SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
(Mark One)

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

     For the quarterly period ended March 31, 2007
                                    --------------

                                       OR

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

     For the transition period from _________________ to _________________

                         Commission file number 0-28366
                                                -------

                             Norwood Financial Corp.
--------------------------------------------------------------------------------
       (Exact name of registrant as specified in its charter)

       Pennsylvania                                               23-2828306
--------------------------------------------------------------------------------
 (State or other jurisdiction of            (I.R.S. employer identification no.)
incorporation or organization)

717 Main Street, Honesdale, Pennsylvania                            18431
--------------------------------------------------------------------------------
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code   (570) 253-1455
                                                  -----------------

                                      N/A
--------------------------------------------------------------------------------
Former  name,  former  address and former  fiscal  year,  if changed  since last
report.

     Indicate  by check (x)  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 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

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

               Class                             Outstanding as of May 11, 2007
---------------------------------------          ------------------------------
Common stock, par value $0.10 per share                   2,787,855


<PAGE>

                             NORWOOD FINANCIAL CORP.
                                    FORM 10-Q
                      FOR THE QUARTER ENDED MARCH 31, 2007
<TABLE>
<CAPTION>

                                                                                                                  Page
                                                                                                                 Number
<S>                 <C>                                                                                          <C>
PART I -            CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP.

Item 1.             Financial Statements                                                                          3
Item 2.             Management's Discussion and Analysis of Financial Condition and Results of Operations        12
Item 3.             Quantitative and Qualitative Disclosures about Market Risk                                   22
Item 4.             Controls and Procedures                                                                      23
Item 4T.            Controls and Procedures                                                                      24

PART II -           OTHER INFORMATION

Item 1.             Legal Proceedings                                                                            24
Item 1A.            Risk Factors                                                                                 24
Item 2.             Unregistered Sales of Equity Securities and Use of Proceeds                                  24
Item 3.             Defaults upon Senior Securities                                                              25
Item 4.             Submission of Matters to a Vote of Security Holders                                          25
Item 5.             Other Information                                                                            25
Item 6.             Exhibits                                                                                     25

Signatures                                                                                                       27
</TABLE>


                                       2
<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets  (unaudited)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>

                                                                          March 31,         December 31,
                                                                            2007                2006
                                                                            ----                ----
<S>                                                                        <C>                 <C>
ASSETS
Cash and due from banks                                                  $  8,604            $  9,450
Interest bearing deposits with banks                                          141                  67
Federal funds sold                                                          3,130                  --
                                                                         --------            --------
          Cash and cash equivalents                                        11,875               9,517

Securities available for sale                                             112,597             112,912
Securities held to maturity, fair value 2007:
   $974, 2006: $971                                                           955                 954
Loans receivable (net of unearned income)                                 320,744             315,567
   Less:  Allowance for loan losses                                         3,871               3,828
                                                                         --------            --------
Net loans receivable                                                      316,873             311,739
Investment in FHLB Stock                                                    1,923               1,687
Bank premises and equipment, net                                            5,935               6,020
Bank owned life insurance                                                   7,549               7,479
Accrued interest receivable                                                 2,175               2,129
Other Assets                                                                1,501               1,919
                                                                         --------            --------
    TOTAL ASSETS                                                         $461,383            $454,356
                                                                         ========            ========

LIABILITIES
  Deposits:
      Non-interest bearing demand                                        $ 54,046            $ 53,856
      Interest bearing                                                    305,988             304,247
                                                                         --------            --------
        Total deposits                                                    360,034             358,103
  Short-term borrowings                                                    19,986              22,736
  Long-term debt                                                           23,000              13,000
  Accrued interest payable                                                  3,402               2,894
  Other liabilities                                                         1,902               5,392
                                                                         --------            --------
TOTAL LIABILITIES                                                         408,324             402,125

STOCKHOLDERS' EQUITY
   Common  stock, $.10 par value per share, authorized
     10,000,000; shares issued 2,840,872                                      284                 284
   Surplus                                                                 10,233              10,149
   Retained  earnings                                                      43,946              43,125
   Treasury stock at cost: 2007: 53,017 shares, 2006: 43,721               (1,556)             (1,283)
   Accumulated other comprehensive income (loss)                              152                (44)
                                                                         --------            --------
  TOTAL STOCKHOLDERS' EQUITY                                               53,059              52,231
                                                                         --------            --------
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $461,383            $454,356
                                                                         ========            ========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.


                                       3
<PAGE>

NORWOOD FINANCIAL CORP. Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                                  March 31,
                                                             -------------------
                                                              2007         2006
                                                              ----         ----
<S>                                                          <C>          <C>
INTEREST INCOME
  Loans receivable, including fees                           $5,840       $4,944
  Securities                                                  1,218        1,050
  Other                                                          21            2
                                                             ------       ------
  Total interest income                                       7,079        5,996

INTEREST EXPENSE
  Deposits                                                    2,486        1,590
  Short-term borrowings                                         256          187
  Long-term debt                                                246          293
                                                             ------       ------
  Total interest expense                                      2,988        2,070
                                                             ------       ------

NET INTEREST INCOME                                           4,091        3,926
PROVISION FOR LOAN LOSSES                                        50           70
                                                             ------       ------
NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES                                   4,041        3,856
                                                             ------       ------

OTHER INCOME
  Service charges and fees                                      606          590
  Income from fiduciary activities                              125           77
  Net realized gain on sales of securities                       --            7
  Gain on sale of loans                                           7           --
  Earnings on life insurance policies                            81           74
  Other                                                          75           76
                                                             ------       ------
  Total other income                                            894          824
                                                             ------       ------

OTHER EXPENSES
  Salaries and employee benefits                              1,497        1,406
  Occupancy, furniture & equipment, net                         415          380
  Data processing                                               174          156
  Taxes, other than income                                      118          113
  Professional fees                                              89          113
  Amortization of intangibles                                    13           13
  Other                                                         555          585
                                                             ------       ------
  Total other expenses                                        2,861        2,766
                                                             ------       ------

INCOME BEFORE INCOME TAXES                                    2,074        1,914
INCOME TAX EXPENSE                                              611          581
                                                             ------       ------
NET INCOME                                                   $1,463       $1,333
                                                             ======       ======

BASIC EARNINGS PER SHARE                                     $ 0.52       $ 0.48
                                                             ======       ======

DILUTED EARNINGS PER SHARE                                   $ 0.51       $ 0.47
                                                             ======       ======
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

                                       4
<PAGE>


NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
<TABLE>
<CAPTION>

(dollars in thousands, except per                                                                  Accumulated
share  data)                           Number                                           Unearned   Other
                                       of shares  Common             Retained  Treasury ESOP       Comprehensive
                                       issued     Stock     Surplus  Earnings  Stock    Shares     Income (Loss)  Total
                                       ------     -----     -------  --------  -----    ------     -------------  -----

<S>                                    <C>        <C>       <C>       <C>      <C>        <C>        <C>          <C>
Balance December 31, 2006              2,840,872  $284      $10,149   $43,125  ($1,283)   $ --       ($44)        $52,231
Comprehensive Income:
  Net Income                                                            1,463                                       1,463
Change in unrealized gains (losses)
  on securities available for sale, net
  of reclassification adjustment and
  tax effects                                                                                         196             196
                                                                                                                  -------
Total comprehensive income                                                                                          1,659
                                                                                                                  -------

Cash dividends declared $.23 per
  share                                                                  (642)                                       (642)
Acquisition of 9,267 shares of
  treasury stock                                                                  (273)                              (273)
Compensation expense related to stock
  options                                                        84                         --                         84
                                       ---------  ----      -------   -------  -------    ----       ----         -------
Balance, March 31, 2007                2,840,872  $284      $10,233   $43,946  ($1,556)   $ --       $152         $53,059
                                       =========  ====      =======   =======  =======    ====       ====         =======
</TABLE>


See accompanying notes to the unaudited consolidated financial statements.

                                       5
<PAGE>

NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>

                                                                                           Three Months Ended March 31,
                                                                                           ----------------------------
                                                                                                2007       2006
                                                                                              --------    --------
<S>                                                                                           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                                                    $  1,463    $  1,333
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
  Provision for loan losses                                                                         50          70
  Depreciation                                                                                     144         123
  Amortization of intangible assets                                                                 13          13
  Deferred income taxes                                                                             82        (129)
  Net amortization of securities premiums and discounts                                             49          92
  Net realized gain on sales of securities                                                          --          (7)
  Earnings on life insurance policy                                                                (70)        (64)
  Net gain on sale of mortgage loans                                                                (7)         --
  Mortgage loans originated for sale                                                              (327)         --
  Proceeds from sale of mortgage loans                                                             334          --
  Release of ESOP shares                                                                            --         146
  Compensation expense related to stock options                                                     84          --
  Decrease in accrued interest receivable and other assets                                         301         959
  Increase (decrease) in accrued interest payable and other liabilities                         (3,080)        153
                                                                                              --------    --------
    Net cash provided by (used in) operating activities                                           (964)      2,689
                                                                                              --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES
  Securities available for sale:
    Proceeds from maturities and principal reductions on mortgage-backed securities             13,861       3,622
    Purchases                                                                                  (13,300)     (4,765)
  Securities held to maturity, proceeds from maturities                                             --         505
  Increase in investment in FHLB stock                                                            (236)       (453)
  Net increase in loans                                                                         (5,210)       (972)
  Purchase of bank premises and equipment                                                          (59)       (238)
                                                                                              --------    --------
    Net cash used in investing activities                                                       (4,944)     (2,301)
                                                                                              --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net (decrease) increase in deposits                                                            1,931      (1,096)
  Net increase (decrease) in short-term borrowings                                              (2,750)      1,201
  Proceeds from long-term debt                                                                  10,000          --
  Acquisition of treasury stock                                                                   (273)       (396)
  Cash dividends paid                                                                             (642)       (561)
                                                                                              --------    --------
    Net cash provided by(used in) financing activities                                           8,266        (852)
                                                                                              --------    --------
    Increase (decrease) in cash and cash equivalents                                             2,358        (464)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                     9,517       9,816
                                                                                              --------    --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                      $ 11,875    $  9,352
                                                                                              ========    ========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.

                                       6
<PAGE>

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1.   BASIS OF PRESENTATION
     ---------------------

     The  consolidated  financial  statements  include  the  accounts of Norwood
Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and
the Bank's wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp.
and  WTRO  Properties.  All  significant  intercompany  transactions  have  been
eliminated in consolidation.

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in conformity with generally accepted accounting principles for interim
financial  statements and with instructions to Form 10-Q.  Accordingly,  they do
not include all of the information and footnotes  required by generally accepted
principles  for  complete  financial  statements.  In  preparing  the  financial
statements, management is required to make estimates and assumptions that affect
the  reported  amounts of assets and  liabilities  as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ from
those estimates. The financial statements reflect, in the opinion of management,
all normal,  recurring  adjustments  necessary to present  fairly the  financial
position of the Company.  The operating results for the three month period ended
March  31,  2007  are not  necessarily  indicative  of the  results  that may be
expected  for the year  ending  December  31, 2007 or any other  future  interim
period.

     These  statements  should  be read in  conjunction  with  the  consolidated
financial  statements and related notes which are  incorporated  by reference in
the Company's Annual Report on Form 10-K for the year-ended December 31, 2006.

2.   EARNINGS PER SHARE
     ------------------

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

     The  following  table  sets  forth the  computations  of basic and  diluted
earnings per share:
<TABLE>
<CAPTION>
(in thousands)
                                                               Three Months Ended
                                                                    March 31,
                                                               ------------------
                                                                 2007       2006
                                                                -----      -----
<S>                                                             <C>        <C>
Basic EPS weighted average shares outstanding                   2,791      2,797
Dilutive effect of stock options                                   56         55
                                                                -----      -----
Diluted EPS weighted average shares outstanding                 2,847      2,852
                                                                =====      =====
</TABLE>

                                       7
<PAGE>
3.   STOCK-BASED COMPENSATION
     ------------------------

     In December 2004, the Financial  Accounting  Standards  Board (FASB) issued
Statement No.  123(R),  "Share-Based  Payment."  Statement  No. 123(R)  replaces
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Statement No. 123(R)
requires that the fair value of share-based  payment  transactions be recognized
as  compensation  costs in the  financial  statements  over the  period  than an
employee  provides  service in  exchange  for the  award.  The fair value of the
share-based payments is estimated using the Black-Scholes  option-pricing model.
The Company adopted  Statement No. 123(R)  effective  January 1, 2006, using the
modified-prospective  transition method.  Under the modified prospective method,
companies are required to record  compensation  cost for new and modified awards
over the  related  vesting  period of such awards and record  compensation  cost
prospectively for the unvested portion,  at the date of adoption,  of previously
issued and outstanding  awards over the remaining vesting period of such awards.
No change to prior periods presented is permitted under the modified prospective
method.  The Company did not issue any stock  options in 2005 and for the period
ended March 31, 2006. All outstanding  options as of December 31, 2005 are fully
vested.  The Company's  shareholders  approved the Norwood  Financial  Corp 2006
Stock  Option  Plan at the  annual  meeting  on April 25,  2006 and the  Company
awarded 47,700 options in 2006, all of which have a twelve month vesting period.
Included in the results for the three months ended March 31, 2007,  were $84,000
in compensation  costs. Net income for the three months ended March 31, 2007 was
reduced by approximately  $80,000 which is net of related income tax benefit. As
of March  31,  2007,  there was  approximately  $166,000  of total  unrecognized
compensation  cost related to nonvested  options  under the plan.  There were no
options awarded or exercised for the three month period ending March 31, 2007.

4.   CASH FLOW INFORMATION
     ---------------------
     For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks,  interest-bearing deposits with banks with
maturities of 90 days or less and federal funds sold.

     Cash  payments  for  interest  for the period ended March 31, 2007 and 2006
were $2,480,000 and $2,124,000  respectively.  Cash payments for income taxes in
2007 were $4,000  compared to $5,000 in 2006.  Non-cash  investing  activity for
2007 and 2006  included  foreclosed  mortgage  loans and  repossession  of other
assets of $24,000 and $26,000, respectively.

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


                                       8
<PAGE>
<TABLE>
<CAPTION>
(in thousands)                                            Three Months Ended March 31
                                                          ---------------------------
                                                              2007         2006
                                                              ----         ----
<S>                                                          <C>          <C>
Unrealized holding gains (losses)
  on available for sale securities                           $ 294        $(199)
Reclassification adjustment for gains
  realized in income                                            --           (7)
                                                             -----        -----
Net unrealized gain (losses)                                   294         (206)
Income tax expense (benefit)                                    98          (70)
                                                             -----        -----
Other comprehensive income (loss)                            $ 196        $(136)
                                                             =====        =====
</TABLE>

6.   OFF BALANCE SHEET FINANCIAL INSTRUMENTS AND GUARANTEES
     ------------------------------------------------------

     The Bank is a party to financial instruments with off-balance-sheet risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These financial  instruments include commitments to extend credit and letters of
credit.  Those instruments  involve, to varying degrees,  elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the  financial  instrument  for  commitments  to extend credit and letters of
credit is represented by the contractual amount of those  instruments.  The Bank
uses the same credit policies in making commitments and conditional  obligations
as it does for on-balance sheet instruments.

A summary of the Bank's financial instrument commitments is as follows:

(in thousands)                                                  March 31
--------------                                                  --------
                                                            2007         2006
                                                           -------     -------

Commitments to grant loans                                 $ 8,940     $18,971
Unfunded commitments under lines of credit                  30,376      31,532
Standby letters of credit                                    6,914       7,120
                                                           -------     -------
                                                           $46,230     $57,623
                                                           =======     =======

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

     The Bank  does not  issue  any  guarantees  that  would  require  liability
recognition or  disclosure,  other than its standby  letters of credit.  Standby
letters of credit  written  are  conditional  commitments  issued by the Bank to
guarantee the performance of a customer to a third party. Generally, all letters
of credit,  when

                                       9
<PAGE>

issued  have  expiration  dates  within one year.  The credit  risk  involved in
issuing  letters of credit is essentially the same as those that are involved in
extending loan facilities to customers.  The Bank,  generally,  holds collateral
and/or personal  guarantees  supporting these commitments.  Management  believes
that  the  proceeds  obtained  through  a  liquidation  of  collateral  and  the
enforcement of guarantees  would be sufficient to cover the potential  amount of
future payments required under the corresponding guarantees.  The current amount
of the liability as of March 31, 2007 for  guarantees  under standby  letters of
credit issued is not material.

7.   NEW  AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
     ---------------------------------------------------

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

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

     In March 2007,  the FASB  ratified EITF Issue No.  06-11,  "Accounting  for
Income Tax Benefits of  Dividends on  Share-Based  Payment  Awards."  EITF 06-11
requires  companies to recognize the income tax benefit  realized from dividends
or  dividend  equivalents  that are  charged to  retained  earnings  and paid to
employees for nonvested equity-classified employee share-based payment awards as
an increase to additional  paid-in  capital.  EITF 06-11 is effective for fiscal
years beginning after September 15, 2007. The Company does not expect EITF 06-11
will have a material impact on its consolidated  financial position,  results of
operations or cash flows.

     In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral  Assignment  Split-Dollar Life Insurance  Agreements"
(EITF 06-10).  EITF 06-10 provides  guidance for determining a liability for the
postretirement  benefit obligation as well as recognition and measurement of the
associated  asset  on the  basis  of the  terms  of  the  collateral  assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007.  The  Company  is  currently  assessing  the  impact of EITF  06-10 on its
consolidated financial position and results of operations.

                                       10
<PAGE>

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

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

     In September 2006, the FASB's Emerging Issues Task Force (EIFT) issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance  Arrangements"  ("EITF 06-4).
EITF 06-4 requires the recognition of a liability related to the  postretirement
benefits covered by an endorsement split-dollar life insurance arrangement.  The
consensus  highlights  that the employer  (who is also the  policyholder)  has a
liability  for the benefit it is  providing  to its  employee.  As such,  if the
policyholder  has  agreed  to  maintain  the  insurance  policy in force for the
employee's benefit during his or her retirement,  then the liability  recognized
during the  employee's  active service period should be based on the future cost
of insurance to be incurred during the employee's  retirement.  Alternatively if
the policy holder has agreed to provide the employee with a death benefit,  then
the liability for the future death benefit should be recognized by following the
guidance in SFAS No. 106 or Accounting Principals Board (APB) Opinion No. 12, as
appropriate.  For  transition,  an entity can choose to apply the guidance using
either of the following approaches: (a) a change in accounting principle through
retrospective application to all periods presented or (b) a change in accounting
principle  through a  cumulative-effect  adjustment  to the  balance in retained
earnings at the beginning of the year of adoption.  The disclosures are required
in  fiscal  years  beginning  after  December  15,  2007,  with  early  adoption
permitted.  The Company is evaluating  the potential  impact of this guidance on
Company's consolidated financial statements.

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

                                       11
<PAGE>

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

FORWARD-LOOKING STATEMENTS
--------------------------

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


CRITICAL ACCOUNTING POLICIES
----------------------------

     Note 2 to the  Company's  consolidated  financial  statements  for the year
ended December 31, 2006  (incorporated  by reference in Item 8 of the Form 10-K)
lists significant  accounting  policies used in the development and presentation
of its financial  statements.  This  discussion  and analysis,  the  significant
accounting  policies,  and other financial  statement  disclosures  identify and
address key variables and other  qualitative and  quantitative  factors that are
necessary for an understanding  and evaluation of the Company and its results of
operations.

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

     The Company adopted SFAS No. 123(R) "Share-Based  Payment" as of January 1,
2006, which requires that transactions be recognized as compensation cost in the
income statement based on their fair values on the measurement  date, which, for
the Company is the grant date.  There were no stock  options  awarded in 2005 or
for the three months ended March 31, 2006. The Norwood Financial Corp 2006 Stock
Option  Plan was  approved  on April 25,  2006 and the  Company  granted  47,700
options  during 2006.  For the three  months ended March 31, 2007,  salaries and
employee  benefit expense  includes $84,000 related to the adoption of Statement
No. 123 (R) and $-0- for the three months ended March 31, 2006.

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

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

                                       12
<PAGE>

Company  believes that the unrealized  losses at March 31, 2007 and December 31,
2006 represent temporary impairment of the securities.

CHANGES IN FINANCIAL CONDITION
------------------------------

GENERAL
-------
     Total  assets as of March 31, 2007 were $461.4  million  compared to $454.4
million as of  December  31,  2006 an  increase  of $7.0  million  or 1.6%.  The
increase  reflects a $5.1 million,  or 1.6%,  increase in loans receivable and a
$2.4 million increase in cash and cash equivalents.

SECURITIES
----------
     The fair value of  securities  available  for sale as of March 31, 2007 was
$112.6  million  compared to $112.9 million as of December 31, 2006. The Company
purchased  $13.3 million of securities  using the proceeds from $13.9 million of
securities called, maturities and principal reductions.

     The carrying  value of the Company's  securities  portfolio  (Available-for
Sale and Held-to Maturity) consisted of the following:
<TABLE>
<CAPTION>
                                                    March 31, 2007                          December 31, 2006
                                             -----------------------------------------------------------------------------
(dollars in thousands)                       Amount          % of portfolio             Amount              % of portfolio
                                             ------          --------------             ------              --------------
<S>                                         <C>                   <C>                  <C>                        <C>
US Government agencies                      $ 43,656              38.5%                $ 47,581                   41.9%
States and political subdivisions             19,900              17.5                   17,419                   15.3
Corporate securities                           7,457               6.6                    8,439                    7.4
Mortgage-backed securities                    40,792              35.9                   38,652                   33.9
Equity securities                              1,747               1.5                    1,775                    1.6
                                            --------             -----                 --------                  -----
  Total                                     $113,552             100.0%                $113,866                  100.0%
</TABLE>

     The Company has securities in an unrealized loss position.  In Management's
opinion,  the unrealized  losses reflect changes in interest rates subsequent to
the  acquisition  of  specific  securities.  The  Company's   available-for-sale
portfolio has an average repricing term of 2.2 years.  Interest rates in the 2-3
year section of the treasury yield curve decreased during the three months ended
March 31, 2007  favorably  impacting  the fair value of  individual  securities.
Management believes that the unrealized losses represent temporary impairment of
the securities and are the result of changes in interest rates.  The Company has
the intent and ability to hold these  investments until maturity or market price
recovery.

LOANS RECEIVABLE
----------------
     Loans  receivable  totaled $320.7 million  compared to $315.7 million as of
December 31, 2006.  Residential real estate  increased $3.3 million  principally
due to growth in single family first lien  residential  loans.  Commercial  real
estate  increased $2.9 million  during the period.  Consumer loans declined $1.2
million due to continued run-off in the Company's indirect automobile portfolio.

                                       13
<PAGE>
     Set forth below is selected  data relating to the  composition  of the loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
Types of loans
(dollars in thousands)                                          March 31, 2007         December 31, 2006
                                                             --------------------     ---------------------
                                                                $             %          $              %
                                                               ---           ---        ---            ---
<S>                                                          <C>             <C>      <C>              <C>
Real Estate-Residential                                      $117,120        36.5     $113,783         36.0
            Commercial                                        141,830        44.2      138,881         44.0
            Construction                                        6,660         2.1        7,714          2.4
Commercial, financial and agricultural                         35,097        10.9       34,019         10.8
Consumer loans to individuals                                  20,354         6.3       21,520          6.8
                                                             --------       -----     --------       ------
  Total loans                                                 321,061       100.0      315,917        100.0

  Deferred fees                                                  (317)                    (350)
                                                             --------                 --------
                                                              320,744                  315,567

  Allowance for loan losses                                    (3,871)                  (3,828)
                                                             --------                 --------
  Net loans receivable                                       $316,873                 $311,739
                                                             ========                 ========
</TABLE>

ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
---------------------------------------------------

     Following is a summary of changes in the  allowance for loan losses for the
periods indicated:

                                                                Three
                                                                -----
(dollars in thousands)                                   Months Ended March 31,
                                                         ----------------------
                                                           2007           2006
                                                           ----           ----
Balance, beginning                                       $ 3,828       $ 3,669
Provision for loan losses                                     50            70
Charge-offs                                                  (28)          (27)
Recoveries                                                    21            31
                                                         -------       -------
  Net (charge-offs)/recoveries                                (7)            4
                                                         -------       -------
Balance, ending                                          $ 3,871       $ 3,743
                                                         =======       =======

Allowance to total loans                                    1.21%         1.28%
  Net (charge-offs) recoveries to average loans
    (annualized)                                            (.01%)         .01%

     The allowance for loan losses  totaled  $3,871,000 as of March 31, 2007 and
represented  1.21% of total  loans,  compared  to  $3,828,000  at year end,  and
$3,743,000 as of March 31, 2006. The Company had net  charge-offs  for the three
months ended March 31, 2007 of $7,000  compared to net  recoveries  of $4,000 in
2006. The Company's  loan review process  assesses the adequacy of the allowance
for loan losses on a quarterly  basis.  The process  includes an analysis of the
risks inherent in the loan portfolio.  It includes an analysis of impaired loans
and a historical review of credit losses by loan type. Other factors  considered
include:  concentration of credit in specific industries;  economic and industry
conditions;  trends in  delinquencies  and loan  classifications,  large  dollar
exposures and loan growth.  Management considers the allowance adequate at March
31, 2007 based on the  Company's  criteria.  However,  there can be no assurance
that the allowance for loan losses will be adequate to cover significant losses,
if any, that might be incurred in the future.

                                       14
<PAGE>

     As of March 31, 2007,  non-performing loans totaled $407,000, which is .13%
of total loans  compared  to  $409,000,  or .13% of total loans at December  31,
2006. The following table sets forth information regarding  non-performing loans
and foreclosed real estate at the dates indicated:
<TABLE>
<CAPTION>
(dollars in thousands)                            March 31, 2007     December 31, 2006
                                                  --------------     -----------------
<S>                                                   <C>                 <C>
Loans accounted for on a non-accrual basis:
   Commercial and all other                           $    -              $    -
   Real Estate                                           401                 392
   Consumer                                                6                  17
                                                      ------              ------
   Total                                                 407                 409

Accruing loans which are contractually
  past due 90 days or more                                 -                   -
                                                      ------              ------
Total non-performing loans                               407                 409
Foreclosed real estate                                     -                   -
                                                      ------              ------
Total non-performing assets                           $  407              $  409
                                                      ======              ======
Allowance for loans losses                            $3,871              $3,828
Coverage of non-performing loans                        9.5x                 9.4x
Non-performing loans to total loans                     .13%                 .13%
Non-performing assets to total assets                   .09%                 .09%

</TABLE>


DEPOSITS
--------

     Total deposits as of March 31, 2007 were $360.0 million increasing slightly
from $358.1 million as of December 31, 2006.

     The following table sets forth deposit balances as of the dates indicated:

(dollars in thousands)                  March 31, 2007        December 31, 2006
                                        --------------        -----------------

Non-interest bearing demand                $ 54,046              $ 53,856
Interest bearing demand                      36,498                36,600
Money Market                                 50,095                50,048
Savings                                      43,895                45,144
Time deposits <$100,000                     118,589               115,719
Time deposits >$100,000                      56,911                56,736
                                           --------              --------

     Total                                 $360,034              $358,103
                                           ========              ========

The increase in deposits was principally due to a higher level of short-term CDs
that pay a higher rate of return.

                                       15
<PAGE>

BORROWINGS
----------

     Short-term  borrowings as of March 31, 2007 were $20.0 million  compared to
$22.7  million as of December 31,  2006.  Short-term  borrowings  consist of the
following:
<TABLE>
<CAPTION>
                                                             March 31, 2007        December 31, 2006
                                                             --------------        -----------------
<S>                                                              <C>                    <C>
(dollars in thousands)
Securities sold under agreements to repurchase                   $18,986                $21,736
U.S. Treasury demand notes                                         1,000                  1,000
                                                                 -------                -------
                                                                 $19,986                $22,736
                                                                 =======                =======
</TABLE>

     Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                             March 31, 2007        December 31, 2006
                                                             --------------        -----------------
<S>                                                              <C>                    <C>
(dollars in thousands)
Notes with the FHLB:
Fixed rate note due April 2008 at 4.17%                         $ 5,000                 $ 5,000
Convertible note due April 2009 at 5.53%                          5,000                   5,000
Convertible note due January 2011 at 5.24%                        3,000                   3,000
Convertible note due January 2017 at 4.71%                       10,000                       -
                                                                -------                 -------
                                                                $23,000                 $13,000
                                                                =======                 =======
</TABLE>

     The convertible notes contain an option which allows the FHLB, at quarterly
intervals to change the note to an adjustable-rate  advance at three month LIBOR
plus 11 to 16 basis points.  If the notes are  converted,  the option allows the
Bank to put the funds back to the FHLB at no charge.

OFF BALANCE SHEET ARRANGEMENTS
------------------------------

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

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


                                       16
<PAGE>
     A summary of the contractual amount of the Company's  financial  instrument
commitments is as follows:
<TABLE>
<CAPTION>
                                                          March 31,    December 31,
                                                             2007         2006
                                                             ----         ----
                                                               (in thousands)
<S>                                                        <C>           <C>
Commitments to grant loans                                 $ 8,940       $12,611
Unfunded commitments under lines of credit                  30,376        34,152
Standby letters of credit                                    6,914         7,215
                                                           -------       -------

                                                           $46,230       $53,978
                                                           =======       =======
</TABLE>

STOCKHOLDERS' EQUITY AND CAPITAL RATIOS
---------------------------------------
     As of March 31, 2007, stockholders' equity totaled $53.1 million,  compared
to $52.2 million as of December 31, 2006. The net change in stockholders' equity
included  $1,463,000  in net income,  that was  partially  offset by $642,000 of
dividends  declared.   In  addition,   accumulated  other  comprehensive  income
increased  $196,000  due to an  increase  in fair  value  of  securities  in the
available  for sale  portfolio.  This  increase in fair value is the result of a
change in interest rates, which may impact the value of the securities.  Because
of interest rate  volatility,  the  Company's  accumulated  other  comprehensive
income could materially fluctuate for each interim and year-end period.

     A comparison of the Company's regulatory capital ratios is as follows:

                                     March 31, 2007       December 31, 2006
                                     --------------       -----------------
Tier 1 Capital
    (To average assets)                  11.48%                  11.43%
Tier 1 Capital
    (To risk-weighted assets)            15.84%                  15.67%
Total Capital
    (To risk-weighted assets)            17.15%                  16.99%

     The  minimum  capital  requirements  imposed  by the  FDIC on the  Bank for
leverage, Tier 1 and Total Capital are 4%, 4% and 8%, respectively.  The Company
has  similar  capital  requirements  imposed  by the Board of  Governors  of the
Federal  Reserve  System  (FRB).  The  Bank is also  subject  to more  stringent
Pennsylvania  Department of Banking (PDB) guidelines.  The Bank's capital ratios
do not differ  significantly from the Company's ratios.  Although not adopted in
regulation form, the PDB utilizes capital standards  requiring a minimum of 6.5%
leverage  capital  and 10%  total  capital.  The  Company  and the Bank  were in
compliance  in FRB, FDIC and PDB capital  requirements  as of March 31, 2007 and
December 31, 2006.

LIQUIDITY
---------

     As of March 31, 2007,  the Company had cash and cash  equivalents  of $11.9
million in the form of cash,  due from banks,  federal funds sold and short-term
deposits with other institutions.  In addition, the Company had total securities
available for sale of $112.6  million  which could be used for liquidity  needs.
This totals  $124.5  million and  represents  27.0% of total assets  compared to
$122.4  million and 26.9% of total assets as of December  31, 2006.  The Company
also monitors other liquidity  measures,  all of which were within the Company's
policy  guidelines as of March 31, 2007 and December 31, 2006.  Based upon these
measures, the Company believes its liquidity is adequate.

                                       17
<PAGE>

CAPITAL RESOURCES
-----------------

     The Company has a line of credit commitment available from the Federal Home
Loan Bank (FHLB) of Pittsburgh for borrowings of up to $20,000,000 which expires
in December 2011. There were no borrowings under this line at March 31, 2007 and
December 31, 2006.  The Company has a line of credit  commitment  available from
PNC for  $12,000,000,  Atlantic  Central  Bankers Bank for  $7,000,000,  Bank of
Lancaster County for $5,000,000 and Wachovia Bank for $2,000,000.  There were no
borrowings under these lines of credit at March 31, 2007 and December 31, 2006.

     The Bank's maximum  borrowing  capacity with the Federal Home Loan Bank was
$215,775,000  of  which  $23,000,000  was  outstanding  at  March  31,  2007 and
$13,000,000 was outstanding at December 31, 2006. Advances from the Federal Home
Loan Bank are secured by qualifying assets of the Bank.


                                       18
<PAGE>


RESULTS OF OPERATIONS
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)
<TABLE>
<CAPTION>
                                                                            Three Months Ended March 31,
                                                        -----------------------------------------------------------------------
                                                                      2007                                    2006
                                                        ---------------------------------       -------------------------------
                                                        Average                   Average       Average                 Average
                                                        Balance     Interest        Rate        Balance     Interest       Rate
                                                        -------     --------        ----        -------     --------       ----
                                                          (2)          (1)          (3)           (2)         (1)         (3)
<S>                                                    <C>          <C>             <C>        <C>            <C>
Assets
Interest-earning assets:
   Federal funds sold                                  $  1,445     $   19          5.26%      $      -       $    -           -%
   Interest bearing deposits with banks                     152          2          5.26            150            2        5.33
   Securities held-to-maturity                              954         22          9.22          1,062           25        9.42
   Securities available for sale:
     Taxable                                             97,831      1,045          4.27         99,225          858        3.46
     Tax-exempt                                          17,756        241          5.43         19,135          267        5.58
                                                       --------     ------          ----       --------       ------        ----
        Total securities available for sale (1)         115,587      1,286          4.45        118,360        1,125        3.80
     Loans receivable (4) (5)                           319,934      5,879          7.35        290,414        4,994        6.88
                                                       --------     ------                     --------       ------
        Total interest earning assets                   438,072      7,208          6.58        409,986        6,146        6.00
Non-interest earning assets:
   Cash and due from banks                                8,137                                   8,113
   Allowance for loan losses                            (3,859)                                  (3,709)
   Other assets                                          17,017                                  16,661
                                                       --------                                --------
        Total non-interest earning assets                21,298                                  21,065
                                                       --------                                --------
Total Assets                                           $459,370                                $431,051
                                                       ========                                ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
   Interest bearing demand and money market            $ 85,691        430          2.01       $ 96,967          359        1.48
   Savings                                               44,660         51          0.46         52,720           61        0.46
   Time                                                 175,612      2,005          4.57        138,217        1,170        3.39
                                                       --------     ------          ----      --------        ------        ----
      Total interest bearing deposits                   305,963      2,486          3.25        287,904        1,590        2.21
Short-term borrowings                                    22,578        256          4.54         19,163          187        3.90
Long-term debt                                           20,222        246          4.87         23,000          293        5.10
                                                       --------     ------          ----      --------        ------        ----
   Total interest bearing liabilities                   348,763      2,988          3.43        330,067        2,070        2.51
Non-interest bearing liabilities:
   Demand deposits                                       53,378                                 50,222
   Other liabilities                                      4,531                                  2,207
                                                       --------                               --------
      Total non-interest bearing liabilities             57,909                                 52,429
   Stockholders' equity                                  52,698                                 48,555
                                                       --------                               --------
Total Liabilities and Stockholders' Equity             $459,370                               $431,051
                                                       ========                               ========

Net interest income (tax equivalent basis)                           4,220          3.15%                      4,076        3.49%
                                                                                    ====                                    ====
Tax-equivalent basis adjustment                                       (129)                                     (150)
                                                                    ------                                    ------
Net interest income                                                 $4,091                                    $3,926
                                                                    ======                                    ======
Net interest margin (tax equivalent basis)                                          3.85%                                   3.98%
                                                                                    ====                                    ====
</TABLE>

(1)  Interest  and  yields  are  presented  on a  tax-equivalent  basis  using a
     marginal tax rate of 34%.
(2)  Average balances have been calculated based on daily balances.
(3)  Annualized
(4)  Loan balances include non-accrual loans and are net of unearned income. (5)
     Loan yields  include the effect of  amortization  of deferred  fees, net of
     costs.


                                       19
<PAGE>

RATE/VOLUME  ANALYSIS.  The following  table shows the fully taxable  equivalent
effect of changes in volumes and rates on interest income and interest expense.
<TABLE>
<CAPTION>
                                                      Increase/(Decrease)
                                                      -------------------
                                           Three months ended March 31, 2007 Compared to
                                           ---------------------------------------------
                                                 Three months ended March 31, 2006
                                                 ---------------------------------
                                                         Variance due to
                                                         ---------------
                                                   Volume       Rate        Net
                                                   ------       ----        ---
                                                      (dollars in thousands)
<S>                                               <C>        <C>        <C>
Assets
Interest earning assets:
Federal funds sold ............................     $   9     $   10     $   19
Interest bearing deposits with banks ..........         -          -          -
Securities held to maturity ...................        (2)        (1)        (3)
Securities available for sale:
Taxable .......................................       (80)       267        187
Tax-exempt securities .........................       (19)        (7)       (26)
                                                    -----     ------     ------
Total securities ..............................       (99)       260        161
Loans receivable ..............................       528        357        885
                                                    -----     ------     ------
Total interest earning assets .................       436        626      1,062
                                                    -----     ------     ------

Interest bearing liabilities:
Interest-bearing demand and money market ......      (234)       305         71
Savings .......................................        (9)        (1)       (10)
Time ..........................................       365        470        835
                                                    -----     ------     ------
Total interest bearing deposits ...............       122        774        896
Short-term borrowings .........................        36         33         69
Other borrowings ..............................       (34)       (13)       (47)
                                                    -----     ------     ------
Total interest bearing liabilities ............       124        794        918
                                                    -----     ------     ------
Net interest income (tax-equivalent basis) ....     $ 312     $ (168)    $  144
                                                    =====     ======     ======
</TABLE>


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



                                       20
<PAGE>


COMPARISON  OF  OPERATING  RESULTS FOR THE THREE  MONTHS ENDED MARCH 31, 2007 TO
--------------------------------------------------------------------------------
MARCH 31, 2006
--------------

GENERAL
-------

     For the three months ended March 31, 2007, net income  totaled  $1,463,000,
an increase of $130,000,  or 9.8%, over $1,333,000  earned in the similar period
of 2006. Earnings per share for the current period were $.52 basic and $.51 on a
diluted basis,  compared to $.48 basic and $.47 on a fully diluted basis for the
three months ended March 31, 2006.  The resulting  return on average  assets and
return on average  equity for the three months  ended March 31, 2007,  was 1.29%
and 11.26%, respectively,  compared to 1.25% and 11.14%,  respectively,  for the
similar period in 2006.

     The following table sets forth changes in net income:
<TABLE>
<CAPTION>
(dollars in thousands)                                                   Three months ended
                                                                         ------------------
                                                                  March 31, 2007 to March 31, 2006
                                                                  --------------------------------
<S>                                                                           <C>
Net income three months ended March 31, 2006                                  $1,333
Change due to:
Net interest income                                                              165
Provision for loan losses                                                         20
Other income                                                                      70
Salaries and employee benefits                                                   (91)
All other expenses                                                                (4)
Income tax effect                                                                (30)
                                                                              ------

Net income three months ended  March 31, 2007                                 $1,463
                                                                              ======
</TABLE>

NET INTEREST INCOME
-------------------

     Net interest income on a fully taxable equivalent basis (fte) for the three
months ended March 31, 2007 totaled $4,221,000,  an increase of $145,000 or 3.6%
over the similar period in 2006. The net interest  spread (fte) and net interest
margin were 3.15% and 3.85%, respectively,  for the three months ended March 31,
2007 compared to 3.49% and 3.98%, respectively for the similar period in 2006.

     Interest  income (fte) totaled  $7,208,000  with a yield on average earning
assets of 6.58%,  increasing from $6,146,000 and 6.00% for the 2006 period.  The
increase  was  due in  part to  growth  in the  loan  portfolio.  Average  loans
increased $29.5 million and represented 73.0% of average earnings assets for the
three months ended March 31, 2007  compared to 70.8% of average  earning  assets
for the similar period in 2006. The average yield (fte) on loans also increased,
and was 7.35% for the 2007 period  compared  to 6.88% for the similar  period in
2006.  The increase in yield was  principally  the result of the increase in the
prime  interest  rate which was 8.25% as of March 31, 2007  compared to 7.75% on
March 31, 2006. The yield on the  available-for-sale  investment  portfolio also
benefited  from higher  short-term  rates as the fte yield for the three  months
ended March 31, 2007  increased 65 basis points from the similar period in 2006.

     Interest  expense  for the  three  months  ended  March  31,  2007  totaled
$2,988,000 at an average cost of 3.43%  compared to $2,070,000 and 2.51% for the
similar period in 2006. As a result of the increase in short-term interest rates
the  Company  increased  rates on money  market  accounts  and  short-term  time
deposits.  The cost of time deposits averaged 4.57% for the 2007 period compared
to 3.39% for the similar period in 2006. Deposits

                                       21
<PAGE>


have also shifted to higher costing instruments with time deposits  representing
50.3% of average  interest  bearing  liabilities in the 2007 period  compared to
41.2% for the 2006 period.

OTHER INCOME
------------

     Other income totaled $894,000 for the three months ended March 31, 2007, an
increase of $70,000 from $824,000 for the similar  period in 2006.  The increase
was due in part to a  $48,000  increase  in  income  from  fiduciary  activities
resulting in part from higher estate fees in the current period.  Non-sufficient
funds (nsf) charges totaled $324,000 for the current period,  increasing $32,000
from the 2006 period.

OTHER EXPENSES
--------------

     Other expenses for the three months ended March 31, 2007 totaled $2,861,000
an  increase of $95,000 or 3.4% over the similar  period in 2006.  Salaries  and
employee benefits increased $91,000 which included $84,000 of expense related to
stock  options  in the  current  period  with no such  expense  in 2006  period.
Occupancy  costs  increased  $34,000  principally  due  to  the  opening  of the
Tannersville  Office in December 2006. For the three months ended March 31, 2006
the Company incurred a $50,000 loss in a robbery at one of its branch locations.

INCOME TAX EXPENSE
------------------

     Income tax expense totaled  $611,000 for an effective tax rate of 29.5% for
the period  ending March 31, 2007 compared to $581,000 for an effective tax rate
of 30.3% for the similar  period in 2006.  The  effective tax rate is lower than
the statutory rate due to tax-exempt income on certain investments and loans.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK
-----------

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

     Net interest income, which is the primary source of the Company's earnings,
is impacted  by changes in  interest  rates and the  relationship  of  different
interest rates. To manage the impact of the rate changes, the balance sheet must
be  structured  so that  repricing  opportunities  exist  for  both  assets  and
liabilities  at  approximately  the same time  intervals.  The Company  uses net
interest  simulation  to assist in interest  rate risk  management.  The process
includes  simulating  various interest rate environments and their impact on net
interest income.  As of March 31, 2007, the level of net interest income at risk
in a 200 basis points change in interest  rates was within the Company's  policy
limits.  The  Company's  policy  allows  for a decline of no more than 8% of net
interest income.

     Imbalance  in  repricing  opportunities  at a given point in time  reflects
interest-sensitivity  gaps  measured as the  difference  between  rate-sensitive
assets  (RSA)  and  rate-sensitive  liabilities  (RSL).  These  are

                                       22
<PAGE>

static gap measurements  that do not take into account any future activity,  and
as such are  principally  used as early  indications of potential  interest rate
exposures over specific intervals.

     As of March 31, 2007,  the Bank had a positive 90 day interest  sensitivity
gap of $14.8 million or 3.2% of total assets,  decreasing  from $24.0 million or
5.3% of total assets as of December 31, 2006. The change was  principally due to
a higher  level of time  deposits  maturing in the 90 day time frame as of March
31,2007.  A positive  gap means that  rate-sensitive  assets  are  greater  than
rate-sensitive  liabilities at the time interval.  This would indicate that in a
rising rate  environment,  the yield on  interest-earning  assets would increase
faster than the cost of  interest-bearing  liabilities in the 90 day time frame.
The repricing intervals are managed by ALCO strategies,  including adjusting the
average life of the  investment  portfolio,  pricing of deposit  liabilities  to
attract  longer term time  deposits,  loan  pricing to encourage  variable  rate
products and evaluation of loan sales of long-term fixed rate mortgages.
<TABLE>
<CAPTION>
March 31, 2007
--------------
Rate Sensitivity Table
----------------------
(dollars in thousands)
                                                         3 Months    3-12 Months   1 to 3 Years     3 Years        Total
                                                         --------    -----------   ------------     -------        -----
<S>                                                     <C>          <C>            <C>           <C>             <C>
Federal funds sold and interest bearing deposits        $  3,271     $      --      $      --     $     --        $     --
Securities                                                20,180        32,159         35,710       25,503         113,552
Loans Receivable                                          95,331        52,714         69,082      103,617         320,744
                                                        --------     ---------      ---------     --------        --------
  Total RSA                                              118,782        84,873       104,7921      129,120         437,567

Non-maturity interest-bearing deposits                    20,424        22,344         58,891       28,829         130,488
Time Deposits                                             70,470        74,938         22,256        7,836         175,500
Other                                                     13,064         6,738         23,184           --          42,986
                                                        --------     ---------      ---------     --------        --------
  Total RSL                                              103,958       104,020        104,331       36,665         348,974

Interest Sensitivity Gap                                $ 14,824     ($19,147)      $     461     $ 92,455        $ 88,593
Cumulative Gap                                            14,824       (4,323)        (3,862)       88,593
RSA/RSL-cumulative                                        114.3%         97.9%          98.8%       125.4%

December 31,2006

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

ITEM 4.  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 the 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.

                                       23
<PAGE>

     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 4T. CONTROL PROCEDURES

See Item 4 above.

PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 1A. RISK FACTORS

No material  changes  from those  disclosed  in the Form 10-K for the year ended
December 31, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SALES AND USE OF PROCEEDS
<TABLE>
<CAPTION>

                                            Issuer Purchases of Equity Securities
                                            -------------------------------------
                                                                                                    Maximum number
                                                                                                    --------------
                                                                          Total number of           of shares (or approximate
                                                                          ---------------           -------------------------
                                                                          shares purchased          dollar value) that 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 (2)
                                        ---------          -----          -----------               ---------------
<S>                                          <C>             <C>            <C>                      <C>
January 1-January 31, 2007                   5,000           $31.25         5,000                    87,863
February 1-February 28, 2007                    -                 -             -                         -
March 1 - March 31, 2007                     4,296  (1)       31.50             -                         -
                                        ----------           ------         -----                    ------
                                             9,296           $31.37         5,000                    87,863
                                        ==========           ======         =====                    ======
</TABLE>


(1) Purchases  related to the Company's  Employee  Stock  Ownership  Plan (ESOP)
related to purchase of shares from terminated participants.

(2) 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.


                                       24
<PAGE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

None

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS
<TABLE>
<CAPTION>

<S>       <C>      <C>
(a)       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      Wayne Bank Stock Option Plan*
         10.5      Salary Continuation Agreement between the Bank and William W. Davis, Jr.***
         10.6      Salary Continuation Agreement between the Bank and Lewis J. Critelli***
         10.7      Salary Continuation Agreement between the Bank and Edward C. Kasper***
         10.8      1999 Directors Stock Compensation Plan***
         10.9      Salary Continuation Agreement between the Bank and Joseph A. Kneller****
         10.10     Salary Continuation Agreement between the Bank and John H. Sanders****
         10.11     2006 Stock Option Plan *****
         10.12     First and Second Amendments to Salary Continuation Agreement with William W. Davis, Jr.******
         10.13     First and Second Amendments to Salary Continuation Agreement with Lewis J. Critelli******
         10.14     First and Second Amendments to Salary Continuation Agreement with Edward C. Kasper******
         10.15     First and Second Amendments to Salary Continuation Agreement with Joseph A. Kneller******
         10.16     First and Second Amendments to Salary Continuation Agreement with John H. Sanders******
         31.1      Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
         31.2      Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
         32.1      Section 1350 Certification
</TABLE>

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

*        Incorporated  herein by reference to the identically  numbered exhibits
         of the Registrant's Form 10 Registration Statement initially filed with
         the Commission on April 29, 1996.

**       Incorporated  herein by reference to the identically  numbered exhibits
         to the  Registrant's  Form 8-K filed  with the  Commission  on March 6,
         2006.

***      Incorporated  herein by reference to the identically  numbered exhibits
         of the  Registrant's  Form 10-K filed with the  Commission on March 20,
         2000.

                                       25
<PAGE>

****     Incorporated herein by reference to the identically  numbered exhibit
         to the  Registrants  Form 10-K filed with the Commission on March 22,
         2004.

*****    Incorporated  herein by reference to the Registrant's Form 8-K filed
         with the Commission on April 25, 2006.

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


                                       26
<PAGE>

SIGNATURES
----------

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

                                      NORWOOD FINANCIAL CORP.

Date:    May 11, 2007                 By:  /s/ William W. Davis, Jr.
                                           -----------------------------------
                                           William W. Davis, Jr.
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)

Date:    May 11, 2007                 By:  /s/ Lewis J. Critelli
                                           -----------------------------------
                                           Lewis J. Critelli
                                           Executive Vice President and
                                           Chief Financial Officer
                                           (Principal Financial Officer)


                                       27