UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------

                                    FORM 10-K
(Mark One):

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
     For the fiscal year ended December 31, 2006
                               -----------------

                                       or

[x]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE  ACT OF 1934
     For the transition period from _____________ to _____________.


Commission File No. 0-28364
                             Norwood Financial Corp.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as specified in Its Charter)

Pennsylvania                                                   23-2828306
---------------------------------------------               ------------------
(State or Other Jurisdiction of Incorporation               (I.R.S. Employer
  or Organization)                                          Identification No.)

717 Main Street, Honesdale, Pennsylvania                          18431
----------------------------------------                   ------------------
(Address of Principal Executive Offices)                        (Zip Code)

Registrant's Telephone Number, Including Area Code:              (570) 253-1455
                                                                 --------------

Securities registered pursuant to Section 12(b) of the Act:

   Title of Each Class              Name of Each Exchange on which Registered
---------------------------         ------------------------------------------
Common Stock $.10 par value              The Nasdaq Stock Market LLC


Securities registered pursuant to Section 12(g) of the Act:  None
                                                             ----

     Indicate by check mark if the registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act. [ ] YES [X] NO

     Indicate by check mark if the  registrant  is not  required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO

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

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

         Indicate by check mark whether the  registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer [ ]  Accelerated filer [ ]   Non-accelerated filer [X]

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

     As of March 14,  2007,  there  were  2,792,151  shares  outstanding  of the
registrant's Common Stock.                ---------

     The Registrant's  voting stock trades on the NASDAQ Global Market under the
symbol  "NWFL."  The  aggregate  market  value  of  the  voting  stock  held  by
non-affiliates  of the  registrant,  based on the last  price  the  registrant's
Common Stock was sold on June 30, 2006,  $31.46 per share, was $70,727,743 based
on 2,248,180 shares of Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year ended
     December 31, 2006. (Parts I, II, and IV)

2.   Portions  of  the  Proxy   Statement   for  the  2007  Annual   Meeting  of
     Stockholders. (Part III)

<PAGE>

                             NORWOOD FINANCIAL CORP.
                                    FORM 10-K
<TABLE>
<CAPTION>
                                Table of Contents
<S>           <C>                                                                                              <C>

Part I                                                                                                          Page

Item 1.        Business                                                                                         1
Item 1A        Risk Factors                                                                                     18
Item 1B.       Unresolved Staff Comments                                                                        24
Item 2         Properties                                                                                       24
Item 3         Legal Proceedings                                                                                24
Item 4.        Submission of Matters to a Vote of Security Holders                                              24

Part II

Item 5.        Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
               of Equity Securities                                                                             25
Item 6.        Selected Financial Data                                                                          25
Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations            25
Item 7A.       Quantitative and Qualitative Disclosure about Market Risk                                        26
Item 8.        Financial Statements and Supplementary Data                                                      26
Item 9         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure             26
Item 9A.       Controls and Procedures                                                                          26
Item 9B.       Other Information                                                                                26

Part III

Item 10.       Directors, Executive Officers and Corporate Governance                                           27
Item 11.       Executive Compensation                                                                           27
Item 12.       Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   27
Item 13.       Certain Relationships and Related Transactions and Director Independence                         27
Item 14.       Principal Accounting Fees and Services                                                           28

Part IV

Item 15.       Exhibits, Financial Statement Schedules                                                          29
               Signatures                                                                                       31
</TABLE>

                                       1
<PAGE>
                                     PART I

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  as
detailed in Item 1A include:

o    our ability to effectively manage future growth
o    loan losses in excess of our allowance
o    risks inherent in commercial lending
o    real estate collateral which is subject to declines in value
o    regional economic factors
o    loss of senior officers
o    comparatively low legal lending limits
o    limited market for the Company's stock
o    restrictions on ability to pay dividends
o    common stock may lose value
o    competitive environment
o    issuing additional shares may dilute ownership
o    extensive and complex governmental regulation and associated cost
o    interest rate risks

     Norwood  Financial Corp.  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.

ITEM 1.  BUSINESS
-----------------

GENERAL

     Norwood Financial Corp. (the "Company"), a Pennsylvania corporation, is the
holding  company for Wayne Bank. On March 29, 1996, the Bank completed a holding
company  reorganization and became a wholly owned subsidiary of the Company.  As
of December 31, 2006, the Company had total assets of $454.4  million,  deposits
of $358.1  million,  and  stockholders'  equity of $52.2 million.  The Company's
ratio of average  equity to average  assets  was  11.23%,  11.19% and 11.15% for
fiscal years, 2006, 2005 and 2004, respectively

     Wayne Bank is a Pennsylvania  chartered  commercial bank  headquartered  in
Honesdale,  Pennsylvania. The Bank was originally chartered on February 17, 1870
as Wayne County  Savings  Bank.  Wayne  County  Savings Bank changed its name to
Wayne  County Bank and Trust in  December  1943.  In  September  1993,  the Bank
adopted  the name Wayne  Bank.  The Bank's  deposits  are  currently  insured to
applicable  limits by the Deposit  Insurance Fund ("DIF") as administered by the
Federal Deposit  Insurance  Corporation  ("FDIC").  The Bank is regulated by the
Pennsylvania Department of Banking ("PDB") and the FDIC.

                                       2
<PAGE>
     The Bank is an independent community bank with six offices in Wayne County,
three offices in Pike County and three offices in Monroe County. The Bank offers
a wide variety of personal and business credit services and trust and investment
products  and real  estate  settlement  services to the  consumers,  businesses,
nonprofit organizations,  and municipalities in each of the communities that the
Bank serves. The Bank primarily serves the Pennsylvania  counties of Wayne, Pike
and  Monroe,  and to a much  lesser  extent,  the  counties  of  Lackawanna  and
Susquehanna.  In addition,  the Bank operates twelve  automated teller machines,
one in each of its branch locations. The Company's main office is located at 717
Main Street, Honesdale, Pennsylvania and its telephone number is (570) 253-1455.
The Bank maintains a website at www.waynebank.com.

COMPETITION

     The  competition  for deposit  products comes from other insured  financial
institutions such as commercial banks, thrift  institutions,  credit unions, and
multi-state  regional  banks in the  Company's  market  area of Wayne,  Pike and
Monroe Counties, Pennsylvania. Based on data compiled by the FDIC as of June 30,
2006 (the  latest  date for  which  data is  available),  the Bank had the third
largest share of FDIC-insured deposits in Wayne County with approximately 20.5%,
second in Pike County with 18.5%, and 12th in Monroe County with 1.3%. This data
does not  reflect  deposits  held by  credit  unions  with  which  the Bank also
competes.  Deposit competition also includes a number of insurance products sold
by  local  agents  and  investment  products  such as  mutual  funds  and  other
securities sold by local and regional brokers. Loan competition varies depending
upon market conditions and comes from other insured financial  institutions such
as commercial banks, thrift  institutions,  credit unions,  multi-state regional
banks, and mortgage bankers.

PERSONNEL

     As of  December  31,  2006,  the Bank  had 117  full-time  and 5  part-time
employees.  None  of  the  Bank's  employees  are  represented  by a  collective
bargaining group.

LENDING ACTIVITIES

     The Bank's loan products  include loans for personal and business use. This
includes mortgage lending to finance principal residences as well as second home
dwellings.  The products  include  adjustable rate mortgages with terms up to 30
years which are  retained  and serviced  through the Bank,  fixed rate  mortgage
products which may be sold, servicing retained,  in the secondary market through
the Federal  National  Mortgage  Association  (Fannie Mae) or held in the Bank's
portfolio subject to the extent consistent with our  asset/liability  management
strategies.  Fixed-rate  home  equity  loans are  originated  on terms up to 180
months, as well as offering a home equity line of credit tied to prime rate. The
Bank to a lesser extent also offers  indirect  dealer  financing of  automobiles
(new and used),  boats, and  recreational  vehicles through a limited network of
dealers in Northeast Pennsylvania.

     Commercial  loans and commercial  mortgages are provided to local small and
mid-sized  businesses  at a  variety  of terms and rate  structures.  Commercial
lending  activities  include  lines of credit,  revolving  credit,  term  loans,
mortgages,  various forms of secured  lending and a limited  amount of letter of
credit facilities. The structure may be fixed, immediately repricing tied to the
prime rate or adjustable at set intervals.

     Adjustable-rate  loans  decrease  the  risks  associated  with  changes  in
interest  rates by  periodically  repricing,  but involve other risks because as
interest rates increase, the underlying payments by the borrower increase,  thus
increasing   the  potential  for  payment   default.   At  the  same  time,  the

                                       3
<PAGE>
marketability of the underlying  collateral may be adversely  affected by higher
interest rates.  Upward adjustment of the contractual  interest rate may also be
limited by the maximum  periodic  interest rate adjustment  permitted in certain
adjustable-rate  mortgage loan documents,  and, therefore is potentially limited
in  effectiveness  during periods of rapidly rising interest rates.  These risks
have not had an adverse effect on the Bank.

     Consumer lending,  including  indirect  financing  provides benefits to the
Bank's  asset/liability  management  program by reducing the Bank's  exposure to
interest rate changes,  due to their  generally  shorter  terms.  Such loans may
entail additional credit risks compared to owner-occupied  residential  mortgage
lending.  As a result,  the Bank has  de-emphasized the indirect lending product
line.

     Commercial lending including  real-estate  related loans entail significant
additional  risks when  compared  with  residential  real  estate  and  consumer
lending. For example, commercial loans typically involve larger loan balances to
single borrowers or groups of related borrowers.  The payment experience on such
loans  typically  is dependent  on the  successful  operation of the project and
these risks can be significantly  impacted by the cash flow of the borrowers and
market conditions for commercial office, retail, and warehouse space. In periods
of decreasing cash flows, the commercial  borrower may permit a lapse in general
maintenance of the property  causing the value of the  underlying  collateral to
deteriorate. The liquidation of commercial property is often more costly and may
involve more time to sell than  residential  real estate.  The Bank offsets such
factors with  requiring  more owner  equity,  a lower loan to value ratio and by
obtaining the personal guaranties of the principals.  In addition, a majority of
the Bank's commercial real estate portfolio is owner occupied property.

     Due to the type and nature of the collateral,  consumer  lending  generally
involves more credit risk when compared with  residential  real estate  lending.
Consumer  lending   collections  are  typically   dependent  on  the  borrower's
continuing  financial  stability,  and thus,  are more  likely  to be  adversely
affected by job loss, divorce,  illness and personal bankruptcy.  In most cases,
any  repossessed  collateral  for a defaulted  consumer loan will not provide an
adequate  source of repayment of the  outstanding  loan  balance.  The remaining
deficiency is usually turned over to a collection agency.

     There are additional  risks  associated  with indirect  automobile  lending
since we must rely on the automobile  dealer to provide accurate  information to
us and accurate  disclosures to the borrowers.  These loans are principally done
on a  non-recourse  basis.  We seek to mitigate these risks by only dealing with
dealers with whom we have a long-standing relationship.

LOAN SOLICITATION AND PROCESSING

     The Bank has  established  various lending limits for its officers and also
maintains an Officer Loan  Committee to approve  higher loan  amounts.  The loan
committee is comprised of the  President  and Chief  Executive  Officer,  Senior
Lending Officer and other Bank officers. The Loan Committee has the authority to
approve all loans up to set limits based on the type of loan and the collateral.
Requests in excess of these  limits must be  submitted  to the  Directors'  Loan
Committee or Board of Directors  for approval.  Additionally,  the President and
Chief Executive Officer,  and the Senior Lending Officer and other officers have
the authority to approve secured and unsecured  loans up to amounts  approved by
the Board of Directors and maintained in the Bank's Loan Policy. Notwithstanding
individual lending  authority,  certain loan policy exceptions must be submitted
to the loan committee for approval.

                                       4
<PAGE>

     Hazard insurance coverage is required on all properties securing loans made
by the Bank. Flood insurance is also required, when applicable.

     Loan applicants are notified of the credit decision by letter.  If the loan
is approved,  the loan  commitment  specifies  the terms and  conditions  of the
proposed loan including the amount,  interest rate,  amortization  term, a brief
description of the required collateral, and the required insurance coverage. The
borrower  must  provide  proof of  fire,  flood  (if  applicable)  and  casualty
insurance on the property serving as collateral and title  insurance,  and these
applicable insurances must be maintained during the full term of the loan.

                                       5
<PAGE>

     TYPES  OF  LOANS.  Set  forth  below  is  selected  data  relating  to  the
composition of the Bank's loan portfolio at the dates indicated.

<TABLE>
<CAPTION>

                                                                        As of December 31,
                                         --------------------------------------------------------------------------------------
                                                2006               2005              2004             2003             2002
                                         ---------------    ---------------   ---------------   --------------  ---------------
                                            $         %         $        %       $         %       $        %      $         %
                                         -------     ---    -------     ---   -------     ---   -------    ---  -------     ---
                                                                      (dollars in thousands)
<S>                                      <C>         <C>    <C>         <C>   <C>      <C>   <C>        <C>   <C>        <C>
Type of Loans:
Commercial, Financial and Agricultural..$ 34,019   10.8   $ 26,755      9.2  $ 20,263    7.9  $ 17,022    7.3  $ 15,074     6.9
Real Estate-Construction................   7,714    2.4      5,944      2.0     4,890    1.9     5,904    2.5     4,109     1.9
Real Estate-Mortgage
                 Residential............ 113,783   36.0    100,705     34.6    90,606   35.5    77,459   33.1    69,040    31.6
                 Commercial............. 138,881   44.0    133,495     45.8   111,164   43.6    96,276   41.1    79,623    36.5
Lease financing, net of unearned income.       -      -        -          -         -      -       316     .1     1,592      .7
Consumer Loans to Individuals...........  21,520    6.8     24,353      8.4    28,193   11.1    37,219   15.9    48,951    22.4
                                         -------  -----   --------    -----  --------  -----  --------  -----  --------   -----
                                         315,917  100.0    291,252    100.0   255,116  100.0   234,196  100.0   218,389   100.0
                                                  =====               =====            =====            =====             =====
Unearned income and deferred fees.......    (350)             (362)              (359)            (463)            (419)
Allowance for loan losses...............  (3,828)           (3,669)            (3,448)          (3,267)          (3,146)
                                        --------          --------           --------         --------         --------
                                        $311,739          $287,221           $251,309         $230,466         $214,824
                                        ========          ========           ========         ========         ========
</TABLE>

                                       6
<PAGE>
     MATURITIES AND  SENSITIVITIES  OF LOANS TO CHANGES IN INTEREST  RATES.  The
following table sets forth maturities and interest rate sensitivity for selected
categories of loans as of December 31, 2006.  Scheduled  repayments are reported
in the maturity category in which payment is due.
<TABLE>
<CAPTION>
                                   Less than        One to           Over
                                   One Year       Five Years      Five Years     Total
                                   --------       ----------      ----------     -----
                                                      (in thousands)
<S>                              <C>                <C>             <C>          <C>
Commercial, Financial
  and Agricultural               $12,329            $10,551         $11,139      $34,019
Real Estate - Construction         7,714                 --              --        7,714
                                 -------            --------        -------      -------

      Total                      $20,043            $10,551         $11,139      $41,733
                                 =======            =======         =======      =======

Loans with fixed-rates           $ 4,260            $ 6,177         $ 5,869      $16,306
Loans with floating rates         15,783              4,374           5,270       25,427
                                 -------            -------         -------      -------

      Total                      $20,043            $10,551         $11,139      $41,733
                                 =======            =======         =======      =======
</TABLE>

     NON-PERFORMING ASSETS. The following table sets forth information regarding
non-accrual  loans,  foreclosed  real estate owned and loans that are 90 days or
more  delinquent  but on which  the  Bank was  accruing  interest  at the  dates
indicated.  The Bank  did not have any  loans  accounted  for as  troubled  debt
restructurings  at the dates  indicated.  For the year ended  December 31, 2006,
interest  income  that  would have been  recorded  on loans  accounted  for on a
non-accrual  basis under the  original  terms of such loans was $37,000 of which
$8,000 was collected.

                                       7
<PAGE>
<TABLE>
<CAPTION>
                                                                                As of December 31,
                                                            -------------------------------------------------------
                                                            2006         2005         2004         2003        2002
                                                            ----         ----         ----         ----        ----
                                                                             (dollars in thousands)
<S>                                                         <C>          <C>          <C>          <C>         <C>

Non-accrual loans:
  Commercial and all other........................          $ --         $ --         $ --         $ --        $ --
  Real estate.....................................           392          330           32          125         213
  Consumer........................................            17           11            8           --           3
                                                            ----         ----         ----         ----        ----
Total.......................................                 409          341           40          125         216

Accruing loans which are contractually past-
due 90 days or more:
   Commercial and all other.......................            --           --           --           --          --
   Real estate....................................            --           --            5           --          --
   Consumer.......................................            --           12           22           18           5
                                                            ----         ----         ----         ----        ----
Total.............................................            --           12           27           18           5
                                                            ----         ----         ----         ----        ----

Total non-performing loans........................           409          353           67          143         221
Foreclosed real estate............................            --           --           --           --          21
                                                            ----         ----         ----         ----        ----
Total non-performing assets.......................          $409         $353         $ 67         $143        $242
                                                            ====         ====         ====         ====        ====
Total non-performing loans to total loans....                .13%         .12%         .03%         .06%        .10%
Total non-performing loans to total assets........           .09%         .08%         .02%         .04%        .06%
Total non-performing assets to total assets.......           .09%         .08%         .02%         .04%        .07%
</TABLE>

     The recorded  investment in impaired loans,  not requiring an allowance for
loan  losses  was   $290,000  and  $310,000  at  December  31,  2006  and  2005,
respectively.  The recorded  investment in impaired loans requiring an allowance
for loan losses was $-0- at December  31, 2006 and 2005.  The related  allowance
for loan losses  associated  with these loans was $-0- at December  31, 2006 and
2005. For the years ended December 31, 2006, 2005 and 2004, the average recorded
investment  in these  impaired  loans was  $286,000,  $316,000  and $-0- and the
interest income recognized on these impaired loans was $1,000, $11,000 and $-0-,
respectively.

     POTENTIAL  PROBLEM LOANS. As of December 31, 2006,  there were no loans not
previously disclosed,  where known information about possible credit problems of
borrowers  causes  management  to have serious  doubts as to the ability of such
borrowers to comply with the present loan repayment terms.

     ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES.  The following  table sets forth
information  with respect to the Bank's  allowance for loan losses for the years
indicated:

                                       8
<PAGE>
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                   --------------------------------------------------------
                                                                   2006         2005         2004         2003        2002
                                                                   ----         ----         ----         ----        ----
                                                                                        (dollars in thousands)

<S>                                                              <C>         <C>          <C>          <C>         <C>
Total loans receivable net of unearned income ................   $ 315,567   $ 290,890    $ 254,757    $ 233,733   $ 217,970
Average loans receivable .....................................     301,533     274,053      245,783      225,680     213,814
                                                                 ---------   ---------    ---------    ---------   ---------

 Allowance balance at beginning of period ....................   $   3,669   $   3,448    $   3,267    $   3,146   $   3,216

Charge-offs:
  Commercial and all other ...................................          --          (4)         (19)        (121)        (34)
  Real Estate ................................................          --          (6)         (10)          --        (122)
  Consumer ...................................................        (150)       (200)        (342)        (478)       (608)
  Leases .....................................................          --          --          (11)         (36)        (30)
                                                                 ---------   ---------    ---------    ---------   ---------
Total ........................................................        (150)       (210)        (382)        (635)       (794)
                                                                 ---------   ---------    ---------    ---------   ---------

Recoveries:
  Commercial and all other ...................................          18          12           13            5          --
  Real Estate ................................................           2          18            8           24          13
  Consumer ...................................................          65          46           78           64          72
  Leases .....................................................           4           5            9            3           9
                                                                 ---------   ---------    ---------    ---------   ---------
Total ........................................................          89          81          108           96          94
                                                                 ---------   ---------    ---------    ---------   ---------

Net Charge-offs ..............................................         (61)       (129)        (274)        (539)       (700)

Provision Expense ............................................         220         350          455          660         630
                                                                 ---------   ---------    ---------    ---------   ---------
Allowance balance at end of period ...........................   $   3,828   $   3,669    $   3,448    $   3,267   $   3,146
                                                                 =========   =========    =========    =========   =========
Allowance for loan losses as a percent of total loans
outstanding ..................................................        1.21%       1.26%        1.35%        1.40%       1.44%

Net  loans charged  off  loans  percent  of  average
outstanding ..................................................         .02%        .05%         .11%         .24%        .33%
</TABLE>

     ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of the Bank's  allowance for loan losses by loan category and the
percent of loans in each  category  to total  loans at the date  indicated.  The
allocation is made for analytical purposes and is not necessarily  indicative of
the  categories  in which  credit  losses  may  occur.  The total  allowance  is
available to absorb losses from any type of loan.

                                       9
<PAGE>
<TABLE>
<CAPTION>
                                                                     As of December 31,
                                          -----------------------------------------------------------------------
                                                  2006                     2005                     2004
                                          --------------------      -------------------     --------------------
                                                                  (Dollars in thousands)
                                                        % of                     % of                     % of
                                                       Loans                    Loans                     Loans
                                                      to Total                 to Total                 to Total
                                          Amount       Loans        Amount      Loans       Amount        Loans
                                          ------       -----        ------      -----       ------        -----
<S>                                        <C>          <C>           <C>        <C>          <C>          <C>
Commercial, financial and agricultural   $  505         10.8%      $  427        9.2%       $  337         7.9%
Real estate - construction                   44          2.4           36        2.0            20         1.9
Real estate - mortgage                    2,667         80.0        2,713       80.4         2,480        79.1
Consumer  loans to individuals              388          6.8          442        8.4           483        11.1
Lease Financing                              --           --           --         --            --          --
General Risk Allocation                     224           --           51         --           128          --
                                         ------        -----       ------      -----        ------       -----
     Total                               $3,828        100.0%      $3,669      100.0%       $3,448       100.0%
                                         ======        =====       ======      =====        ======       =====


<CAPTION>
                                                     As of December 31,
                                          -----------------------------------------
                                                  2003                   2002
                                         -------------------     ------------------
                                                   (Dollars in thousands)
                                                      % of                    % of
                                                     Loans                   Loans
                                                    to Total                to Total
                                         Amount      Loans       Amount      Loans
                                         ------      -----       ------      -----
<S>                                      <C>         <C>         <C>        <C>
Commercial, financial and agricultural  $  291        7.3%       $  265      6.9%
Real estate - construction                  27        2.5            21      1.9
Real estate - mortgage                   2,222       74.2         1,926     68.1
Consumer  loans to individuals             634       15.9           788     22.4
Lease Financing                              9         .1            24       .7
General Risk Allocation                     84         --           122       --
                                        ------      -----        ------    -----
     Total                              $3,267      100.0%       $3,146    100.0%
                                        ======      =====        ======    =====
</TABLE>

                                       10
<PAGE>

INVESTMENT ACTIVITIES
---------------------

     GENERAL.  The  Company  maintains  a  portfolio  of  investment  securities
consisting  principally of  obligations of the U.S.  Government and its agencies
including  mortgage-backed  securities and  obligations of states,  counties and
municipalities  including school districts. To a lesser extent, the Company also
has corporate debt obligations in the portfolio as well as a portfolio of equity
instruments of other financial  services  companies.  The Company  considers its
investment portfolio a source of earnings and liquidity.

     SECURITIES PORTFOLIO.  Carrying values of securities at the dates indicated
are as follows:
<TABLE>
<CAPTION>
                                                                    As of December 31,
                                                               ---------------------------------
            (dollars in thousands)                              2006         2005         2004
                                                              --------     --------     --------
<S>                                                           <C>          <C>          <C>
            Securities:
            (carrying value)
            U.S. Treasury Securities.....................     $     --     $  1,989     $  2,014
            U.S. Government Agencies.................           47,581       51,996       47,151
            State and political Subdivisions.............       17,419       21,175       24,256
            Corporate Obligations........................        8,439       10,450       15,308
            Mortgage-backed securities.................         38,652       29,954       32,060
            Equity Securities..............................      1,775        1,702        1,868
                                                              --------     --------     --------
              Total Securities ..........................     $113,866     $117,266     $122,657
                                                              ========     ========     ========
            Fair value of Securities....................      $113,883     $117,294     $122,811
                                                              ========     ========     ========
</TABLE>

                                       11
<PAGE>
         MATURITY  DISTRIBUTION  OF SECURITIES.  The following  table sets forth
certain  information  regarding  carrying values,  weighted average yields,  and
maturities of the Company's securities portfolio as of December 31, 2006. Yields
on tax-exempt  securities are stated on a fully taxable equivalent basis using a
Federal  tax  rate  of  34%.  Actual  maturities  may  differ  from  contractual
maturities as certain  instruments  have call features which allow prepayment of
obligations.   Maturity  on  the   mortgage-backed   securities  is  based  upon
contractual  terms,  the average  life may differ as a result of changes in cash
flow.  Equity  securities with no stated maturity are classified as "one year or
less."

<TABLE>
<CAPTION>

Investment Portfolio Maturities                        After one through   After five through                       Total Investment
                                    One year or less     five years            ten years         After ten years      Securities
                                   -----------------  ------------------  ------------------  ------------------ -------------------
                                   Carrying  Average  Carrying   Average   Carrying  Average  Carrying   Average  Carrying  Average
(Dollars in thousands)             Value     Yield    Value      Yield     Value     Yield    Value      Yield    Value     Yield
                                   -----     -----    -----      -----     -----     -----    -----      -----    -----     -----
<S>                                <C>      <C>     <C>        <C>       <C>        <C>     <C>         <C>      <C>         <C>
U.S. Government Agencies            $25,361  2.95%   $20,224    4.56%     $ 1,996     5.65%  $    --      --       $47,581    3.75%
State and political subdivisions        991  3.23%     6,452    3.84%       7,341     6.27%    2,635     6.22%      27,419    5.47%
Corporate Obligations                 5,483  2.84%     2,956    4.21%          --       --        --      --         8,439    3.32%
Mortgage-backed securities               --    --      9,380    3.93%       6,192     5.32%   23,080     4,87%      38,652    4.71%
Equity Securities                     1,775  3.14%        --      --           --       --        --      --         1,775    3.14%
                                    -------  ----    -------    ----      -------     ----   -------     ----     --------    ----

  Total Investment Securities       $33,610  2.95%   $39,012    4.26%     $15,529     5.81%  $25,715     5.01%    $113,866    4.30%
                                    =======  ====    =======    ====      =======     ====   =======     ====     ========    ====
</TABLE>


                                       12
<PAGE>

DEPOSIT ACTIVITIES.

GENERAL.  The Bank  provides a full range of deposit  products to its retail and
business  customers.  These include  interest-bearing  and  noninterest  bearing
transaction accounts,  statement savings and money market accounts.  Certificate
of  deposit  terms  range  up  to 5  years  for  retail  instruments.  The  Bank
participates  in Jumbo CD ($100,000 and over) markets with local  municipalities
and school  districts  which are typically  priced on a  competitive  bid basis.
Other  services the Bank offers its  customers on a limited  basis  include cash
management, direct deposit and Automated Clearing House (ACH) activity. The Bank
operates  twelve  automated  teller machines and is affiliated with the STAR ATM
network.  Internet banking including  bill-pay is offered through the website at
www.waynebank.com.

  The following table sets forth information regarding deposit categories of the
Company.
<TABLE>
<CAPTION>
                                        2006                        2005                             2004
                                        ----                        ----                             ----
(dollars in thousands)                 Average                     Average                          Average
                                 ---------------------      ------------------------          -----------------------
                                 Balance     Rate Paid      Balance        Rate Paid          Balance       Rate Paid
                                 -------     ---------      -------        ---------          -------       ---------
<S>                             <C>              <C>       <C>                 <C>           <C>                 <C>
Non-interest bearing
  demand                        $ 54,798           --%     $ 52,109              --%         $ 47,399             --%
Interest-bearing demand           39,472          .10%       44,026             .10%           42,385            .10%
Money Market                      57,410         2.87%       49,721            1.86%           47,466           1.07%
Savings                           49,937          .46%       57,128             .47%           58,243            .47%
Time                             146,344         3.96%      128,704            2.82%          118,512           2.31%
                                --------                   --------                          --------
Total                           $347,961                   $331,688                          $314,005
                                ========                   ========                          ========
</TABLE>

MATURITIES OF TIME  DEPOSITS.  The following  table  indicates the amount of the
Bank's  certificates  of deposit in amounts of  $100,000  or more and other time
deposits of $100,000 or more by time remaining until maturity as of December 31,
2006.


             (dollars in thousands)

             Maturity Period
             ---------------

             Within three months...........................      $28,040
             Over three through six months.................       15,770
             Over six through twelve months................        7,520
             Over twelve months............................        5,406
                                                                 -------
                                                                 $56,736
                                                                 =======

                                       13
<PAGE>
SHORT-TERM BORROWINGS

The following  table sets forth  information  concerning  short-term  borrowings
(those  maturing  within one year) which consist  principally of securities sold
under agreements to repurchase, federal funds purchased and U.S. Treasury demand
notes, that the Company had during the periods indicated.
<TABLE>
<CAPTION>


(dollars in thousands)                                      Years ended December 31,
                                                        -----------------------------
                                                          2006       2005       2004
                                                         ------     ------     ------
<S>                                                     <C>        <C>        <C>
Short term borrowings:
Average balance during the year .....................   $22,209    $15,059    $12,965
Maximum month-end balance during the year ...........    29,677     24,956     22,982
Average interest rate during the year ...............      4.39%      2.76%      1.17%
Total short-term borrowings at end of the year ......   $22,736    $18,564    $22,982
Weighted average interest rate at the end of the year      4.20%      3.76%      1.83%
</TABLE>


TRUST ACTIVITIES

The Bank operates a Wealth  Management/Trust  Department  which provides  estate
planning, investment management and financial planning to customers for which it
is generally compensated based on a percentage of assets under management. As of
December  31,  2006,  the Bank had  $96.9  million  of assets  under  management
compared to $87.0 million as of December 31, 2005.

SUBSIDIARY ACTIVITIES

The Bank, a Pennsylvania  chartered bank, is the only wholly owned subsidiary of
the  Company.   Norwood  Investment  Corp.  (NIC),  a  Pennsylvania  Corporation
incorporated  in  1996,  a  Pennsylvania   licensed   insurance   agency,  is  a
wholly-owned  subsidiary of the Bank.  NIC's business is annuity and mutual fund
sales and discount brokerage  activities primarily to customers of the Bank. The
annuities,  mutual  funds and other  investment  products are not insured by the
FDIC or any other government  agency.  They are not deposits,  obligations of or
guaranteed by any bank. The securities  are offered  through Invest  Financial a
registered  broker/dealer.  NIC had  sales  volume  of  $10.1  million  in 2006,
generating  gross revenues for the Company of $131,000,  compared to $150,000 in
2005 included in Other Income.

WCB Realty Corp., a  Pennsylvania  Corporation,  is a  wholly-owned  real estate
subsidiary of the Bank whose  principal asset is the  administrative  offices of
the Company, which also includes the Main Office of the Bank.

WTRO Properties Inc., a Pennsylvania Corporation,  is a wholly-owned real estate
subsidiary  of the Bank  established  to hold title to certain  real estate upon
which the Bank has  foreclosed.  WTRO did not hold title to any  property  as of
December 31, 2006 and 2005.

Norwood Settlement Services,  LLC, a Pennsylvania Limited Liability Company, was
established  in 2004 to provide title and  settlement  service to bank customers
and  non-customers.  The  subsidiary is 70% owned by Wayne Bank and 30% owned by
Title  Strategies,  LLC.  Gross  revenues,  included in other  income,  for 2006
totaled $37,000 and $26,000 in 2005.

                                       14
<PAGE>

                                   REGULATION

     Set forth below is a brief  description of certain laws which relate to the
regulation of the Registrant and the Bank. The  description  does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

REGULATION OF THE COMPANY

     GENERAL.  The  Company,  as a bank holding  company  under the Bank Holding
Company  Act of  1956,  as  amended  ("BHCA"),  is  subject  to  regulation  and
supervision by the Board of Governors of the Federal  Reserve  System  ("Federal
Reserve") and by the Pennsylvania Department of Banking (the "Department").  The
Company is required to file  annually a report of its  operations  with,  and is
subject  to  examination  by,  the  Federal  Reserve  and the  Department.  This
regulation and oversight is generally intended to ensure that the Company limits
its  activities to those allowed by law and that it operates in a safe and sound
manner without endangering the financial health of its subsidiary banks.

     Under the BHCA,  the Company must obtain the prior  approval of the Federal
Reserve before it may acquire  control of another bank or bank holding  company,
merge  or  consolidate  with  another  bank  holding  company,  acquire  all  or
substantially  all of the assets of another  bank or bank  holding  company,  or
acquire direct or indirect ownership or control of any voting shares of any bank
or bank holding  company if, after such  acquisition,  the bank holding  company
would directly or indirectly own or control more than 5% of such shares.

     Federal  statutes  impose  restrictions  on the  ability of a bank  holding
company and its nonbank  subsidiaries  to obtain  extensions  of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the  holding  company,  and on the  subsidiary  bank's  taking of the holding
company's  stock or securities as collateral  for loans to any borrower.  A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.

     A bank holding  company is required to serve as a source of  financial  and
managerial  strength to its subsidiary  banks and may not conduct its operations
in an unsafe or unsound  manner.  In  addition,  it is the policy of the Federal
Reserve  that a  bank  holding  company  should  stand  ready  to use  available
resources to provide  adequate capital to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial  flexibility and
capital-raising  capacity  to obtain  additional  resources  for  assisting  its
subsidiary  banks. A bank holding  company's  failure to meet its obligations to
serve  as a source  of  strength  to its  subsidiary  banks  will  generally  be
considered by the Federal Reserve to be an unsafe and unsound  banking  practice
or a violation of the Federal Reserve regulations, or both.

     NON-BANKING  ACTIVITIES.  The business activities of the Company, as a bank
holding  company,  are  restricted  by the BHCA.  Under the BHCA and the Federal
Reserve's bank holding company  regulations,  the Company may only engage in, or
acquire or control  voting  securities  or assets of a company  engaged  in, (1)
banking or managing or controlling banks and other subsidiaries authorized under
the BHCA and (2) any BHCA activity the Federal  Reserve has  determined to be so
closely  related to  banking or  managing  or  controlling  banks to be a proper
incident thereto.  These include any incidental activities necessary to carry on
those  activities,  as

                                       15
<PAGE>

well as a lengthy list of activities  that the Federal Reserve has determined to
be so closely  related  to the  business  of banking as to be a proper  incident
thereto.

     FINANCIAL  MODERNIZATION.   The  Gramm-Leach-Bliley  Act,  permits  greater
affiliation  among  banks,  securities  firms,  insurance  companies,  and other
companies under a new type of financial  services  company known as a "financial
holding  company." A financial  holding  company  essentially  is a bank holding
company with  significantly  expanded powers.  Financial  holding  companies are
authorized by statute to engage in a number of financial  activities  previously
impermissible for bank holding  companies,  including  securities  underwriting,
dealing and market making;  sponsoring  mutual funds and  investment  companies;
insurance underwriting and agency; and merchant banking activities. The Act also
permits the Federal Reserve and the Treasury Department to authorize  additional
activities for financial  holding companies if they are "financial in nature" or
"incidental"  to  financial  activities.  A bank  holding  company  may become a
financial  holding company if each of its subsidiary banks is well  capitalized,
well managed,  and has at least a "satisfactory" CRA rating. A financial holding
company  must  provide  notice  to the  Federal  Reserve  within  30 days  after
commencing activities previously determined by statute or by the Federal Reserve
and Department of the Treasury to be permissible.  The Company has not submitted
notice to the  Federal  Reserve of its intent to be deemed a  financial  holding
company.

     REGULATORY  CAPITAL  REQUIREMENTS.  The Federal Reserve has adopted capital
adequacy  guidelines  pursuant to which it assesses  the  adequacy of capital in
examining and supervising a bank holding  company and in analyzing  applications
to it under the Bank Holding Company Act. The Federal Reserve's capital adequacy
guidelines  are  similar  to those  imposed on the Bank by the  Federal  Deposit
Insurance   Corporation.   See  "Regulation  of  the   Bank-Regulatory   Capital
Requirements."

REGULATION OF THE BANK

     GENERAL. As a Pennsylvania chartered,  insured commercial bank, the Bank is
subject to extensive  regulation  and  examination  by the Department and by the
FDIC,  which  insures its deposits to the maximum  extent  permitted by law. The
federal and state laws and regulations applicable to banks regulate, among other
things, the scope of their business, their investments, the reserves required to
be kept against deposits,  the timing of the availability of deposited funds and
the  nature  and  amount  of and  collateral  for  certain  loans.  The laws and
regulations  governing  the Bank  generally  have been  promulgated  to  protect
depositors and not for the purpose of protecting  stockholders.  This regulatory
structure also gives the federal and state banking agencies extensive discretion
in connection with their supervisory and enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the  establishment of adequate loan loss reserves for regulatory  purposes.  Any
change in such  regulation,  whether by the  Department,  the FDIC or the United
States Congress, could have a material impact on the Company, the Bank and their
operations.

     PENNSYLVANIA  BANKING LAW. The  Pennsylvania  Banking Code ("Banking Code")
contains detailed  provisions  governing the organization,  location of offices,
rights and responsibilities of directors,  officers,  and employees,  as well as
corporate  powers,  savings and  investment  operations and other aspects of the
Bank and its affairs. The Banking Code delegates extensive rule-making power and
administrative  discretion  to  the  Department  so  that  the  supervision  and
regulation of state  chartered  banks may be flexible and readily  responsive to
changes in economic conditions and in savings and lending practices.

     The Federal Deposit Insurance Corporation Act ("FDIA"),  however, prohibits
state chartered banks from making new investments,  loans, or becoming  involved
in activities as principal  and equity  investments  which are not permitted for
national banks unless (1) the FDIC  determines  the activity or investment  does
not  pose a


                                       16
<PAGE>

significant  risk of loss to the BIF  and  (2) the  bank  meets  all  applicable
capital requirements.  Accordingly,  the additional operating authority provided
to the Bank by the Banking Code is significantly restricted by the FDIA.

     FEDERAL DEPOSIT INSURANCE.  The FDIC is an independent  federal agency that
insures the deposits,  up to prescribed  statutory  limits, of federally insured
banks and savings  institutions  and  safeguards the safety and soundness of the
banking and savings  industries.  The FDIC previously  administered two separate
insurance  funds,  the  Bank  Insurance  Fund  (BIF),  which  generally  insured
commercial bank and state savings bank deposits,  and the Savings Insurance Fund
("SAIF"), which generally insured savings association deposits.

     Under the Federal Deposit  Insurance Reform Act of 2005 (The "Reform Act"),
which was signed into law on February 15, 2006 (i) the Bank  Insurance  Fund and
the Savings  Association  Insurance  Fund were merged into a new combined  fund,
called the Deposit  Insurance  Fund effective  March 31, 2006,  (ii) the current
$100,000  deposit  insurance  coverage  will  be  indexed  for  inflation  (with
adjustments  every five years,  commencing  January 1, 2011);  and (iii) deposit
insurance  coverage  for  retirement  accounts  were  increased  to $250,000 per
participant subject to adjustment for inflation. The FDIC has been given greater
latitude in setting the  assessment  rates for insured  depository  institutions
which could be used to impose minimum assessments.

     The FDIC is authorized to set the reserve ratios for the Deposit  Insurance
Fund annually at between 1.15% and 1.5% of estimated  insured  deposits.  If the
Deposit Insurance Fund's reserves exceed the designated  reserve ratio, the FDIC
is required to pay out all or, if the reserve ratio is less than 1.5%, a portion
of the excess as a  dividend  to insured  depository  institutions  based on the
percentage  of  insured   deposits  held  on  December  31,  1996  adjusted  for
subsequently  paid  premiums.  Insured  depository  institutions  that  were  in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future  assessments  based
on their past contributions to the BIF or SAIF.

     Pursuant  to the  Reform  Act,  the FDIC has  determined  to  maintain  the
designated  reserve ratio at its current 1.25%.  The FDIC has also adopted a new
risk-based  premium system that provides for quarterly  assessments  based on an
insured  institution's  ranking  in one of four risk  categories  based on their
examination  ratings and capital  ratios.  Beginning  in 2007,  well-capitalized
institutions  with the CAMELS ratings of 1 or 2 will be grouped in Risk Category
I and will be assessed  for deposit  insurance at an annual rate of between five
and seven basis points with the assessment rate for an individual institution to
be  determined  according  to a  formula  based  on a  weighted  average  of the
institution's  individual  CAMEL  component  ratings plus either five  financial
ratios or the  average  ratings  of its  long-term  debt.  Institutions  in Risk
Categories  II,  III and IV will be  assessed  at annual  rates of 10, 28 and 43
basis points, respectively.  The Bank anticipates that it will be able to offset
its deposit insurance premium for 2007 with the special assessment credit.

     In  addition,  all  insured  institutions  of the FDIC are  required to pay
assessments  to  fund  interest  payments  on  bonds  issued  by  the  Financing
Corporation,  an  agency  of  the  Federal  government  established  to  finance
resolutions of insolvent thrifts. These assessments,  the current quarterly rate
of which is  approximately  .0154 of insured  deposits,  will continue until the
Financing Corporation bonds mature in 2017.

     REGULATORY CAPITAL REQUIREMENTS.  The FDIC has promulgated capital adequacy
requirements for  state-chartered  banks that, like the Bank, are not members of
the Federal  Reserve  System.  At  December  31,  2006,  the Bank  exceeded  all
regulatory capital requirements and was classified as "well capitalized."

     The  FDIC's  capital  regulations  establish  a minimum  3% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an  additional  cushion  of at least 100 to 200 basis  points for all other
state-chartered,  non-member banks, which effectively increases the minimum Tier
I leverage ratio for

                                       17
<PAGE>

such other banks to 4% to 5%.  Under the FDIC's  regulation,  the  highest-rated
banks are those that the FDIC  determines are not  anticipating  or experiencing
significant  growth and have well diversified risk,  including no undue interest
rate risk exposure,  excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization,  rated composite
1 under the Uniform Financial Institutions Rating System. Tier I or core capital
is  defined  as the  sum of  common  stockholders'  equity  (including  retained
earnings),  noncumulative  perpetual  preferred stock and related  surplus,  and
minority  interests in consolidated  subsidiaries,  minus all intangible  assets
other than certain servicing and purchased credit card relationships,  and minus
certain other listed assets.

     The FDIC's regulations also require that state-chartered,  non-member banks
meet a risk-based capital standard. The risk-based capital standard requires the
maintenance   of  total  capital  (which  is  defined  as  Tier  I  capital  and
supplementary  (Tier 2) capital) to risk weighted  assets of 8%. In  determining
the amount of risk-weighted  assets, all assets,  plus certain off balance sheet
assets,  are multiplied by a risk-weight  of 0% to 100%,  based on the risks the
FDIC believes are inherent in the type of asset or item.  The components of Tier
I capital for the  risk-based  standards  are the same as those for the leverage
capital  requirement.  The components of supplementary  (Tier 2) capital include
cumulative  perpetual preferred stock,  mandatory  subordinated debt,  perpetual
subordinated  debt,  intermediate-term  preferred stock, up to 45% of unrealized
gains on equity  securities  and a bank's  allowance  for loan and lease losses.
Allowance  for loan and lease  losses  includable  in  supplementary  capital is
limited to a maximum of 1.25% of risk-weighted  assets.  Overall,  the amount of
supplementary  capital that may be included in total  capital is limited to 100%
of Tier I capital.

     A bank that has less  than the  minimum  leverage  capital  requirement  is
subject to various  capital plan and activities  restriction  requirements.  The
FDIC's regulations also provide that any insured  depository  institution with a
ratio of Tier I capital to total  assets  that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and could be subject to potential termination of deposit insurance.

     The Bank is also  subject to minimum  capital  requirements  imposed by the
Department  on   Pennsylvania-chartered   depository  institutions.   Under  the
Department's  capital  regulations,  a  Pennsylvania  bank or savings  bank must
maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC's
capital regulations) to total assets of 4%. In addition,  the Department has the
supervisory  discretion to require a higher leverage ratio for any  institutions
based on the institution's  substandard performance in any of a number of areas.
The  Bank  was  in  compliance  in  both  the  FDIC  and  Pennsylvania   capital
requirements as of December 31, 2006.

     AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the ability
of banks to engage in transactions with their  affiliates,  including their bank
holding  companies.  In  particular  loans by a  subsidiary  bank and its parent
company or the nonbank  subsidiaries  of the bank holding company are limited to
10% of a bank subsidiary's  capital and surplus and, with respect to such parent
company and all such  nonbank  subsidiaries,  to an aggregate of 20% of the bank
subsidiary's capital and surplus.  Further, loans and other extensions of credit
generally  are  required  to be  secured by  eligible  collateral  in  specified
amounts.  Federal law also requires that all transactions between a bank and its
affiliates  be  on  terms  as  favorable  to  the  bank  as  transactions   with
non-affiliates.

     LOANS TO ONE  BORROWER.  Under  Pennsylvania  law,  commercial  banks have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to 15% of the institution's  capital accounts.  An institution's capital account
includes the  aggregate  of all capital,  surplus,  undivided  profits,  capital
securities and general  reserves for loan losses.  Pursuant to the national bank
parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to
the maximum amounts  permissible  for national banks,  which are allowed to

                                       18
<PAGE>

make  loans to one  borrower  of up to 25% of  capital  and  surplus  in certain
circumstances.  As of December 31, 2006,  loans-to-one-borrower  limitation  was
$8.2 million and the Bank was in compliance with such limitation.

     FEDERAL  HOME  LOAN  BANK  SYSTEM.  The  Bank is a  member  of the  FHLB of
Pittsburgh,  which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region.  It is funded primarily
from  funds  deposited  by member  institutions  and  proceeds  from the sale of
consolidated  obligations  of the FHLB System.  It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Trustees of the FHLB.

     As a member,  the Bank is required to purchase  and  maintain  stock in the
FHLB of  Pittsburgh  in an amount  equal to the  greater of 1% of its  aggregate
unpaid   residential   mortgage  loans,  home  purchase   contracts  or  similar
obligations  at the  beginning  of  each  year or 5% of the  Bank's  outstanding
advances  from the FHLB. At December 31, 2006,  the Bank was in compliance  with
this requirement.

     FEDERAL  RESERVE  SYSTEM.  The  Federal  Reserve  requires  all  depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against their  transaction  accounts  (primarily  checking and NOW accounts) and
non-personal  time  deposits.  The  balances  maintained  to  meet  the  reserve
requirements imposed by the Federal Reserve may be used to satisfy the liquidity
requirements that are imposed by the Department.  At December 31, 2006, the Bank
met its reserve requirements.

     RESTRICTIONS ON DIVIDENDS.  The Pennsylvania  Banking Code states, in part,
that dividends may be declared and paid only out of accumulated net earnings and
may not be declared or paid unless surplus (retained earnings) is at least equal
to contributed  capital.  The Bank has not declared or paid any dividends  which
cause the Bank's  retained  earnings  to be reduced  below the amount  required.
Finally,  dividends  may not be  declared  or paid if the Bank is in  default in
payment of any assessment due the FDIC.

     The Federal  Reserve has issued a policy  statement  on the payment of cash
dividends by bank holding companies,  which expresses the Federal Reserve's view
that a bank holding  company  should pay cash  dividends only to the extent that
the holding  company's  net income for the past year is sufficient to cover both
the cash dividends and a rate of earnings  retention that is consistent with the
holding company's capital needs, asset quality and overall financial  condition.
The Federal Reserve also indicated that it would be inappropriate  for a company
experiencing  serious  financial  problems  to  borrow  funds to pay  dividends.
Furthermore, under the federal prompt corrective action regulations, the Federal
Reserve may  prohibit a bank holding  company  from paying any  dividends if the
holding company's bank subsidiary is classified as "undercapitalized."

ITEM 1A.  RISK FACTORS
----------------------

     In  determining  whether  to invest  in our  securities,  investors  should
consider, among other factors, the following:


                                       19
<PAGE>
                          RISKS RELATED TO OUR BUSINESS

OUR  SUCCESS  WILL  DEPEND  UPON OUR  ABILITY TO  EFFECTIVELY  MANAGE OUR FUTURE
GROWTH.

We believe  that we have in place the  management  and systems,  including  data
processing  systems,  internal controls and a strong credit culture,  to support
continued growth.  However, our continued growth and profitability depend on the
ability of our officers and key employees to manage such growth effectively,  to
attract and retain skilled  employees and to maintain adequate internal controls
and a strong credit culture. Accordingly, there can be no assurance that we will
be  successful  in  managing  our  expansion,  and the  failure  to do so  would
adversely affect our financial condition and results of operations.

IF WE EXPERIENCE  LOAN LOSSES IN EXCESS OF OUR  ALLOWANCE,  OUR EARNINGS WILL BE
ADVERSELY AFFECTED.

The risk of credit  losses on loans varies  with,  among other  things,  general
economic  conditions,  the type of loan being made, the  creditworthiness of the
borrower  over the term of the loan and, in the case of a  collateralized  loan,
the value and marketability of the collateral for the loan. Management maintains
an  allowance  for loan  losses  based  upon,  among  other  things,  historical
experience,  an  evaluation  of  economic  conditions  and  regular  reviews  of
delinquencies and loan portfolio  quality.  Based upon such factors,  management
makes various assumptions and judgments about the ultimate collectibility of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of  the  outstanding  balances  and  for  specific  loans  when  their  ultimate
collectibility  is considered  questionable.  If  management's  assumptions  and
judgments  prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses,  or if the bank  regulatory  authorities  require us to
increase the allowance for loan losses as a part of their  examination  process,
our earnings and capital could be significantly and adversely affected.

As of December 31, 2006,  our  allowance  for loan losses was  $3,828,000  which
represented  1.21% of outstanding  loans. At such date, we had 10  nonperforming
loans totaling $409,000. We actively manage our nonperforming loans in an effort
to minimize credit losses.  Although  management believes that its allowance for
loan losses is adequate, there can be no assurance that the allowance will prove
sufficient to cover future loan losses.  Further,  although  management uses the
best information  available to make determinations with respect to the allowance
for loan losses,  future  adjustments  may be  necessary if economic  conditions
differ  substantially  from the assumptions used or adverse  developments  arise
with respect to our  non-performing or performing loans.  Material  additions to
our  allowance  for loan losses would result in a decrease in our net income and
capital, and could have a material adverse effect on our financial condition and
results of operations.

MOST OF OUR LOANS ARE TO  COMMERCIAL  BORROWERS,  WHICH HAVE A HIGHER  DEGREE OF
RISK THAN OTHER TYPES OF LOANS.

Commercial loans are often larger and may involve greater risks than other types
of lending. Because payments on such loans are often dependent on the successful
operation of the property or business  involved,  repayment of such loans may be
more  sensitive  than  other  types of loans to adverse  conditions  in the real
estate market or the economy. Unlike residential mortgage loans, which generally
are made on the basis of the  borrower's  ability to make  repayment from his or
her  employment  and other income and which are secured by real  property  whose
value tends to be more easily ascertainable, commercial loans typically are made
on the basis of the  borrower's  ability to make repayment from the cash flow of
the  borrower's  business.  As a  result,  the  availability  of  funds  for the
repayment of commercial loans may be  substantially  dependent on the success of
the business itself and

                                       20
<PAGE>

the general economic  environment.  If the cash flow from business operations is
reduced, the borrower's ability to repay the loan may be impaired.

MOST OF OUR LOANS ARE SECURED,  IN WHOLE OR IN PART, WITH REAL ESTATE COLLATERAL
WHICH IS SUBJECT TO DECLINES IN VALUE.

In addition  to the  financial  strength  and cash flow  characteristics  of the
borrower in each case, we often secure our loans with real estate collateral. As
of  December  31,  2006,  approximately  82% of our loans,  had real estate as a
primary,  secondary or tertiary component of collateral.  Real estate values and
real estate  markets are generally  affected by, among other things,  changes in
national, regional or local economic conditions,  fluctuations in interest rates
and the availability of loans to potential  purchasers,  changes in tax laws and
other governmental  statutes,  regulations and policies, and acts of nature. The
real estate collateral in each case provides an alternate source of repayment in
the event of default  by the  borrower.  If real  estate  prices in our  markets
decline,  the value of the real estate  collateral  securing  our loans could be
reduced. If we are required to liquidate the collateral securing a loan during a
period of reduced  real estate  values to satisfy  the debt,  our  earnings  and
capital could be adversely affected.

OUR BUSINESS IS GEOGRAPHICALLY  CONCENTRATED AND IS SUBJECT TO REGIONAL ECONOMIC
FACTORS THAT COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.

Substantially  all of our  business  is with  customers  in our  market  area of
Northeastern  Pennsylvania.  Most of our  customers  are consumers and small and
medium-sized  businesses which are dependent upon the regional economy.  Adverse
changes in economic  and  business  conditions  in our markets  could  adversely
affect  our  borrowers,  their  ability  to  repay  their  loans  and to  borrow
additional funds, and consequently our financial condition and performance.

Additionally,  we often  secure our loans with real estate  collateral,  most of
which is  located in  Northeastern  Pennsylvania.  A decline  in local  economic
conditions could adversely affect the values of such real estate.  Consequently,
a decline in local economic conditions may have a greater effect on our earnings
and capital than on the earnings  and capital of larger  financial  institutions
whose real estate loan portfolios are geographically diverse.

THE LOSS OF SENIOR EXECUTIVE OFFICERS AND CERTAIN OTHER KEY PERSONNEL COULD HURT
OUR BUSINESS.

Our success depends,  to a great extent,  upon the services of William W. Davis,
Jr., our President  and Chief  Executive  Officer,  and Lewis J.  Critelli,  our
Executive  Vice  President  and  Chief  Financial  Officer.   Although  we  have
employments  agreements  with  non-compete  provisions  with  Messrs.  Davis and
Critelli,  the existence of such  agreements does not assure that we will retain
their services.  The unexpected loss of these  individuals could have a material
adverse  effect on our  operations.  From time to time,  we also need to recruit
personnel to fill vacant  positions for experienced  lending officers and branch
managers.  Competition  for  qualified  personnel  in the  banking  industry  is
intense, and there can be no assurance that we will continue to be successful in
attracting, recruiting and retaining the necessary skilled managerial, marketing
and technical  personnel for the successful  operation of our existing  lending,
operations,  accounting and administrative functions or to support the expansion
of the  functions  necessary  for our future  growth.  Our  inability to hire or
retain key  personnel  could have a material  adverse  effect on our  results of
operations.

                                       21
<PAGE>
OUR LEGAL LENDING  LIMITS ARE RELATIVELY LOW AND RESTRICT OUR ABILITY TO COMPETE
FOR LARGER CUSTOMERS.

At December 31, 2006,  our lending  limit per  borrower was  approximately  $8.2
million,  or  approximately  15% of our capital plus  allowance for loan losses.
Accordingly,  the size of loans that we can offer to potential borrowers is less
than the size of loans that many of our competitors  with larger  capitalization
are able to offer.  We may engage in loan  participations  with other  banks for
loans in excess of our legal lending limits.  However, there can be no assurance
that  such  participations  will  be  available  at all or on  terms  which  are
favorable to us and our customers.

                        RISKS RELATED TO OUR COMMON STOCK

THERE IS A LIMITED  TRADING  MARKET FOR OUR COMMON  STOCK,  WHICH MAY  ADVERSELY
IMPACT  YOUR  ABILITY  TO SELL YOUR  SHARES AND THE PRICE YOU  RECEIVE  FOR YOUR
SHARES.

Although our common stock is quoted on the Nasdaq Global Market,  there has been
limited  trading  activity  in our  stock and an  active  trading  market is not
expected  to  develop.  This means that there may be limited  liquidity  for our
common stock,  which may make it difficult to buy or sell our common stock,  may
negatively  affect the price of our common stock and may cause volatility in the
price of our common stock.

THERE ARE RESTRICTIONS ON OUR ABILITY TO PAY CASH DIVIDENDS.

Although we have paid cash  dividends on a quarterly  basis since 1996,  and the
Bank has paid dividends for many previous  years,  there is no assurance that we
will continue to pay cash dividends.  Future payment of cash dividends,  if any,
will be at the  discretion of the Board of Directors and will be dependent  upon
our financial  condition,  results of operations,  capital requirements and such
other  factors as the Board may deem  relevant and will be subject to applicable
federal and state laws that impose restrictions on our ability to pay dividends.

OUR COMMON  STOCK IS NOT  INSURED  AND YOU COULD  LOSE THE VALUE OF YOUR  ENTIRE
INVESTMENT.

An  investment in shares of our common stock is not a deposit and is not insured
against loss by the government.

OUR MANAGEMENT AND SIGNIFICANT  SHAREHOLDERS CONTROL A SUBSTANTIAL PERCENTAGE OF
OUR STOCK AND THEREFORE  HAVE THE ABILITY TO EXERCISE  SUBSTANTIAL  CONTROL OVER
OUR AFFAIRS.

As of December 31, 2006, our directors and executive officers beneficially owned
approximately  374,733  shares,  or  approximately  12.8 % of our common  stock,
including  options to purchase 125,187 shares,  in the aggregate,  of our common
stock at exercise prices ranging from $10.36 to $31.50 per share. Because of the
large percentage of stock held by our directors and executive officers and other
significant  shareholders,  these  persons  could  influence  the outcome of any
matter submitted to a vote of our shareholders.

WE MAY ISSUE ADDITIONAL  SHARES OF COMMON OR PREFERRED  STOCK,  WHICH MAY DILUTE
THE  OWNERSHIP  AND VOTING POWER OF OUR  SHAREHOLDERS  AND THE BOOK VALUE OF OUR
COMMON STOCK.

We are currently  authorized to issue up to 10,000,000 shares of common stock of
which 2,797,151  shares are currently  outstanding and up to 5,000,000 shares of
preferred stock of which no shares are  outstanding.  Our Board of Directors has
authority,  without action or vote of the shareholders,  to issue all or part of
the authorized  but unissued  shares and to establish the terms of any series of
preferred  stock.  These authorized but unissued

                                       22
<PAGE>

shares  could be issued  on terms or in  circumstances  that  could  dilute  the
interests  of other  stockholders.  In  addition,  a total of 250,000  shares of
common stock have been reserved for issuance  under the Norwood  Financial  Corp
2006 Stock Option Plan,  of which 47,700 were issued as of December 31, 2006. As
of  December  31,  2006,  options to  purchase a total of  135,945  shares  were
exercisable  and had exercise  prices  ranging  from $10.36 to $31.50.  Any such
issuance will dilute the percentage  ownership  interest of shareholders and may
further dilute the book value of our common stock.

PROVISIONS  OF OUR  ARTICLES  OF  INCORPORATION  AND THE  PENNSYLVANIA  BUSINESS
CORPORATION  LAW  COULD  DETER  TAKEOVERS  WHICH  ARE  OPPOSED  BY THE  BOARD OF
DIRECTORS.

Our articles of  incorporation  require the  approval of 80% of our  outstanding
shares for any merger or consolidation unless the transaction meets certain fair
price  criteria or the business  combination  has been approved or authorized by
the Board of Directors.  In addition,  our articles of incorporation may require
the  disgorgement  of profits  realized  by any person who  attempts  to acquire
control of the Company. As a Pennsylvania corporation with a class of securities
registered with the Securities and Exchange Commission,  the Company is governed
by certain provisions of the Pennsylvania  Business  Corporation Law that, inter
alia, permit the disparate treatment of certain shareholders;  prohibit calls of
special  meetings  of  shareholders;   require  unanimous  written  consent  for
shareholder  action  in lieu of a  meeting;  require  shareholder  approval  for
certain  transactions  in  which  a  shareholder  has an  interest;  and  impose
additional  requirements  on  business  combinations  with  persons  who are the
beneficial owners of more than 20% of the Company's stock.

                          RISKS RELATED TO OUR INDUSTRY

WE OPERATE IN A COMPETITIVE  MARKET WHICH COULD  CONSTRAIN OUR FUTURE GROWTH AND
PROFITABILITY.

We operate in a competitive  environment,  competing for deposits and loans with
commercial banks, savings associations and other financial entities. Competition
for deposits comes primarily from other commercial banks, savings  associations,
credit unions, money market and mutual funds and other investment  alternatives.
Competition  for loans comes  primarily  from other  commercial  banks,  savings
associations,   mortgage  banking  firms,  credit  unions  and  other  financial
intermediaries.  Many of the  financial  intermediaries  operating in our market
area offer certain services, such as international banking services, which we do
not  offer.   Moreover,   banks  with  a  larger  capitalization  and  financial
intermediaries  not subject to bank regulatory  restrictions have larger lending
limits and are thereby able to serve the needs of larger customers.

WE ARE REQUIRED TO COMPLY WITH  EXTENSIVE  AND COMPLEX  GOVERNMENTAL  REGULATION
WHICH CAN ADVERSELY AFFECT OUR BUSINESS.

Our operations are and will be affected by current and future legislation and by
the  policies  established  from  time to  time by  various  federal  and  state
regulatory  authorities.  We are subject to supervision and periodic examination
by the  Federal  Reserve  Board  (the  "FRB"),  the  Federal  Deposit  Insurance
Corporation  (the "FDIC") and the  Pennsylvania  Department of Banking.  Banking
regulations,  designed  primarily  for the  safety  of  depositors,  may limit a
financial  institution's  growth and the return to its investors by  restricting
such  activities as the payment of dividends,  mergers with or  acquisitions  by
other institutions,  investments,  loans and interest rates, interest rates paid
on deposits,  expansion of branch  offices,  and the offering of  securities  or
trust services. We are also subject to capitalization  guidelines established by
federal  law and could be subject to  enforcement  actions to the extent that we
are found by regulatory examiners to be undercapitalized.  It is not possible to
predict  what  changes,  if any,  will be made to  existing  federal  and  state
legislation  and regulations or the effect that any such

                                       23
<PAGE>

changes may have on our future  business and earnings  prospects.  Further,  the
cost of compliance with regulatory requirements may adversely affect our ability
to operate profitability.

In addition,  the monetary policies of the FRB have had a significant  effect on
the operating results of banks in the past and are expected to continue to do so
in the  future.  Among the  instruments  of  monetary  policy used by the FRB to
implement  its  objectives  are  changes in the  discount  rate  charged on bank
borrowings and changes in the reserve  requirements on bank deposits.  It is not
possible to predict what changes,  if any, will be made to the monetary policies
of the FRB or to existing federal and state  legislation or the effect that such
change may have on our future business and earnings prospects.

During  the past  several  years,  significant  legislative  attention  has been
focused on the regulation and deregulation of the financial  services  industry.
Non-bank financial  institutions,  such as securities brokerage firms, insurance
companies  and money market funds,  have been  permitted to engage in activities
which compete directly with traditional bank business.

WE REALIZE INCOME PRIMARILY FROM THE DIFFERENCE BETWEEN INTEREST EARNED ON LOANS
AND  INVESTMENTS  AND INTEREST PAID ON DEPOSITS AND  BORROWINGS,  AND CHANGES IN
INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY AND ASSETS.

Changes in prevailing interest rates may hurt our business. We derive our income
mainly from the  difference  or "spread"  between the interest  earned on loans,
securities  and other  interest-earning  assets,  and interest paid on deposits,
borrowings and other  interest-bearing  liabilities.  In general, the larger the
spread,  the more we earn. When market rates of interest change, the interest we
receive on our assets and the interest we pay on our liabilities will fluctuate.
This can cause decreases in our spread and can adversely affect our income.

Interest  rates affect how much money we can lend.  For example,  when  interest
rates  rise,  the cost of  borrowing  increases  and loan  originations  tend to
decrease. In addition,  changes in interest rates can affect the average life of
loans and investment securities. A reduction in interest rates generally results
in increased prepayments of loans and mortgage-backed  securities,  as borrowers
refinance  their  debt in order to reduce  their  borrowing  cost.  This  causes
reinvestment risk, because we generally are not able to reinvest  prepayments at
rates  that are  comparable  to the  rates we  earned  on the  prepaid  loans or
securities.  Changes in market interest rates could also reduce the value of our
financial  assets.  If we are unsuccessful in managing the effects of changes in
interest rates, our financial condition and results of operations could suffer.

AS A PUBLIC COMPANY, WE ARE SUBJECT TO NUMEROUS REPORTING  REQUIREMENTS THAT ARE
CURRENTLY EVOLVING AND COULD  SUBSTANTIALLY  INCREASE OUR OPERATING EXPENSES AND
DIVERT MANAGEMENT'S ATTENTION FROM THE OPERATION OF OUR BUSINESS.

The  Sarbanes-Oxley  Act of 2002,  which  became law in July 2002,  has required
changes  in  some  of  our  corporate  governance,   securities  disclosure  and
compliance  practices.  In response to the requirements of that Act, the SEC has
promulgated new rules covering a variety of subjects.  Compliance with these new
rules has significantly  increased our legal and financial and accounting costs,
and we expect these  increased costs to continue.  In addition,  compliance with
the requirements has taken a significant amount of management's and the Board of
Directors' time and resources.  Likewise,  these  developments  may make it more
difficult  for us to  attract  and  retain  qualified  members  of our  board of
directors, particularly independent directors, or qualified executive officers.

                                       24
<PAGE>

As directed  by Section 404 of the  Sarbanes-Oxley  Act,  the SEC adopted  rules
requiring  public  companies to include a report of  management on the company's
internal  control over financial  reporting in their annual reports on Form 10-K
that contains an assessment by management of the  effectiveness of the company's
internal  control over financial  reporting  beginning with the annual report on
Form 10-K for our fiscal year ending  December  31, 2007.  In  addition,  in the
future, the public accounting firm auditing the company's  financial  statements
must attest to and report on management's assessment of the effectiveness of the
company's internal control over financial  reporting.  This requirement is first
applicable  to our annual report on Form 10-K for fiscal 2008 and for all future
annual  reports.   The  costs  associated  with  the   implementation   of  this
requirement, including documentation and testing, have not been estimated by us.
If we are ever unable to conclude that we have effective  internal  control over
financial  reporting  or, if our  independent  auditors are unable to provide us
with an unqualified  report as to the effectiveness of our internal control over
financial  reporting  for any future  year-ends  as  required  by  Section  404,
investors could lose confidence in the reliability of our financial  statements,
which could result in a decrease in the value of our securities.


ITEM 1B.  UNRESOLVED STAFF COMMENTS
-----------------------------------

         None

ITEM  2.  PROPERTIES
--------------------


     The Bank  operates  from  its  main  office  located  at 717  Main  Street,
Honesdale,  Pennsylvania and eleven additional branch offices.  The Bank's total
investment  in office  property and  equipment is $13.3  million with a net book
value of $6.0  million as of December  31,  2006.  The Bank  currently  operates
automated teller machines at all twelve of its facilities.  The Bank leases four
of its locations with minimum lease commitments of $4,011,000  through 2029. The
four locations have various renewal options.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     Neither the Company nor its  subsidiaries are involved in any pending legal
proceedings,  other than routine legal matters  occurring in the ordinary course
of  business,  which in the  aggregate  involve  amounts  which are  believed by
management to be immaterial to the consolidated  financial  condition or results
of operations of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
------------------------------------------------------------

     None.


                                       25
<PAGE>

                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
--------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------

     Information  relating  to the market  for  Registrant's  common  equity and
related  stockholder  matters  appears  under  "Capital  and  Dividends"  in the
Registrant's  Annual Report to  Stockholders  for the fiscal year ended December
31, 2006 ("Annual Report") and is incorporated herein by reference.
<TABLE>
<CAPTION>
                                                  Issuer  Purchases of Equity Securities
                                                  --------------------------------------
                                                                                                            Maximum number
                                                                                                            of shares (or
                                                                                                            approximate
                                                                                   Total number of          dollar value) that
                                                                                   shares purchased         may yet
                                              Total number   Average price         as part of  publicly     be purchased
                                              of shares      paid per              announced plans          under the plans
                                              purchased      share                 or programs*             or programs
                                              ----------     -----                 --------------------     -----------
<S>                                             <C>          <C>                      <C>                        <C>
October 1-October 31, 2006                      5,000        $31.10                   5,000                      94,863
November 1-November 30, 2006                       --            --                      --                          --
December 1-December 31, 2006                    2,000         31.25                   2,000                      92,863
                                                -----         -----                   -----                      ------
  Total                                         7,000        $31.14                   7,000                      92,863
                                                =====         =====                   =====                      ======
</TABLE>


* On June 15, 2005, the  Registrant  announced its intention to repurchase up to
5% of its outstanding  common stock  (approximately  134,000 shares) in the open
market.

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The   above-captioned   information  appears  under  "Summary  of  Selected
Financial Data" in the Annual Report, and is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------

     The above-captioned  information appears under "Management's Discussion and
Analysis" in the Annual Report and is incorporated  herein by reference from the
Annual Report.

                                       26
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------------------------------------------------------------------

     The above-captioned  information appears under "Management's Discussion and
Analysis  -- Market  Risk" in the Annual  Report and is  incorporated  herein by
reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

     The  Company's  consolidated  financial  statements  listed  in Item 15 are
incorporated herein by reference from the Annual Report.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

     None.

ITEM 9A.  CONTROLS AND PROCEDURES
---------------------------------

     The Company's management evaluated, with the participation of the Company's
Chief Executive  Officer and Chief Financial  Officer,  the effectiveness of the
Company's  disclosure  controls  and  procedures,  as of the  end of the  period
covered by this report.  Based on that evaluation,  the Chief Executive  Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information  required to be disclosed by
the  Company  in the  reports  that it files or  submits  under  the  Securities
Exchange Act of 1934 is recorded, processed,  summarized and reported within the
time periods  specified in the  Securities and Exchange  Commission's  rules and
forms.

     There were no changes in the  Company's  internal  control  over  financial
reporting  that  occurred  during the  Company's  last fiscal  quarter that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION
--------------------------

     None.

                                       27
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
----------------------------------------------------------------

     The  information  contained  under the sections  captioned  "Section  16(a)
Beneficial  Ownership  Reporting  Compliance"  and  "Proposal  I--  Election  of
Directors" and "Corporate Governance" in the Proxy Statement for the 2007 Annual
Meeting of  Stockholders  (the "Proxy  Statement")  are  incorporated  herein by
reference.

     The  Company has  adopted a Code of Ethics  that  applies to its  principal
executive officer,  principal financial officer and principal accounting officer
or controller. The Company undertakes to provide a copy of the Code of Ethics to
any person  without  charge,  upon request to Lewis J. Critelli  Executive  Vice
President and Chief Financial Officer, Norwood Financial Corp., 717 Main Street,
Honesdale, PA 18431.

ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

     The  information  contained  under  the  section  captioned  "Director  and
Executive  Compensation"  in the  Proxy  Statement  is  incorporated  herein  by
reference.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
--------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------

     (a)  Security Ownership of Certain Beneficial Owners

          Information  required by this item is incorporated herein by reference
          to the Section  captioned  "Principal  Holders of Our Common Stock" of
          the Proxy Statement.

     (b)  Security Ownership of Management

          Information  required by this item is incorporated herein by reference
          to the sections captioned "Proposal I -- Election of Directors" of the
          Proxy Statement.

     (c)  Changes in Control

          Management  of the Company  knows of no  arrangements,  including  any
          pledge by any person of  securities  of the Company,  the operation of
          which may at a  subsequent  date  result in a change in control of the
          registrant.

     (d)  Equity Compensation Plan Information


                                       28
<PAGE>
                      EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
                                                    (a)                  (b)                        (c)

                                                                                            Number of securities
                                         Number of securities      Weighted average       remaining available for
                                           To be issued upon      exercise price of        future issuance under
                                              Exercise of            outstanding         equity compensation plans
                                         outstanding options,     options, warrants        (excluding securities
                                          warrants and rights         and rights          reflected in column (a)
                                          -------------------         ----------          -----------------------
<S>                                             <C>                    <C>
Equity compensation plans
  approved by shareholders:

  Stock Option Plan.............                128,027                $18.71                              --
  2006 Stock Option Plan........                 47,700                 30.91                         202,300

Equity compensation plan
  not approved by shareholders:

  1999 Directors Stock
    Compensation Plan...........                  7,918                 17.10                              --
                                                -------                ------                         -------

   TOTAL.....................                   183,645                $21.81                         202,300
                                                =======                ======                         =======
</TABLE>

     The 1999 Directors  Stock  Compensation  Plan provides for annual grants of
options to non-employee  directors as of the close of business on the day of the
first regularly scheduled board meeting in December of each year. The amounts of
such awards are  determined  by the board or a committee  thereof.  The exercise
price for each option is equal to the fair  market  value of the stock as of the
date of grant.  Options  generally  have terms of ten years and one day from the
date of grant and vest over periods ranging from six months to one year from the
date of grant.  Except in the event of death or  disability,  optionees  may not
sell shares  acquired  on  exercise of options  within six months of the date of
grant.  Options  are not  transferable  except  in the event of the death of the
optionee.

ITEM  13.  CERTAIN   RELATIONSHIPS   AND  RELATED   TRANSACTIONS   AND  DIRECTOR
--------------------------------------------------------------------------------
INDEPENDENCE
------------

     The information  required by this item is incorporated  herein by reference
to the section in the Proxy Statement captioned "Related Party Transactions" and
"Corporate Governance".

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
------------------------------------------------

     The information  required by this item is incorporated  herein by reference
to the section on the Proxy  Statement  captioned  "Proposal  2-Ratification  of
Appointment of Independent Auditors."


                                       29
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT, AND SCHEDULES
-----------------------------------------------------

     (a)  Listed below are all financial  statements  and exhibits filed as part
          of this report, and are incorporated by reference.

     1.   The  consolidated  balance  sheets  of  Norwood  Financial  Corp.  and
          subsidiary  as  of  December  31,  2006  and  2005,  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,
          2006,  together with the related  notes and the report of  independent
          registered  public  accounting  firm  of  Beard  Miller  Company  LLP,
          independent registered public accounting firm.

     2.   Schedules omitted as they are not applicable.
<TABLE>
<CAPTION>
     3.   Exhibits

<S>     <C>
3(i)    Articles of  Incorporation  of Norwood  Financial  Corp.*
3(ii)   Bylaws of Norwood  Financial  Corp.*
4.0     Specimen Stock  Certificate of Norwood  Financial Corp.*
10.1+   Amended  Employment  Agreement  with William W. Davis,  Jr.**
10.2+   Amended Employment Agreement with Lewis J. Critelli**
10.3+   Form of Change-in-Control Severance Agreement with seven key employees of the Bank***
10.4+   Consulting Agreement with Russell L. Ridd****
10.5+   Norwood Financial Corp. Stock Option Plan*****
10.6+   Salary Continuation Agreement between the Bank and William W. Davis, Jr.***
10.7+   Salary Continuation Agreement between the Bank and Lewis J. Critelli***
10.8+   Salary Continuation Agreement between the Bank and Edward C. Kasper***
10.9+   1999 Directors Stock Compensation Plan***
10.10+  Salary Continuation Agreement between the Bank and Joseph A. Kneller******
10.11+  Salary Continuation Agreement between the Bank and John H. Sanders******
10.12+  2006 Stock Option Plan*******
10.13+  First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr.********
10.14+  First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli ********
10.15+  First and Second Amendments to Salary Continuation Agreement with Edward C. Kasper********
10.16+  First and Second Amendments to Salary Continuation Agreement with Joseph A. Kneller********
10.17+  First and Second Amendments to Salary Continuation Agreement with John H. Sanders********
13      Annual Report to Stockholders for the fiscal year ended December 31, 2006
21      Subsidiaries of Norwood Financial Corp. (see Item 1.  Business, General and Subsidiary Activity)
23      Consent of Independent Registered Public Accounting Firm
31.1    Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2    Rule 13a-14(a)/15d-14(a) Certification of CFO
32      Certification pursuant to 18 U.S. C. SS.1350, as adopted pursuant to SS.906 of Sarbanes Oxley Act of 2002
</TABLE>

                                       30
<PAGE>

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

+        Management contract or compensatory plan arrangement.

*        Incorporated herein by reference into this document from the Exhibits
         to  Form  10,   Registration   Statement  initially  filed  with  the
         Commission on April 29, 1996, Registration No.0-28364.

**       Incorporated  by reference  into this document  from the  identically
         numbered  exhibits  to the  registrant's  Form  8-K  filed  with  the
         Commission March 6, 2006.

***      Incorporated  herein by reference  into this document from the Exhibits
         to the  Registrant's  Form 10-K filed with the  Commission on March 23,
         2000, File No. 0-28364.

****     Incorporated  by reference  into this  document from the Exhibit to the
         Registrant's  Form 10-K filed with the  Commission  on March 31,  1997,
         File No. 0-28364.

*****    Incorporated  by reference into this document from the Exhibits to Form
         S-8 filed with the Commission on August 14, 1998, File No. 333-61487.

******   Incorporated  by reference  into this document  from the  identically
         numbered  exhibits  to the  Registrant's  Form  10-K  filed  with the
         Commission on March 22, 2004, File No. 0-28364.

*******  Incorporated  by  reference  to this  document  from  Exhibit 4.1 to
         Registrant's   Registration   Statement   on  Form  S-8   (File  No.
         333-134831) filed with the Commission on June 8, 2006.

******** Incorporated   herein  by  reference  from  the  Exhibits  to  the
         Registrant's Current Report on Form 8-K filed April 4, 2006.



                                       31
<PAGE>
                                   SIGNATURES

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

                                                     NORWOOD FINANCIAL CORP.

Dated:  March 22, 2007                       By:/s/ William W. Davis, Jr.
                                                --------------------------------
                                                William W. Davis, Jr.
                                                President, Chief Executive
                                                Officer and Director
                                                (Duly Authorized Representative)

      Pursuant to the  requirement of the Securities  Exchange Act of 1934, this
Report has been signed  below on  March 22,  2007 by the  following  persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>

<S>    <C>                                                    <C>
By:   /s/ William W. Davis, Jr.                              By: /s/ Lewis J. Critelli
      --------------------------------------                     --------------------------------------------
      William W. Davis, Jr.                                      Lewis J. Critelli
      President, Chief Executive Officer                         Executive Vice President
        and Chief Financial Officer
        and Director                                             (Principal Financial and Accounting
      (Principal Executive Officer)                              Officer)

                                                             By:
                                                                 --------------------------------------------
                                                                 John E. Marshall
                                                                 Director

By:   /s/ Daniel J. O'Neill                                  By: /s/ Dr. Kenneth A. Phillips
      --------------------------------------                     --------------------------------------------
      Daniel J. O'Neill                                          Dr. Kenneth A. Phillips
      Director                                                   Director

By:   /s/ Gary P. Rickard                                    By: /s/ Russell L. Ridd
      --------------------------------------                     --------------------------------------------
      Gary P. Rickard                                            Russell L. Ridd
      Director                                                   Director

By:   /s/ Ralph A. Matergia                                  By:
      --------------------------------------                     --------------------------------------------
      Ralph A. Matergia                                          Richard L. Snyder
      Director                                                   Director

By:   /s/ Susan Gumble-Cottell
      -------------------------------------
      Susan Gumble-Cottell
      Director

</TABLE>

                                       32