720,000,  respectively at December 31, 2006 were pledged
as collateral for these  agreements.  The  securities  underlying the agreements
were under the Company's control.

                                                                              45

<PAGE>

NOTE 7 - BORROWINGS (CONTINUED)
         The Company has a line of credit commitment  available from the Federal
Home Loan Bank (FHLB) of Pittsburgh for  borrowings of up to  $20,000,000  which
expires in December 2011.  There were no borrowings  under this line at December
31, 2007 and 2006.  The Company has a line of credit  commitment  available from
Atlantic  Central  Bankers  Bank for  $7,000,000  which  expires in May 2008 and
Wachovia Bank for  $2,000,000  which has no set expiration  date.  There were no
borrowings  under  these  lines of credit at  December  31,  2007 and 2006.  The
Company has a line of credit  commitment  available  which has no set expiration
date from PNC Bank for $12,000,000 at December 31, 2007.  Borrowings  under this
line of credit were $800,000 at December 31, 2007 and $-0- at December 31, 2006.

         Long-term  debt  consisted  of the  following  at December 31, 2007 and
2006:

                                                              2007         2006
                                                            --------------------
                                                                (In Thousands)
         Notes with the Federal Home Loan Bank (FHLB):
           Fixed note due April 2008 at 4.17%               $ 5,000      $ 5,000
           Convertible note due April 2009 at 4.83%               -        5,000
           Convertible note due January 2011 at 5.24%         3,000        3,000
           Convertible note due October 2012 at 4.37%         5,000            -
           Convertible note due January 2017 at 4.71%        10,000            -
                                                            --------------------
                                                            $23,000      $13,000
                                                            ====================

         The  convertible  notes  contain an option  which  allows the FHLB,  at
quarterly  intervals,  to  change  the  note to an  adjustable-rate  advance  at
three-month  LIBOR plus 11 to 17 basis points.  If the notes are converted,  the
option allows the Bank to put the funds back to the FHLB at no charge.

         Contractual  maturities  of long-term  debt at December 31, 2007 are as
follows (in thousands):

                                                           2008          $ 5,000
                                                           2009                -
                                                           2010                -
                                                           2011            3,000
                                                           2012            5,000
                                                           Thereafter     10,000
                                                                         -------
                                                                         $23,000
                                                                         =======

         The Bank's maximum  borrowing  capacity with the Federal Home Loan Bank
was  $240,172,000  of which  $23,000,000  was  outstanding at December 31, 2007.
Advances from the Federal Home Loan Bank are secured by qualifying assets of the
Bank.

NOTE 8 - EMPLOYEE BENEFIT PLANS
         The  Company  has a  defined  contributory  profit-sharing  plan  which
includes provisions of a 401(k) plan. The plan permits employees to make pre-tax
contributions  up  to  15%  of  the  employee's  compensation.   The  amount  of
contributions  to  the  plan,  including  matching  contributions,   is  at  the
discretion  of the  Board of  Directors.  All  employees  over the age of 21 are
eligible  to  participate  in the plan  after one year of  employment.  Employee
contributions  are vested at all times, and any Company  contributions are fully
vested after five years. The Company's contributions are expensed as the cost is
incurred, funded currently, and amounted to $400,000, $181,000, and $207,000 for
the years ended December 31, 2007, 2006 and 2005, respectively.

46

<PAGE>

NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED)
         The Company has a non-qualified  supplemental executive retirement plan
for the benefit of certain  executive  officers.  At December 31, 2007 and 2006,
other liabilities include approximately  $966,000 and $858,000 accrued under the
Plan.  Compensation  expense  includes  approximately  $108,000,  $138,000,  and
$140,000,  relating to the supplemental executive retirement plan for 2007, 2006
and 2005, respectively. To fund the benefits under this plan, the Company is the
owner  of  single  premium  life  insurance  policies  on  participants  in  the
non-qualified  retirement plan. At December 31, 2007 and 2006, the cash value of
these policies was $7,767,000 and $7,479,000, respectively.

         The Company has a leveraged  employee stock ownership plan ("ESOP") for
the benefit of employees  who meet the  eligibility  requirements  which include
having  completed  one year of service with the Company and having  attained age
twenty-one.  The ESOP Trust purchased  shares of the Company's common stock with
proceeds from a loan from the Company.  The Bank made cash  contributions to the
ESOP on an annual basis  sufficient to enable the ESOP to make the required loan
payments. The loan bears interest at the prime rate adjusted annually.  Interest
is payable annually and principal payable in equal annual  installments over ten
years.  The loan was secured by the shares of the stock  purchased  and was paid
off in 2006.

         As the debt was  repaid,  shares  were  released  from  collateral  and
allocated to qualified employees based on the proportion of debt service paid in
the year.  The  Company  accounts  for its  leveraged  ESOP in  accordance  with
Statement of Position  93-6.  Accordingly,  the shares pledged as collateral are
reported as  unallocated  ESOP shares in the  consolidated  balance  sheets.  As
shares are released from collateral,  the Company reports  compensation  expense
equal  to the  current  market  price  of the  shares,  and  the  shares  become
outstanding  for earnings per share  computations.  Dividends on allocated  ESOP
shares are  recorded  as a reduction  of  retained  earnings  and  dividends  on
unallocated ESOP shares are recorded as a reduction of debt.  Dividends recorded
as a reduction  of debt were $-0- and $12,000 for the years ended  December  31,
2007 and  2006,  respectively.  The  total  employer  contribution  was $-0- and
$143,000 for the years ended December 31, 2007 and 2006, respectively.

         Compensation expense for the ESOP was $-0-, $444,000,  and $588,000 for
the years ended December 31, 2007, 2006, and 2005, respectively. .

         The status of the ESOP shares at December 31 are as follows:

                                                              2007        2006
                                                           --------------------
         Allocated shares                                   160,243     162,690
         Shares released from allocation                     30,666      28,219
         Unreleased shares                                        -           -
                                                           --------------------
                  Total ESOP shares                         190,909     190,909
                                                           ====================
         Fair value of unreleased shares                   $      -    $      -
                                                           ====================

NOTE 9 - INCOME TAXES
         The  components  of the  provision  for  federal  income  taxes  are as
follows:

                                                        Years Ended December 31,
                                                       -------------------------
                                                        2007      2006     2005
                                                       -------------------------
                                                             (In Thousands)
         Current                                      $2,780    $2,787   $2,378
         Deferred                                       (151)     (108)     (37)
                                                      --------------------------
                                                      $2,629    $2,679   $2,341
                                                      ==========================

                                                                              47

<PAGE>

NOTE 9 - INCOME TAXES (CONTINUED)
         Deferred income taxes reflect temporary  differences in the recognition
of revenue and expenses for tax  reporting  and  financial  statement  purposes,
principally  because  certain items,  such as, the allowance for loan losses and
loan fees are  recognized in different  periods for financial  reporting and tax
return purposes. A valuation allowance has not been established for deferred tax
assets.  Realization  of the  deferred  tax assets is  dependent  on  generating
sufficient  taxable  income.  Although  realization  is not assured,  management
believes it is more likely than not that all of the  deferred  tax asset will be
realized. Deferred tax assets are recorded in other assets.

         Income tax expense of the Company is less than the amounts  computed by
applying  statutory  federal  income  tax rates to income  before  income  taxes
because of the following:

<TABLE>
<CAPTION>
                                                                                       Percentage of Income
                                                                                       before Income Taxes
                                                                             -----------------------------------------
                                                                                     Years Ended December 31,
                                                                             -----------------------------------------
                                                                             2007             2006              2005
                                                                             -----------------------------------------
<S>                                                                        <C>              <C>               <C>
         Tax at statutory rates                                              34.0 %           34.0 %            34.0 %
         Tax exempt interest income, net of interest expense disallowance    (3.4)            (3.6)             (4.7)
         Increase in fair market value of ESOP                                  -              1.2               1.6
         Incentive Stock Options                                              0.8              0.5                 -
         Earnings on life insurance                                          (1.1)            (1.0)             (1.1)
         Other                                                               (1.5)             0.1               0.1
                                                                             -----------------------------------------
                                                                             28.8 %           31.2 %            29.9 %
                                                                             =========================================
</TABLE>

         The income tax provision  includes  $6,000,  $22,000,  and $14,000,  of
income taxes relating to realized  securities gains for the years ended December
31, 2007, 2006, and 2005, respectively.

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

                                                       2007             2006
                                                     ------------------------
                                                          (In Thousands)
         Deferred tax assets:
           Allowance for loan losses                 $ 1,271          $ 1,142
           Deferred compensation                         345              292
           Intangible assets                              68               94
           Net unrealized losses on securities             -                1
           Other                                          29               21
                                                     ------------------------
               Total Deferred Tax Assets               1,713            1,550
                                                     ------------------------
         Deferred tax liabilities:
           Premises and equipment                        226              215
           Deferred loan fees                            307              305
           Net unrealized gains on securities            549                -
                                                     ------------------------
               Total Deferred Tax Liabilities          1,082              520
                                                     ------------------------
         Net Deferred Tax Asset                      $   631          $ 1,030
                                                     ========================

48

<PAGE>

NOTE 9 - INCOME TAXES (CONTINUED)
         Effective  January 1, 2007,  the  Company  adopted  the  provisions  of
Financial  Accounting  Standards (FASB)  Interpretation  No. 48, "Accounting for
Uncertainty  in Income  Taxes." The  Interpretation  provides  clarification  on
accounting  for  uncertainty  in  income  taxes  recognized  in an  enterprise's
financial  statements in accordance with FASB Statement of Financial  Accounting
Standards  (SFAS) No. 109,  "Accounting  for Income  Taxes." The  Interpretation
prescribes a recognition  threshold and measurement  attribute for the financial
statement  recognition and measurement of a tax position taken or expected to be
taken  in  a  tax  return,   and  also  provides   guidance  on   derecognition,
classification,   interest  and  penalties,   accounting  in  interim   periods,
disclosure  and  transition.  As a result  of the  Company's  evaluation  of the
implementation  of  FIN  48,  no  significant   income  tax  uncertainties  were
identified.  Therefore,  the Company  recognized no adjustment for  unrecognized
income tax  benefits  for the year ended  December  31,  2007.  Our policy is to
recognize  interest and penalties on  unrecognized  tax benefits in income taxes
expense in the  Consolidated  Statements  of Income.  The amount of interest and
penalties  for the year ended  December 31, 2007 was  immaterial.  The tax years
subject to  examination by the taxing  authorities  are the years ended December
31, 2006, 2005, 2004 and 2003.

         Effective  January 1, 2007,  the Company  adopted the provision of FASB
Staff Position ("FSP") FIN 48-1 "Definition of Settlement in FASB Interpretation
No. 48" (FSP FIN  48-1).  FSP FIN 48-1  provides  guidance  on how to  determine
whether a tax  position is  effectively  settled for the purpose of  recognizing
previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to
January 1, 2007.  The  implementation  of this  standard did not have a material
impact on our consolidated financial position or results of operations.

NOTE 10 - TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
         Certain directors and executive officers of the Company, their families
and their  affiliates  are  customers of the Bank.  Any  transactions  with such
parties,  including  loans  and  commitments,  were in the  ordinary  course  of
business  at normal  terms,  including  interest  rates  and  collateralization,
prevailing at the time and did not represent more than normal risks. At December
31,  2007  and  2006  such  loans   amounted  to  $5,635,000   and   $5,959,000,
respectively.  During 2007, new loans to such related parties  totaled  $228,000
and repayments and other reductions aggregated $552,000.

NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
         The  Company  and  Bank  are  subject  to  various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory  and  possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct  material  effect on the Company's  financial  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Company must meet  specific  capital  guidelines  that involve  quantitative
measures of the Company's  assets,  liabilities  and certain  off-balance  sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and  classification  are also  subject to  qualitative  judgments by the
regulators about components, risk-weightings and other factors.

         Quantitative  measures  established  by  regulation  to ensure  capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table  below) of total and Tier 1 capital  (as  defined in the
regulations) to risk-weighted  assets,  and of Tier 1 capital to average assets.
Management believes, as of December 31, 2007, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.

         As of  December  31,  2007,  the  most  recent  notification  from  the
regulators has  categorized  the Bank as well  capitalized  under the regulatory
framework for prompt corrective action.  There are no conditions or events since
that notification that management believes have changed the Bank's category.

                                                                              49

<PAGE>

NOTE 11 - REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED)
        The Bank's actual capital amounts and ratios are presented in the table:

<TABLE>
<CAPTION>
                                                                                            To Be Well Capitalized
                                                                                                  under Prompt
                                                                    For Capital Adequacy       Corrective Action
                                                   Actual                  Purposes                Provisions
                                              --------------------------------------------------------------------
                                               Amount   Ratio           Amount  Ratio            Amount   Ratio
                                              --------------------------------------------------------------------
                                                                    (Dollars in Thousands)
<S>                                          <C>       <C>            <C>        <C>           <C>        <C>
As of December 31, 2007:
  Total capital (to risk-weighted assets)     $57,968   17.43 %        $>26,606  >8.00 %        $>33,258  >10.00 %
                                                                        -        -               -        -
  Tier 1 capital (to risk-weighted assets)     53,545   16.10           >13,303  >4.00           >19,955  > 6.00
                                                                        -        -               -        -
  Tier 1 capital (to average assets)           53,545   11.14           >19,226  >4.00           >24,033  > 5.00
                                                                        -        -               -        -

As of December 31, 2006:
  Total capital (to risk-weighted assets)     $55,017   16.73 %        $>26,308  >8.00 %        $>32,885  >10.00 %
                                                                        -        -               -        -
  Tier 1 capital (to risk-weighted assets)     50,800   15.45           >13,153  >4.00           >19,728  > 6.00
                                                                        -        -               -        -
  Tier 1 capital (to average assets)           50,800   11.15           >18,224  >4.00           >22,780  > 5.00
                                                                        -        -               -        -
</TABLE>

         The Company's ratios do not differ significantly from the Bank's ratios
presented above.

         The Bank is required to maintain average cash reserve balances in vault
cash or with the  Federal  Reserve  Bank.  The amount of these  restricted  cash
reserve  balances at December 31, 2007 and 2006 was  approximately  $266,000 and
$253,000, respectively.

         Under  Pennsylvania  banking  law,  the  Bank  is  subject  to  certain
restrictions  on the  amount of  dividends  that it may  declare  without  prior
regulatory approval. At December 31, 2007, $48,809,000 of retained earnings were
available  for  dividends  without  prior  regulatory  approval,  subject to the
regulatory   capital   requirements   discussed  above.  Under  Federal  Reserve
regulations,  the Bank is  limited  as to the  amount  it may  lend  affiliates,
including  the  Company,  unless  such  loans  are  collateralized  by  specific
obligations.

NOTE 12 - STOCK OPTION PLANS
         The Company's  shareholders  approved the Norwood  Financial  Corp 2006
Stock  Option Plan at the Annual  Meeting on April 26,  2006.  An  aggregate  of
250,000  shares of  authorized  but  unissued  Common  Stock of the Company were
reserved for future  issuance under the Plan.  This includes up to 40,000 shares
for awards to outside  directors.  Under this plan,  the Company  granted 22,000
options in 2007 which  included 4,000 options  granted to outside  directors and
47,700  options  in 2006,  which  included  7,675  options  granted  to  outside
directors.  The  Company  adopted  a Stock  Option  Plan  for the  officers  and
employees of the Company in 1995.  An aggregate of 750,000  shares of authorized
but unissued common stock of the Company were reserved for future issuance under
the Plan. In 1999, the Company  adopted the Directors  Stock  Compensation  Plan
with an aggregate of 26,400  shares  reserved for issuance  under the Plan.  The
stock options  typically have  expiration  terms of ten years subject to certain
extensions and early  terminations and vest over periods ranging from six months
to one year from the date of  grant.  The per  share  exercise  price of a stock
option  shall be,  at a  minimum,  equal to the fair  value of a share of common
stock on the date the option is  granted.  There were no options  granted  under
either plan in 2005, as both plans have expired.

         Total unrecognized compensation cost related to nonvested options under
the Plan was  $154,000 as of December  31, 2007 and  $251,000 as of December 31,
2006.  Salaries and employee  benefits  expense  includes  $251,000 and $136,000
related to the adoption of Statement  No.123(R) for the years ended December 31,
2007 and 2006, respectively. Net income was reduced by $236,000 and $129,000 for
the years ended December 31, 2007 and 2006 respectively.

50

<PAGE>

NOTE 12 - STOCK OPTION PLANS (CONTINUED)
         A  summary  of  the  Company's   stock  option   activity  and  related
information for the years ended December 31 follows:

<TABLE>
<CAPTION>
                             2007                             2006                              2005
                      ----------------------------------------------------------------------------------------
                                 Weighted                          Weighted                           Weighted
                                 Average    Average                Average     Average                Average
                                 Exercise   Intrinsic              Exercise    Intrinsic              Exercise
                      Options    Price      Value       Options    Price       Value       Options    Price
                      ----------------------------------------------------------------------------------------
<S>                  <C>        <C>                    <C>       <C>                        <C>       <C>
Outstanding,
  beginning of year   183,645    $21.81                 140,296   $18.45                     149,997   $18.25
  Granted              22,000     31.25                 47,700     30.91                           -        -
  Exercised           (24,723)    13.76                 (4,351)    13.05                      (9,701)   15.44
         Forfeited       (500)    31.50                      -         -                           -        -
                      ---------------------------------------------------------------------------------------
Outstanding,
  end of year         180,422    $24.04   $1,301,000   183,645    $21.81      $1,780,000     140,296   $18.45
                      =======================================================================================
Exercisable,
  at end of year      158,422    $23.04   $1,301,000
                      ==============================
</TABLE>

         Exercise prices for options  outstanding as of December 31, 2007 ranged
from $10.37 to $31.50 per share. The weighted average remaining contractual life
is 6.1 years.

         The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

                                                      Years Ended December 31,
                                                    ----------------------------
                                                      2007      2006       2005
                                                    ----------------------------

Dividend yield                                        2.75%     2.70%         -%
Expected life                                       7 years   7 years         -
Expected volatility                                  24.17%    25.12%         -%
Risk-free interest rate                               3.53%     4.85%         -%
Weighted average fair value of options granted      $ 6.99    $ 8.11      $   -

         The  expected  volatility  is  based  on  historical  volatility.   The
risk-free  interest rates for periods within the contractual  life of the awards
are based on the U.S.  Treasury  yield curve in effect at the time of the grant.
The expected life is based on historical exercise experience. The dividend yield
assumption  is  based on the  Company's  history  and  expectation  of  dividend
payouts.

         Proceeds from stock option exercises  totaled $341,000 in 2007.  Shares
issued in  connection  with stock options  exercises  are issued from  available
treasury shares. If no treasury shares are available, new shares are issued from
available  authorized  shares.  During 2007, all the shares issued in connection
with stock option exercises,  24,723 shares in total, were issued from available
treasury shares.

                                                                              51

<PAGE>

NOTE 12 - STOCK OPTION PLANS (CONTINUED)
         As of December  31,  2007,  outstanding  stock  options  consist of the
following:

                            Average                                  Average
              Options       Exercise    Remaining       Options      Exercise
            Outstanding      Price     Life, Years    Exercisable      Price
            -----------      -----     -----------    -----------      -----

              14,962        $15.24        1.0           14,962        $15.24
              14,174         14.12        2.0           14,174         14.12
               9,450         10.36        3.0            9,450         10.36
              16,537         16.98        4.0           16,537         16.98
              16,537         19.05        5.0           16,537         19.05
              19,612         23.95        6.0           19,612         23.95
              20,475         30.00        7.0           20,475         30.00
              24,675         30.38        8.3           24,675         30.38
              22,000         31.50        9.0           22,000         31.50
              22,000         31.25       10.0                -             -
             -------                                   -------
Total        180,422        $24.04        6.1          158,422        $23.04
             =======                                   =======

NOTE 13 - EARNINGS PER SHARE
         The following  table sets forth the  computations  of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                                        ------------------------
                                                                         2007     2006     2005
                                                                        ------------------------
                                                                 (In Thousands, Except per Share Data)
<S>                                                                    <C>      <C>      <C>
Numerator, net income                                                   $6,511   $5,910   $5,497
                                                                        ========================
Denominator:
  Denominator for basic earnings per share, weighted
    average shares                                                       2,777    2,795    2,800
  Effect of dilutive securities, employee stock options                     49       55       59
                                                                        ------------------------
Denominator for diluted earnings per share, adjusted weighted average
  shares and assumed conversions                                         2,826    2,850    2,859
                                                                        ========================
Basic earnings per common share                                         $ 2.34   $ 2.11   $ 1.96
                                                                        ========================
Diluted earnings per common share                                       $ 2.30   $ 2.07   $ 1.92
                                                                        ========================
</TABLE>

NOTE 14 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
         The Bank is a party to financial  instruments  with  off-balance  sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers.  These financial instruments include commitments to extend credit and
letters of credit.  Those instruments  involve, to varying degrees,  elements of
credit and interest rate risk in excess of the amount  recognized in the balance
sheets.

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

52

<PAGE>

NOTE 14 - OFF-BALANCE SHEET FINANCIAL  INSTRUMENTS  (CONTINUED)
         A summary of the Bank's financial instrument commitments is as follows:

                                                                 December 31,
                                                            --------------------
                                                              2007         2006
                                                            --------------------
                                                               (In Thousands)

         Commitments to grant loans                         $10,835      $12,611
         Unfunded commitments under lines of credit          34,146       34,150
         Standby letters of credit                            2,348        7,215
                                                            --------------------
                                                            $47,329      $53,976
                                                            ====================

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

         Standby  letters of credit are  conditional  commitments  issued by the
Bank to guarantee the  performance of a customer to a third party.  The majority
of these standby  letters of credit expire  within the next twelve  months.  The
credit risk  involved in issuing  letters of credit is  essentially  the same as
that involved in extending other loan commitments.  The Bank requires collateral
supporting these letters of credit when deemed  necessary.  Management  believes
that the proceeds  obtained  through a liquidation of such  collateral  would be
sufficient to cover the maximum  potential  amount of future  payments  required
under the  corresponding  guarantees.  The current amount of the liability as of
December 31, 2007 for guarantees  under standby  letters of credit issued is not
material.

NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
         Management  uses its best judgment in estimating  the fair value of the
Company's financial  instruments;  however, there are inherent weaknesses in any
estimation technique.  Therefore,  for substantially all financial  instruments,
the fair value estimates  herein are not  necessarily  indicative of the amounts
the Company could have realized in a sales  transaction on the dates  indicated.
The estimated fair value amounts have been measured as of their  respective year
ends  and  have  not  been   re-evaluated  or  updated  for  purposes  of  these
consolidated financial statements subsequent to those respective dates. As such,
the  estimated  fair values of these  financial  instruments  subsequent  to the
respective  reporting  dates may be different than the amounts  reported at each
year end.

         The following  information  should not be interpreted as an estimate of
the fair value of the entire  Company  since a fair  value  calculation  is only
provided for a limited portion of the Company's assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates,  comparisons between the Company's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Company's  financial  instruments at December
31, 2007 and 2006:

o    For cash and due from banks and  interest-bearing  deposits with banks, the
     carrying amount is a reasonable estimate of fair value.

o    For securities,  fair value equals quoted market price, if available.  If a
     quoted market price is not available,  fair value is estimated using quoted
     market prices for similar securities.

o    The fair value of loans is estimated by  discounting  the future cash flows
     using the current  rates at which  similar loans would be made to borrowers
     with similar credit ratings and for the same remaining maturities.

                                                                              53

<PAGE>

NOTE 15 - DISCLOSURES  ABOUT FAIR VALUE OF FINANCIAL  INSTRUMENTS  (CONTINUED)

o    The fair value of the investment in FHLB stock is the carrying amount.

o    The fair value of accrued interest  receivable and accrued interest payable
     is the carrying amount.

o    The fair value of demand  deposits,  savings  accounts  and  certain  money
     market  deposits is the amount payable on demand at the reporting date. The
     fair value of fixed-maturity certificates of deposit is estimated using the
     rates currently offered for deposits for similar remaining maturities.

o    The fair value of short-term borrowings approximate their carrying amount.

o    The fair value of long-term debt is estimated  using  discounted  cash flow
     analyses based upon the Company's current borrowing rates for similar types
     of borrowing arrangements.

o    The fair value of commitments to extend credit and for outstanding  letters
     of credit is  estimated  using the fees  currently  charged  to enter  into
     similar agreements.


         The estimated fair values of the Company's financial instruments are as
follows:

<TABLE>
<CAPTION>
                                                  December 31, 2007     December 31, 2006
                                                 -----------------------------------------
                                                  Carrying    Fair      Carrying    Fair
                                                   Amount     Value      Amount     Value
                                                 -----------------------------------------
                                                                (In Thousands)
<S>                                            <C>        <C>        <C>        <C>
Financial assets:
  Cash and due from banks and interest-bearing
    deposits with banks                          $  9,064   $  9,064   $  9,517   $  9,517
  Securities                                      124,692    124,708    113,866    113,883
  Loans receivable, net                           327,215    326,482    311,739    305,779
  Investment in FHLB stock                          2,072      2,072      1,687      1,687
  Accrued interest receivable                       2,343      2,343      2,129      2,129

Financial liabilities:
  Deposits                                        370,000    370,159    358,103    357,691
  Short-term borrowings                            26,686     26,686     22,736     22,736
  Long-term debt                                   23,000     22,097     13,000     12,974
  Accrued interest payable                          3,198      3,198      2,894      2,894

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

54

<PAGE>

NOTE 16 - NORWOOD FINANCIAL CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION

                              BALANCE SHEETS                     December 31,
                                                             -----------------
                                                               2007      2006
                                                             -----------------
                                                                (In Thousands)
                                 ASSETS
Cash on deposit in bank subsidiary                           $   148   $   552
Securities available for sale                                    623       808
Investment in bank subsidiary                                 54,678    50,781
Other assets                                                   1,058       731
                                                             -----------------
                                                             $56,507   $52,872
                                                             =================
                  LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities                                                  $   688   $   641
Stockholders' equity                                          55,819    52,231
                                                             -----------------
                                                             $56,507   $52,872
                                                             =================

<TABLE>
<CAPTION>
                              STATEMENTS OF INCOME
                                                                Years Ended December 31,
                                                             -----------------------------
                                                               2007       2006       2005
                                                             -----------------------------
                                                                     (In Thousands)
<S>                                                         <C>        <C>        <C>
Income:
  Dividends from bank subsidiary                             $ 4,156    $ 2,369    $ 1,997
  Interest income from bank subsidiary                             -          5         16
  Other interest income                                           30         28         26
  Net realized gain (loss) on sales of securities                 17         15          -
                                                             -----------------------------
                                                               4,203      2,417      2,039
Expenses                                                         177        175        198
                                                             -----------------------------
                                                               4,026      2,242      1,841
Income tax expense (benefit)                                     (51)       (43)       (53)
                                                             -----------------------------
                                                               4,077      2,285      1,894
Equity in undistributed earnings of subsidiary                 2,434      3,625      3,603
                                                             -----------------------------
Net Income                                                   $ 6,511    $ 5,910    $ 5,497
                                                             =============================
</TABLE>

<TABLE>
<CAPTION>
                            STATEMENTS OF CASH FLOWS
                                                                Years Ended December 31,
                                                             -----------------------------
                                                               2007       2006       2005
                                                             -----------------------------
                                                                     (In Thousands)
<S>                                                         <C>        <C>        <C>
Cash Flows from Operating Activities
  Net income                                                 $ 6,511    $ 5,910    $ 5,497
  Adjustments to reconcile net income to
    net cash provided by operating activities:
      Undistributed earnings of bank subsidiary               (2,434)    (3,625)    (3,603)
      Release of ESOP shares                                       -        421        565
      Other, net                                                (168)      (131)      (615)
                                                             -----------------------------
    Net Cash Provided by Operating Activities                  3,909      2,575      1,844
                                                             -----------------------------
Cash Flows from Investing Activities
  Proceeds from sale of securities                                74         30          -
  Purchase of securities available for sale                        -        (43)       (52)
                                                             -----------------------------
       Net Cash Provided by (Used) in Investing Activities        74        (13)       (52)
                                                             -----------------------------
Cash Flows from Financing Activities
  Stock options exercised                                        341         60        150
  ESOP purchase of shares from treasury stock                    144        120        114
  Acquisition of treasury stock                               (2,313)      (890)      (819)
  Cash dividends paid                                         (2,559)    (2,289)    (1,916)
                                                             -----------------------------
      Net Cash Used in Financing Activities                   (4,387)    (2,999)    (2,471)
                                                             -----------------------------
      Net Decrease in Cash and Cash Equivalents                 (404)      (437)      (679)

Cash and Cash Equivalents - Beginning                            552        989      1,668
                                                             -----------------------------
Cash and Cash Equivalents - Ending                           $   148    $   552    $   989
                                                             =============================
</TABLE>

                                                                              55
<PAGE>

INVESTOR INFORMATION

STOCK LISTING
         Norwood  Financial  Corp.  stock is traded on the Nasdaq  Global Market
under the symbol  NWFL.  The  following  firms are known to make a market in the
Company's stock:

Ferris Baker Watts                     Janney Montgomery Scott, LLC
Baltimore, MD                          Scranton, PA  18503
410-659-4616                           800-638-4417

Legg Mason, Inc.                       Boenning & Scattergood, Inc.
Scranton, PA  18507                    West Conshohoken, PA
570-346-9300                           800-496-1170

Stifel Nicolaus
800-793-7226


TRANSFER AGENT
         Illinois Stock  Transfer  Company,  209 West Jackson Blvd.,  Suite 903,
Chicago,  IL 60606.  Stockholders  who may have questions  regarding their stock
ownership should contact the Transfer Agent at 312-427-2953.

DIVIDEND CALENDAR
         Dividends on Norwood  Financial Corp.  common stock, if approved by the
Board of Directors are customarily  paid on or about February 1, May 1, August 1
and November 1.

AUTOMATIC DIVIDEND REINVESTMENT PLAN
         The Plan,  open to all  shareholders,  provides the opportunity to have
dividends automatically reinvested into Norwood stock.  Participants in the Plan
may also  elect to make cash  contributions  to  purchase  additional  shares of
common  stock.   Shareholders  do  not  incur  brokerage   commissions  for  the
transactions.  Please  contact  the  transfer  agent or Lewis  J.  Critelli  for
additional information.

SEC REPORTS AND ADDITIONAL INFORMATION
         A copy of the Company's  annual report on Form 10-K for its fiscal year
ended December 31, 2007 including  financial  statements and schedules  thereto,
required to be filed with the Securities and Exchange Commission may be obtained
upon written request of any stockholder, investor or analyst by contacting Lewis
J. Critelli,  Executive Vice President,  Secretary, and Chief Financial Officer,
Norwood  Financial  Corp.,  717 Main Street,  PO Box 269,  Honesdale,  PA 18431,
570-253-1455.

56

<PAGE>

[PICTURE OMITTED]

At our Annual Reorganizational Meeting held on
April 24, 2007, John Marshall, Director since 1983,
succeeded long-standing Chairman, Russell L. Ridd.
Mr. Ridd had a 44-year career at Wayne Bank.  He
joined the bank in 1963, was appointed to President
and Director in 1980, and Chairman in 1993.  The
Board unanimously passed a resolution designating
Mr. Ridd, Director Emeritus of Norwood Financial
Corp and Wayne Bank.

<TABLE>
<CAPTION>
<S>                       <C>                                       <C>              <C>
------------------------------------------------------------------------------------------------------------------------------------
NORWOOD FINANCIAL CORP - DIRECTORY OF OFFICERS
------------------------------------------------------------------------------------------------------------------------------------

NORWOOD FINANCIAL CORP                                                  Karyn Vashlishan        Vice President
John E. Marshall        Chairman of the Board                           Karen R. Gasper         Internal Auditor & Assistant
William W. Davis, Jr.   President & Chief Executive Officer                                     Vice President
Lewis J. Critelli       Executive Vice President, Chief Financial       Sandra Halas            Assistant Vice President
                        Officer & Secretary                             Norma J. Kuta           Assistant Vice President
Edward C. Kasper        Senior Vice President                           Renee M. Gilbert        Community Office Manager
John H. Sanders         Senior Vice President                           Marianne M. Glamann     Community Office Manager
Joseph A. Kneller       Senior Vice President                           Teresa Melucci          Community Office Manager
                                                                        Sandra Mruczkewycz      Community Office Manager
WAYNE BANK                                                              Nancy M. Worobey        Community Office Manager
John E. Marshall        Chairman of the Board                           Laurie J. Bishop        Assistant Community Office Manager
William W. Davis, Jr.   President & Chief Executive Officer             Wendy L. Davis          Assistant Community Office Manager
Lewis Critelli          Executive Vice President, Chief Financial       Christine Ferdinando    Assistant Community Office Manager
                        Office and Secretary                            Jill Melody             Assistant Community Office Manager
Edward C. Kasper        Senior Vice President & Senior Loan             Diane L. Richter        Assistant Community Office Manager
                        Officer/Corporate Bank                          Toni M. Stenger         Assistant Community Office Manager
John H. Sanders         Senior Vice President/Retail Bank               Gary D. Henry           Consumer Lending Officer
Joseph A. Kneller       Senior Vice President                           Thomas Kowalski         Resource Recovery Manager
Wayne D. Wilcha         Senior Vice President & Trust Officer           William E. Murray       Mortgage Originator
Robert J. Behrens, Jr.  Vice President                                  Sarah J. Rapp           Human Resources Officer
John F. Carmody         Vice President                                  Nilda I. Ramos          Business Development Officer
JoAnn Fuller            Vice President                                  Doreen A. Swingle       Residential Mortgage Lending Officer
Carolyn K. Gwozdziewycz Vice President                                  Karen Verbeke           Training Officer
Nancy A. Hart           Vice President, Controller &
                        Assistant Secretary                             NORWOOD INVESTMENT CORP
Raymond C. Hebden       Vice President                                  William W. Davis, Jr.   President & Chief Executive Officer
William J. Henigan, Jr. Vice President                                  Lewis J. Critelli       Executive Vice President
Jennifer Jaycox         Vice President                                  Scott C. Rickard        Senior Investment Representative,
William R. Kerstetter   Vice President                                                          Invest Financial Corp
Kelley J. Lalley        Vice President & Assistant Secretary
Linda M. Moran          Vice President                                  MONROE COUNTY ASSOCIATE BOARD
MaryAlice Petzinger     Vice President                                  Michael J. Baxter       James H. Ott
Barbara A. Ridd         Vice President & Assistant Secretary            Sara Cramer             Marvin Papillon
Gary H. Sipe            Vice President                                  Andrew Forte            Ray Price
Eli T. Tomlinson        Vice President                                  Ralph A. Matergia       Ron Sarajian
                        Vice President                                  Randy R. Motts
</TABLE>

<PAGE>

NORWOOD
-------
FINANCIAL CORP

VISIT US AT:
WAYNEBANK.COM