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 June 30, 2006
                                    -------------

                                       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 an  accelerated
filer,  an  accelerated  filer,  or  non-accelerated  filer.  See  definition of
"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 Exchange Act): Yes [ ] No [ x]

     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 August 11, 2006
- ---------------------------------------
Common stock, par value $0.10 per share                   2,799,897



                                       1


                             NORWOOD FINANCIAL CORP.
                                    FORM 10-Q
                       FOR THE QUARTER ENDED JUNE 30, 2006
                                      INDEX



                                                                                                           Page
                                                                                                           Number
                                                                                                      
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                                                                               11
Item 3.             Quantitative and Qualitative Disclosures about Market Risk                               25
Item 4.             Controls and Procedures                                                                  26

PART II -           OTHER INFORMATION

Item 1.             Legal Proceedings                                                                        27
Item 1A.            Risk Factors                                                                             27
Item 2.             Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
                    Securities                                                                               27
Item 3.             Defaults upon Senior Securities                                                          27
Item 4.             Submission of Matters to a Vote of Security Holders                                      27
Item 5              Other Information                                                                        28
Item 6              Exhibits                                                                                 28

Signatures                                                                                                   29


                                       2


PART I.  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets
(dollars in thousands, except per share data)


                                                                         June 30,          December 31,
                                                                           2006                2005
                                                                         --------            --------
                                                                      (Unaudited)
                                                                                       
ASSETS
Cash and due from banks                                                  $ 10,509            $  9,746
Interest bearing deposits with banks                                          179                  70
Federal funds sold                                                         13,615                  --
                                                                         --------            --------
    Cash and cash equivalents                                              24,303               9,816

Securities available for sale                                             114,441             115,814
Securities held to maturity, fair value 2006:
   $971, 2005: $1,480                                                         954               1,452
Loans receivable (net of unearned income)                                 299,366             290,890
   Less:  Allowance for loan losses                                         3,794               3,669
                                                                         --------            --------
Net loans receivable                                                      295,572             287,221
Investment in FHLB Stock, at cost                                           2,294               1,620
Bank premises and equipment, net                                            5,457               5,393
Accrued interest receivable                                                 1,965               1,812
Other assets                                                               10,173              10,428
                                                                         --------            --------
    TOTAL ASSETS                                                         $455,159            $433,556
                                                                         ========            ========

LIABILITIES
  Deposits:
      Non-interest bearing demand                                        $ 59,538            $ 50,891
      Interest bearing                                                    293,929             289,712
                                                                         --------            --------
        Total deposits                                                    353,467             340,603
  Short-term borrowings                                                    13,687              18,564
  Other borrowings                                                         35,000              23,000
  Accrued interest payable                                                  1,760               1,691
  Other liabilities                                                         2,053               1,590
                                                                         --------            --------
    TOTAL LIABILITIES                                                     405,967             385,448

STOCKHOLDERS' EQUITY
   Common stock, $.10 par value, authorized 10,000,000
     shares, issued 2006: 2,840,872, 2005: 2,705,715                          284                 270
   Surplus                                                                  9,997               5,648
   Retained  earnings                                                      41,249              43,722
   Treasury stock at cost: 2006: 40,975 shares, 2005: 21,189               (1,205)               (633)
   Unearned ESOP shares                                                       (27)               (127)
   Accumulated other comprehensive  loss                                   (1,106)               (772)
                                                                         --------            --------
  TOTAL STOCKHOLDERS' EQUITY                                               49,192              48,108
                                                                         --------            --------
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $455,159            $433,556
                                                                         ========            ========


See accompanying notes to the consolidated financial statements

                                       3


NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)



                                               Three Months Ended  Six Months Ended
                                               ------------------  -----------------
                                                     June 30,            June 30,
                                               -----------------   -----------------
                                                2006      2005      2006      2005
                                               -------   -------   -------   -------
                                                               
INTEREST INCOME
  Loans receivable, including fees             $ 5,201   $ 4,288   $10,145   $ 8,208
  Securities                                     1,066     1,020     2,116     2,061
  Other                                             83         5        85        17
                                               -------   -------   -------   -------
    Total interest income                        6,350     5,313    12,346    10,286

INTEREST EXPENSE
  Deposits                                       1,738     1,102     3,328     2,089
  Short-term borrowings                            163       112       350       211
  Other borrowings                                 420       303       713       620
                                               -------   -------   -------   -------
    Total interest expense                       2,321     1,517     4,391     2,920
                                               -------   -------   -------   -------
NET INTEREST INCOME                              4,029     3,796     7,955     7,366
PROVISION FOR LOAN LOSSES                           55        90       125       190
                                               -------   -------   -------   -------
NET INTEREST INCOME AFTER
  PROVSION FOR LOAN LOSSES                       3,974     3,706     7,830     7,176

OTHER INCOME
  Service charges and fees                         644       603     1,234     1,182
  Income from fiduciary activities                  95        92       172       176
  Net realized gains on sales of securities         14         3        21        80
  Gain on sale of loans and servicing rights       107        15       107        55
  Other                                            143       152       293       292
                                               -------   -------   -------   -------
    Total other income                           1,003       865     1,827     1,785

OTHER EXPENSES
  Salaries and employee benefits                 1,456     1,334     2,862     2,721
  Occupancy, furniture & equipment, net            369       365       749       749
  Data processing related                          170       153       326       313
  Taxes, other than income                         111       109       224       207
  Professional fees                                104       139       217       248
  Other                                            631       577     1,229     1,090
                                               -------   -------   -------   -------
    Total other expenses                         2,841     2,677     5,607     5,328

INCOME BEFORE INCOME TAXES                       2,136     1,894     4,050     3,633
INCOME TAX EXPENSE                                 660       564     1,241     1,060
                                               -------   -------   -------   -------
NET INCOME                                     $ 1,476   $ 1,330   $ 2,809   $ 2,573
                                               =======   =======   =======   =======

BASIC EARNINGS PER SHARE                       $  0.53   $  0.47   $  1.00   $  0.92
                                               =======   =======   =======   =======

DILUTED EARNINGS PER SHARE                     $  0.52   $  0.46   $  0.98   $  0.90
                                               =======   =======   =======   =======



See accompanying notes to the consolidated financial statements

                                       4



NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders' Equity (unaudited)

(dollars in thousands, except per share data)



                                                                                                          Accumulated
                                              Number of                                         Unearned  Other
                                              Shares     Common             Retained  Treasury  ESOP      Comprehensive
                                              Issued     Stock    Surplus   Earnings  Stock     Shares    Income(Loss)     Total
                                              ------     -----    -------   --------  -----     ------    ------------     -----
                                                                                                
Balance December 31, 2004                     2,705,715    $270    $5,336    $40,222    ($149)    ($327)      $333       $45,685
Comprehensive Income:
  Net Income                                                                   2,573                                       2,573
  Change in unrealized gains (losses) on
    securities available for sale, net of
    reclassification adjustment and tax effects                                                               (436)         (436)
                                                                                                                         -------
  Total comprehensive income                                                                                               2,137
                                                                                                                         -------
Cash dividends declared, $.34 per share                                         (958)                                       (958)
Stock options exercised                                                (3)                 86                                 83
Tax benefit of stock options exercised                                 13                                                     13
Release of treasury stock for ESOP                                                         22                                 22
Acquisition of treasury stock                                                            (408)                              (408)
Release of earned ESOP shares                                         179                            78                      257
                                              ---------    ----    ------    -------  -------      ----    -------       -------

Balance, June 30, 2005                        2,705,715    $270    $5,525    $41,837    ($449)    ($249)     ($103)      $46,831
                                              =========    ====    ======    =======    =====     =====      =====       =======




                                                                                                          Accumulated
                                              Number of                                         Unearned  Other
                                              Shares     Common             Retained  Treasury  ESOP      Comprehensive
                                              Issued      Stock   Surplus   Earnings  Stock     Shares    Loss             Total
                                              ------      -----   -------   --------  -----     ------    ----             -----
                                                                                                
Balance December 31, 2005                     2,705,715    $270    $5,648    $43,722    ($633)    ($127)     ($772)      $48,108
Comprehensive Income:
  Net Income                                                        2,809                                                  2,809
  Change in unrealized gains (losses) on
    securities available for sale, net of
    reclassification adjustment and tax effects                                                               (334)         (334)
                                                                                                                         -------
   Total comprehensive income                                                                                              2,475
                                                                                                                         -------

Cash dividends declared, $.41 per share                                       (1,143)                                     (1,143)
5% Stock dividend at $30.59 per share           135,157      14     4,121     (4,139)                                         (4)
Acquisition of treasury stock                                                            (584)                              (584)
Stock options exercised                                                                    12                                 12
Tax benefit of stock options exercised                                 (2)                                                    (2)
Stock options issued                                                   34                                                     34
Release of earned ESOP shares                                         196                           100                      296
                                              ---------    ----    ------    -------  -------      ----    -------       -------

Balance, June 30, 2006                        2,840,872    $284    $9,997    $41,249  ($1,205)     ($27)   ($1,106)      $49,192
                                              =========    ====    ======    =======  =======      ====    =======       =======


See accompanying notes to the consolidated financial statements

                                       5



NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (unaudited)
(dollars in thousands)



                                                                                        Six Months Ended June 30,
                                                                                        -------------------------
                                                                                          2006        2005
                                                                                          ----        ----
                                                                                           
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                                            $  2,809    $  2,573
Adjustments to reconcile net income to net cash provided by operating activities:
  Provision for loan losses                                                                125         190
  Depreciation                                                                             249         268
  Amortization of intangible assets                                                         26          26
  Deferred income taxes                                                                   (252)       (159)
  Net amortization of securities premiums and discounts                                    173         227
  Net realized gain on sales of securities                                                  (6)        (79)
  Earnings on life insurance policy                                                       (129)       (126)
  Net gain on sale of mortgage loans                                                      (107)        (55)
  Gain on sale of bank premises and equipment and foreclosed real estate                   (12)         (2)
  Mortgage loans originated for sale                                                      (426)     (5,099)
  Proceeds from sale of mortgage loans and servicing rights                                533       5,154
  Tax benefit of stock options exercised                                                    (2)         13
  Compensation expense related to stock options                                             34           -
  Release of ESOP shares                                                                   296         279
  (Increase) decrease in accrued interest receivable and other assets                      522          (3)
  Increase in accrued interest payable and other liabilities                               677         336
                                                                                      --------    --------
    Net cash provided by operating activities                                            4,510       3,543

CASH FLOWS FROM INVESTING ACTIVITIES
 Securities available for sale:
    Proceeds from sales                                                                     30       5,097
    Proceeds from maturities and principal reductions on mortgage-backed securities     11,622       6,242
    Purchases                                                                          (10,960)     (6,748)
 Securities held to maturity- proceeds                                                     505       2,420
 (Increase) decrease in investment in FHLB stock                                          (674)        252
 Net increase in loans                                                                  (8,541)    (20,906)
 Purchase of bank premises and equipment                                                  (313)       (220)
 Proceeds from sale of bank premises and equipment and foreclosed real estate               12           9
                                                                                      --------    --------
    Net cash used in investing activities                                               (8,319)    (13,854)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits                                                                12,864      20,288
Net decrease in short-term borrowings                                                   (4,877)    (12,054)
Repayments of long-term debt                                                                 -      (5,000)
Proceeds from other borrowings                                                          12,000       5,000
Stock options exercised                                                                     12          83
Acquisition of treasury stock                                                             (584)       (408)
Cash dividends paid                                                                     (1,119)       (960)
                                                                                      --------    --------
    Net cash provided by financing activities                                           18,296       6,949
                                                                                      --------    --------
    Increase (decrease) in cash and cash equivalents                                    14,487      (3,362)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                           9,816      20,666
                                                                                      --------    --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                              $ 24,303    $ 17,304
                                                                                      ========    ========


See accompanying notes to the consolidated financial statements

                                       6



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.

2.       ESTIMATES
         ---------

         The accompanying  unaudited consolidated financial statements have been
prepared in conformity  with  accounting  principles  generally  accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes  required by generally accepted
accounting  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 and six
month periods ended June 30, 2006 are not necessarily  indicative of the results
that may be expected  for the year ending  December 31, 2006 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, 2005.

3.       EARNINGS PER SHARE
         ------------------

         On April 11, 2006,  the Company  declared a 5% stock dividend on common
stock  outstanding  payable  May 26, 2006 to  shareholders  of record on May 12,
2006. The stock dividend  resulted in the issuance of 135,157  additional common
shares.  All per  share  data has been  adjusted  for the  effect  of the  stock
dividend.

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

         The  following  table sets forth the  computations of basic and diluted
earnings per share:

(in thousands)



                                                    Three Months Ended            Six Months Ended
                                                          June 30,                    June 30,
                                                  ----------------------       ----------------------
                                                      2006        2005            2006         2005
                                                      ----        ----            ----         ----
                                                                                
Basic EPS weighted average shares outstanding        2,793       2,805           2,796        2,801
Dilutive effect of stock options                        58          60              57           61
                                                     -----       -----           -----        -----
Diluted EPS weighted average shares outstanding      2,851       2,865           2,853        2,862
                                                     =====       =====           =====        =====


                                       7



4.       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 the fair value of share-based payment transactions
to 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. The Company's  shareholders approved the Norwood Financial Corp 2006 Stock
Option Plan at the annual  meeting on April 25, 2006.  As a result,  the Company
awarded  25,200  options,  all of which  have a  twelve  month  vesting  period.
Included  in the  results  for the three and six months  ended June 30, 2006 was
$34,000 in compensation  costs relating to the adoption of Statement No. 123(R).
Net  income  for the three and six months  ended  June 30,  2006 was  reduced by
approximately  $22,000. As of June 30, 2006, there was approximately $170,000 of
total  unrecognized  compensation  cost related to nonvested  options  under the
plan.

         The following  table  illustrates the effect on net income and earnings
per share,  for the three and six months ended June 30, 2005, if the Company had
applied  the fair  value  recognition  provisions  of FASB  Statement  No.  123,
"Accounting for Stock-Based Compensation" to stock-based compensation:



                                                            Three Months Ended      Six Months Ended
(in thousands, except for per share data)                      June 30, 2005          June 30, 2005
                                                            ------------------      ----------------
                                                                                
Net income as reported                                             $1,330                $2,573

Total stock-based employee  compensation cost, net of
tax, which would have been included in the  determination
of net income if the fair value based method had been applied
to all awards                                                         (49)                  (98)
                                                                   ------                ------

Pro forma net income                                               $1,281                $2,475
                                                                   ======                ======

Earnings per share (basic)
  As Reported                                                         .47                   .92
  Pro forma                                                           .46                   .88

Diluted earnings per share (assuming dilution)
  As Reported                                                         .46                   .90
  Pro forma                                                           .45                   .86


                                        8





                                                                  Weighted-      Weighted-
                                                                  Average        Average
                                                                  Exercise       Remaining
                                                     Options      Price          Term (in years)
                                                     -------      -----          ---------------

                                                                        
Outstanding at the beginning of the year             140,296        $18.45
Granted.................................              25,200         30.38
Exercised...............................                (413)        23.95
Forfeited...............................                   -             -
Outstanding as of June 30, 2006                      165,083         20.26           6.3
Exercisable as of June 30, 2006                      139,883         18.43           5.2




         The fair value of options  granted  for the period  ended June 30, were
estimated at the date of grant using a  Black-Scholes  option pricing model with
the following weighted-average assumptions:

                                                        Six Months Ended
                                                         June 30, 2006
                                                         -------------

Dividend yield....................................            2.71%
Expected life.....................................            7 years
Expected volatility...............................           25.4%
Risk-free interest rate...........................            4.99%
Weighted average fair value of options granted....           $8.12

There were no new options granted for the six months ended June 30, 2005.

5.       CASH FLOW INFORMATION
         ---------------------

         For the purposes of  reporting  cash flows,  cash and cash  equivalents
include cash on hand,  amounts due from banks,  interest-bearing  deposits  with
banks and federal funds sold.

         Cash  payments  for interest for the six months ended June 30, 2006 and
2005 were $4,311,000 and $2,971,000 respectively. Cash payments for income taxes
in 2006 were  $1,244,000  compared to  $1,118,000  in 2005.  Non-cash  investing
activities for 2006 and 2005 included foreclosed mortgage loans and repossession
of other assets of $65,000 and $67,000, respectively.

6.       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.

                                       9





(in thousands)                          Three Months Ended              Six Months Ended
                                              June 30,                      June 30,
                                       --------------------           ----------------------
                                          2006        2005               2006        2005
                                          ----        ----               ----        ----
                                                                      
Unrealized holding gains/(losses)
  on available for sale securities       ($287)      $ 791              ($486)      ($584)

Reclassification adjustment for gains
  realized in net income                   (14)         (3)               (21)        (80)
                                         -----       -----              -----       -----

Net unrealized gains/(losses)            $(301)        788               (507)       (664)
Income tax (benefit)                      (103)        267               (173)       (228)
                                         -----       -----              -----       -----

Other comprehensive income (loss)        $(198)      $ 521              $(334)      $(436)
                                         =====       =====              =====       =====



7.       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)


                                                                June 30,
                                                          --------------------
                                                            2006         2005
                                                            ----         ----
Commitments to grant loans                                $17,328      $11,000
Unfunded commitments under lines of credit                 32,547       33,634
Standby letters of credit                                   7,137        1,679
                                                          -------      -------

                                                          $57,012      $46,313
                                                          =======      =======

         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.

                                       10



         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 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 payment required under the corresponding  guarantees.  The current amount
of the liability as of June 30, 2006 for  guarantees  under  standby  letters of
credit issued is not material.

8.       NEW ACCOUNTING PRONOUNCEMENTS
         -----------------------------

In June 2006,  the FASB  issued  FASB  interpretation  No. 48,  "Accounting  for
Uncertainty  in Income Taxes." The  interpretation  clarifies the accounting for
uncertainty in income taxes  recognized in a company's  financial  statements in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income  Taxes."  Specifically,  the  pronouncement  prescribes a recognition
threshold and a measurement  attribute for the financial  statement  recognition
and measurement of a tax position taken or expected to be taken in a tax return.
The  interpretation  also  provides  guidance  on  the  related   derecognition,
classification,   interest  and  penalties,   accounting  for  interim  periods,
disclosure  and  transition of uncertain tax positions.  The  interpretation  is
effective for fiscal years  beginning  after  December 15, 2006.  The Company is
evaluating the impact of this new  pronouncement on its  consolidated  financial
statements.

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

         Material  estimates  that are  particularly  susceptible to significant
change in the near term relate to the  determination  of the  allowance for loan
losses,  accounting for stock options,  the valuation of deferred tax assets and
the  determination  of  other-than-temporary  impairment  losses on  securities.
Please refer to the  discussion  of the  allowance  for loan losses  calculation
under  "Non-performing  Assets and Allowance for Loan Losses" in the  "Financial
Condition"  section.  For periods  ending prior to January 1, 2006,  the Company
accounted  for  stock

                                       11



option plans under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations.  No
stock-based  employee  compensation was reflected in net income,  as all options
granted had an exercise price equal to the market value of the underlying common
stock on the grant  date.  The Company  adopted  SFAS No.  123(R),  "Share-Based
Payment" as of January 1, 2006.  However,  no stock options were 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.  The Company  granted  25,200
options  in the  second  quarter of 2006.  See Note 4 for a  discussion  of this
pronouncement's impact on the Company's consolidated financial statements.

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

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


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

GENERAL
- -------
         Total assets as of June 30, 2006 were $455.2 million compared to $433.6
million as of December 31, 2005, an increase of $21.6 million, or 5.0%.

SECURITIES
- ----------
         The fair value of securities available for sale as of June 30, 2006 was
$114.4  million  compared to $115.8 million as of December 31, 2005. The Company
purchased  $11.0 million of securities to offset $12.1 million of maturities and
principal   reductions  on  mortgage-backed   securities.   The  purchases  were
principally in short-term U.S.  Government  sponsored  agencies and pass-through
mortgage-backed securities.

         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  1.9  years.
Interest  rates  in the 2-3  year  section  of the  treasury  yield  curve  have
increased  over 100 basis  points in the last year  impacting  the fair value of
individual securities.  Management believes that the unrealized losses represent
temporary  impairment  of the  securities,  as a 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 $299.4 million compared to $290.9 million as
of December 31, 2005. Commercial real estate loans decreased $2.7 million due to
the pay off of a short-term $6.7 million loan originated in the first quarter of
2005.  This was offset by a $5.6 million  increase in commercial  term loans and
lines of credit and $8.6 million  growth in residential  real estate loans.  The
growth in residential real estate loans has principally been in fixed rate first
lien residential  mortgages.  The Company does not originate any non-traditional
mortgage  products  such  as  interest-only  loans  or  option   adjustable-rate
mortgages, nor offer any terms over 30 years.

                                       12



         Set forth below is selected  data  relating to the  composition  of the
loan portfolio at the dates indicated:



Types of loans
(dollars in thousands)                                        June 30, 2006          December 31, 2005
                                                            -----------------        -------------------
                                                               $           %            $            %
                                                               -           -            -            -
                                                                                     
Real Estate-Residential                                    $109,353      36.5%      $100,705       34.6%
            Commercial                                      130,799      43.6        133,495       45.8
            Construction                                      4,608       1.5          5,944        2.0
Commercial, financial and agricultural                       32,262      10.8         26,755        9.2
Consumer loans to individuals                                22,733       7.6         24,353        8.4
                                                            -------     -----        -------      -----
  Total loans                                               299,755     100.0%       291,252      100.0%

  Deferred fees (net)                                          (389)                    (362)
                                                           --------                 --------
                                                            299,366                  290,890
  Allowance for loan losses                                  (3,794)                  (3,669)
                                                           --------                 --------
  Net loans receivable                                     $295,572                 $287,221
                                                           ========                 ========



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 Months             Six Months
                                       Ended June 30          Ended June 30
                                       -------------          -------------
(dollars in thousands)               2006        2005        2006        2005
                                     ----        ----        ----        ----
Balance, beginning                 $ 3,743     $ 3,523     $ 3,669     $ 3,448
Provision for loan losses               55          90         125         190
Charge-offs                            (23)        (34)        (50)        (81)
Recoveries                              19          21          50          43
                                   -------     -------     -------     -------
  Net charge-offs                       (4)        (13)          -         (38)
                                   -------     -------     -------     -------
Balance, ending                    $ 3,794     $ 3,600     $ 3,794     $ 3,600
                                   =======     =======     =======     =======

Allowance to total loans              1.27%       1.31%       1.27%       1.31%
Net charge-offs to average loans
    (annualized)                       .01%        .02%        .-%         .03%

           The allowance for loan losses totaled  $3,794,000 as of June 30, 2006
and  represented  1.27% of total loans  compared to  $3,669,000  and 1.26% as of
December 31, 2005. Recoveries offset charge-offs for a net charge-off of -0- for
the six months ended June 30, 2006 declining from net charge-offs of $38,000 for
the similar period in 2005. The decrease was  principally  due to lower level of
repossessed  automobiles,  as the Company  has lowered its  exposure to indirect
automobile lending. As a result of the lower net charge-offs,  the provision for
loan losses was less for the six months ended June 30, 2006, $125,000,  compared
to $190,000 for the similar period in 2005.

                                       13



           The Company 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 risk-rated classifications,  large
dollar exposures and loan growth. Management considers the allowance adequate at
June  30,  2006  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.

           As of June 30, 2006,  non-performing loans totaled $314,000, which is
..10% of total loans compared to $353,000, or .12% of total loans at December 31,
2005. There was one property in foreclosed real estate, carried at $24,000 which
is actively being marketed. The following table sets forth information regarding
non-performing loans and foreclosed real estate at the date indicated:


                                                June 30, 2006  December 31, 2005
                                                -------------  -----------------

(dollars in thousands)
Loans accounted for on a non accrual basis:
   Commercial and all other                             $  -           $  -
   Real Estate                                           303            330
   Consumer                                               11             11
                                                        ----           ----
   Total                                                 314            341

Accruing loans which are contractually
 past due 90 days or more                                  -             12
Total non-performing loans                               314            353
                                                        ----           ----
Foreclosed real estate                                    24              -
                                                        ----           ----
Total non-performing assets                             $338           $353
                                                        ====           ====

Allowance for loan losses
 coverage of non-performing loans                       12.1x          10.4x
Non-performing loans to total loans                      .10%           .12%
Non-performing assets to total assets                    .07%           .08%

DEPOSITS
- --------
           Total  deposits as of June 30, 2006 were  $353.5  million  increasing
from $340.6  million as of  December  31,  2005.  The  increase in  non-interest
bearing and interest  bearing  demand  deposits is due in part to new commercial
accounts and the seasonality of certain corporate and municipal  accounts.  Time
deposits greater than $100,000  decreased $18.2 million because of an $8 million
short-term  time  deposit  moved to a money  market  account  and the  scheduled
maturity of short-term time deposits from local school districts.  Time deposits
less than $100,000 increased  principally due to promotional  efforts in certain
products.

                                       14



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

(dollars in thousands)                         June 30, 2006   December 31, 2005
                                               -------------   -----------------
Non-interest bearing demand                       $ 59,538        $ 50,891
Interest bearing demand                             43,976          40,738
Money Market                                        63,959          52,194
Savings                                             51,005          53,311
Time deposits <$100,000                            104,339          94,612
Time deposits >$100,000                             30,650          48,857
                                                  --------        --------

     Total                                        $353,467        $340,603
                                                  ========        ========


SHORT-TERM BORROWINGS
- ---------------------

         Short-term  borrowings as of June 30, 2006 were $13.7 million  compared
to $18.6 million as of December 31, 2005.

         Short-term borrowings consist of the following:

(dollars in thousands)

                                               June 30, 2006   December 31, 2005
                                               -------------   -----------------
Securities sold under agreements to repurchase     $13,566          $12,464
Federal Funds purchased                                  -            5,100
U.S. Treasury demand notes                             121            1,000
                                                   -------          -------

                                                   $13,687          $18,564
                                                   =======          =======


OTHER BORROWINGS

         Other  borrowings  consist of notes from the Federal  Home Loan Bank of
Pittsburgh. Other borrowings consist of the following: (dollars in thousands)

                                               June 30, 2006   December 31, 2005
                                               -------------   -----------------
Convertible note due December 2006 at 6.19%      $ 5,000             $ 5,000
Fixed rate note due April 2008 at 4.17%            5,000               5,000
Convertible note due April 2009 at 4.83%           5,000               5,000
Convertible note due April 2009 at 5.07%           5,000               5,000
Convertible note due January 2011 at 5.24%         3,000               3,000
Convertible note due July 2006 at 5.11%           12,000                   -
                                                 -------             -------

                                                 $35,000             $23,000
                                                 =======             =======

                                       15


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

         A  summary  of  the  contractual  amount  of  the  Company's  financial
instrument commitments is as follows:

                                                   June 30,      December 31,
                                                     2006           2005
                                                     ----           ----
                                                      (in thousands)
Commitments to grant loans                         $17,328        $16,078
Unfunded commitments under lines of credit          32,547         29,969
Standby letters of credit                            7,137          6,791
                                                   -------        -------

                                                   $57,012        $52,838
                                                   =======        =======


STOCKHOLDERS' EQUITY AND CAPITAL RATIOS
- ---------------------------------------
         At June 30, 2006,  total  stockholders'  equity  totaled $49.2 million,
compared  to  $48.1  million  as  of  December  31,  2005.  The  net  change  in
stockholders'  equity was primarily  due to  $2,809,000 in net income,  that was
partially  offset  by  $1,143,000  of  cash  dividends  declared.  In  addition,
accumulated  other  comprehensive  loss increased  $334,000 due to a decrease in
fair value of securities in the available for sale  portfolio.  This decrease in
fair value is the  result of a change in  interest  rates,  which may impact the
fair value of the securities. Because of interest rate volatility, the Company's
accumulated other comprehensive loss could materially fluctuate for each interim
and year-end period.

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

                                           June 30, 2006     December 31, 2005
                                           -------------     -----------------
Tier 1 Capital
    (To average assets)                        11.08%              11.05%
Tier 1 Capital
    (To risk-weighted assets)                  15.23%              15.29%
Total Capital
    (To risk-weighted assets)                  16.56%              16.63%

         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  with the FRB, FDIC and PDB capital  requirements as of June 30, 2006
and December 31, 2005.

                                       16



LIQUIDITY
- ---------
           As of June 30,  2006,  the Company had cash and cash  equivalents  of
$24.3  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  $114.4  million  which  could  be used  for
liquidity needs. This totals $138.7 million and represents 30.4% of total assets
compared to $125.6  million and 29% of total assets as of December 31, 2005. The
Company also monitors  other  liquidity  measures,  all of which were within the
Company's  policy  guidelines  as of June 30, 2006 and December 31, 2005.  Based
upon these measures, the Company believes its liquidity is adequate.

           The Company  maintains  established  lines of credit with the Federal
Home Loan Bank of Pittsburgh  (FHLB),  the Atlantic  Central Bankers Bank (ACBB)
and other  correspondent  banks, which are available to support liquidity needs.
There were no  outstandings  on the lines of credit as of June 30, 2006 compared
to $5.1 million as of December 31, 2005. The approximate borrowing capacity from
the FHLB was $164 million,  with $35 million outstanding as of June 30, 2006, of
which $12 million matures on July 17, 2006,  compared to $23 million outstanding
as of December 31, 2005.

                                       17



RESULTS OF OPERATIONS
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)



                                                                                Three Months Ended June 30,
                                                           ----------------------------------------------------------------------
                                                                         2006                                 2005
                                                           -------------------------------         ------------------------------
                                                           Average                 Average         Average                Average
                                                           Balance     Interest     Rate           Balance   Interest      Rate
                                                           -------     --------     ----           -------   --------      ----
                                                             (2)          (1)        (3)             (2)       (1)          (3)
                                                                                                          
Assets
Interest-earning assets:
   Federal funds sold                                     $  6,468     $   82       5.07%         $    707   $    4         2.26%
   Interest bearing deposits with banks                         97          1       4.12               121        1         3.31
   Securities held-to-maturity (1)                             954         21       8.81             4,047      122        12.06
   Securities available for sale:
     Taxable                                                98,966        901       3.64            97,856      771         3.15
     Tax-exempt                                             16,953        227       5.36            18,679      257         5.50
                                                          --------     ------                     --------   ------
        Total securities available for sale (1)            115,919      1,128       3.89           116,535    1,028         3.53
   Loans receivable (4) (5)                                295,870      5,232       7.07           271,614    4,326         6.37
                                                          --------     ------                     --------   ------
        Total interest earning assets                      419,308      6,464       6.17           393,024    5,481         5.58
Non-interest earning assets:
   Cash and due from banks                                   8,799                                   8,662
   Allowance for loan losses                                (3,776)                                 (3,577)
   Other assets                                             17,159                                  16,606
                                                          --------                                --------
        Total non-interest earning assets                   22,182                                  21,691
                                                          --------                                --------
Total Assets                                              $441,490                                $414,715
                                                          ========                                ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
   Interest bearing demand and money market               $101,235        450       1.78%         $ 90,163      209         0.93%
   Savings                                                  51,581         59       0.46            58,795       69         0.47
   Time                                                    133,001      1,229       3.70           124,359      824         2.65
                                                          --------     ------                     --------   ------
        Total interest bearing deposits                    285,817      1,738       2.43           273,317    1,102         1.61
Short-term borrowings                                       16,380        163       3.98            17,550      112         2.55
Other borrowings                                            32,626        420       5.15            23,000      303         5.27
                                                          --------     ------                     --------   ------
        Total interest bearing liabilities                 334,823      2,321       2.77           313,867    1,517         1.93
Non-interest bearing liabilities:
   Demand deposits                                          54,508                                  51,604
   Other liabilities                                         3,068                                   2,743
                                                          --------                                --------
        Total non-interest bearing liabilities              57,576                                  54,347
Stockholders' equity                                        49,091                                  46,501
                                                          --------                                --------
Total Liabilities and Stockholders' Equity                $441,490                                $414,715
                                                          ========                                ========

Net interest income (tax equivalent basis)                              4,143       3.39%                     3,964         3.65%
Tax-equivalent basis adjustment                                          (114)      ====                       (168)        ====
                                                                       ------                                ------
Net interest income                                                    $4,029                                $3,796
                                                                       ======                                ======
Net interest margin (tax equivalent basis)                                          3.95%                                   4.03%
                                                                                    ====                                    ====


(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.

                                       18



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



                                                     Increase/(Decrease)
                                                     -------------------
                                        Three Months Ended June 30, 2006 Compared to
                                        --------------------------------------------
                                             Three Months Ended June 30, 2005
                                             --------------------------------
                                                       Variance due to
                                                       ---------------
                                                 Volume     Rate       Net
                                                 -------------------------
                                                     (dollars in thousands)
                                                           
Interest earning assets:
Federal funds sold                               $  68     $  10     $  78
Interest bearing deposits with banks                (1)        1         -
Securities held to maturity                        (75)      (26)     (101)
Securities available for sale:
  Taxable                                            9       121       130
  Tax-exempt securities                            (23)       (7)      (30)
                                                 -----     -----     -----
Total securities                                   (14)      114       100
Loans receivable                                   405       501       906
                                                 -----     -----     -----
Total interest earning assets                      383       600       983

Interest bearing liabilities:
   Interest-bearing demand and money market         28       213       241
   Savings                                          (8)       (2)      (10)
   Time                                             61       344       405
                                                 -----     -----     -----
Total interest bearing deposits                     81       555       636
Short-term borrowings                              (48)       99        51
Other borrowings                                   163       (46)      117
                                                 -----     -----     -----
Total interest bearing liabilities                 196       608       804
                                                 -----     -----     -----
Net interest income (tax-equivalent basis)       $ 187     $  (8)    $ 179
                                                 =====     =====     =====


                                       19


COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2006 TO JUNE
- --------------------------------------------------------------------------------
30, 2005
- --------


GENERAL
- -------
           For the  three  months  ended  June  30,  2006,  net  income  totaled
$1,476,000,  an increase of $146,000, or 10.9% over the $1,330,000 earned in the
similar  period of 2005.  Earnings  per share for the  current  period were $.53
basic and $.52 on a diluted  basis  compared to $.47 basic and $.46 on a diluted
basis for the three months ended June 30, 2005. The resulting  annualized return
on average  assets and return on average  equity for the three months ended June
30, 2006 were 1.34% and 12.06%,  respectively,  improving  from 1.29% and 11.48%
respectively, for the similar period in 2005.

           The following table sets forth changes in net income:

(dollars in thousands)                                  Three Months Ended
                                                        ------------------
                                                  June 30, 2006 to June 30, 2005
                                                  ------------------------------
Net income three months ended June 30, 2005                  $1,330
                                                             ------

Net interest income                                             233
Provision for loan losses                                        35
Net realized gains on sales of securities                        11
Gains on sale of mortgage loans and servicing rights             92
All other income                                                 35
Salaries and employee benefits                                 (122)
All other expenses                                              (42)
Income tax effect                                               (96)
                                                             ------

Net income three months ended June 30, 2006                  $1,476
                                                             ======


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

           Net interest income on a fully taxable equivalent basis (fte) for the
three months ended June 30, 2006 totaled $4,143,000,  an increase of $179,000 or
4.5%  over the  similar  period in 2005.  The fte net  interest  spread  and net
interest margin were 3.39% and 3.95%, respectively, compared to 3.65% and 4.03%,
respectively  for the three  months  ended June 30,  2005.  The  decrease in net
interest   margin  was   principally   due  to  the  increase  in  the  cost  of
interest-bearing  liabilities  from  1.93%  in the 2005  period  to 2.77% in the
current period.

           Interest  income (fte)  totaled  $6,464,000  with an average yield of
6.17%,  for the three months ended June 30, 2006  increasing from $5,481,000 and
5.58% for the similar period in 2005. The increase was due in part to the growth
in the loan  portfolio.  Average loans  increased  $24.3 million and represented
70.6% of average  earning assets compared to 69.1% of average earning assets for
the 2005  period.  The average  yield on loans also  increased  to 7.07% for the
three  months  ended June 30, 2006  compared to 6.37% for the similar  period in
2005.  The increase was due in part to the rise in the prime interest rate which
was  8.25% as of June 30,  2006  compared  to  6.25%  as of June 30,  2005.  The
increase  in prime  rate  increases  the yield on the  Company's  floating  rate
commercial loan portfolio and on its home equity lines of credit.

                                       20



           Interest  expense for the three  months  ended June 30, 2006  totaled
$2,321,000 at an average cost of 2.77%  increasing from $1,517,000 and 1.93% for
the similar  period in 2005. As a result of the increase in short-term  interest
rates  the  Company  has  increased  rates  paid on its money  market  accounts,
short-term CDs and cash management accounts,  included in short-term borrowings.
The cost of time  deposits  averaged  3.70% for the period in 2006  compared  to
2.65% for the  similar  period in 2005.  The  Company  expects  the cost of time
deposits to continue to increase in 2006 as lower rate  instruments are maturing
and then  repricing at the current  higher  interest  rates.  Deposits have also
shifted  to  higher  costing  instruments.  Average  savings  at a cost  of .46%
decreased $7.2 million, with an increase of $8.6 million in time deposits.


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

           Other income  totaled  $1,003,000 for the three months ended June 30,
2006, an increase of $138,000 or 16.0%, over the $865,000 for the similar period
in 2005.  The increase was  principally  due to $107,000 of gains on the sale of
mortgage loans and servicing rights in 2006 compared to $15,000 in such gains in
2005.  The gain in 2006 was  primarily  related to the sale of $13.7  million of
mortgage  servicing  rights to a third party,  on loans  previously  sold in the
secondary market to FNMA..


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

           Other  expenses  for the three  months  ended June 30,  2006  totaled
$2,841,000, an increase of $164,000 or 6.1%, over the $2,677,000 for the similar
period in 2005.  Salaries  and  employee  benefit  expenses  increased  $122,000
principally  due to increased costs related to health care insurance and $34,000
expense  recognition  of stock  options in 2006.  The  Company  also  recorded a
$40,000  loss  (included  in other) on a  fraudulent  check  claim from  another
financial institution.


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

           Income tax expense  totaled  $660,000 for the three months ended June
30,  2006,  for an  effective  tax rate of 30.9%  compared  to  $564,000  and an
effective tax rate of 29.8% for the similar  period in 2005. The increase in the
marginal rate was due in part to a lower level of tax exempt income.

                                       21



RESULTS OF OPERATIONS
NORWOOD FINANCIAL CORP.
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, dollars in thousands)



                                                                                Six Months Ended June 30,
                                                          ----------------------------------------------------------------------
                                                                        2006                                 2005
                                                          -------------------------------         ------------------------------
                                                          Average                 Average         Average                Average
                                                          Balance     Interest     Rate           Balance   Interest      Rate
                                                          -------     --------     ----           -------   --------      ----
                                                             (2)          (1)        (3)             (2)       (1)          (3)
                                                                                                          
Assets
Interest-earning assets:
   Federal funds sold                                    $  3,252      $    82     5.04%         $  1,278      $  16      2.50%
   Interest bearing deposits with banks                       123            3     4.88                99          1      2.02
   Securities held-to-maturity (1)                          1,007           46     9.14             4,725        251     10.62
   Securities available for sale:
     Taxable                                               99,096        1,759     3.55           100,006      1,558      3.12
     Tax-exempt                                            18,038          494     5.48            18,622        512      5.50
                                                         --------      -------                   --------      -----
        Total securities available for sale (1)           117,134        2,253     3.85           118,628      2,070      3.49
   Loans receivable (4) (5)                               293,156       10,226     6.98           265,034      8,276      6.25
                                                         --------      -------                   --------      -----
        Total interest earning assets                     414,672       12,610     6.08           389,764     10,614      5.45
Non-interest earning assets:
   Cash and due from banks                                  8,458                                   8,096
   Allowance for loan losses                               (3,742)                                 (3,537)
   Other assets                                            16,911                                  15,563
                                                         --------                                --------
        Total non-interest earning assets                  21,627                                  20,122
                                                         --------                                --------
Total Assets                                             $436,299                                $409,886
                                                         ========                                ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
   Interest bearing demand and money market              $ 99,113          809     1.63%         $ 89,462        376      0.84%
   Savings                                                 52,148          120     0.46            59,134        138      0.47
   Time                                                   135,595        2,399     3.54           124,133      1,575      2.54
                                                         --------      -------                   --------      -----
        Total interest bearing deposits                   286,856        3,328     2.32           272,729      2,089      1.53
Short-term borrowings                                      17,494          350     4.00            17,334        211      2.43
Other borrowings                                           27,840          713     5.12            23,000        620      5.39
                                                         --------      -------                   --------      -----
        Total interest bearing liabilities                332,190        4,391     2.64           313,063      2,920      1.87
Non-interest bearing liabilities:
   Demand deposits                                         52,373                                  48,658
   Other liabilities                                        2,912                                   1,917
                                                         --------                                --------
        Total non-interest bearing liabilities             55,285                                  50,575
Stockholders' equity                                       48,824                                  46,248
                                                         --------                                --------
Total Liabilities and Stockholders' Equity               $436,299                                $409,886
                                                         ========                                ========

Net interest income (tax equivalent basis)                               8,219     3.44%                       7,694      3.58%
Tax-equivalent basis adjustment                                           (264)    ====                         (328)     ====
                                                                       -------                                ------
Net interest income                                                    $ 7,955                                $7,366
                                                                       =======                                ======
Net interest margin (tax equivalent basis)                                         3.96%                                  3.95%
                                                                                   ====                                   ====

(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.

                                       22


RATE/VOLUME ANALYSIS

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



                                                       Increase/(Decrease)
                                                       -------------------
                                            Six Months Ended June 30, 2006 Compared to
                                            ------------------------------------------
                                                  Six Months Ended June 30, 2005
                                                  ------------------------------
                                                          Variance due to
                                                          ---------------
                                                    Volume      Rate       Net
                                                    --------------------------
                                                        (dollars in thousands)

                                                               
Interest earning assets:
Federal funds sold                                  $  41     $   25     $   66
Interest bearing deposits with banks                    -          2          2
Securities held to maturity                          (174)       (31)      (205)
Securities available for sale:
Taxable                                               (41)       242        201
Tax-exempt securities                                 (16)        (2)       (18)
                                                    -----     ------     ------
Total securities                                      (57)       240        183
Loans receivable                                      928      1,022      1,950
                                                    -----     ------     ------
Total interest earning assets                         738      1,258      1,996

Interest bearing liabilities:
Interest-bearing demand and money market               44        389        433
Savings                                               (16)        (2)       (18)
Time                                                  155        669        824
                                                    -----     ------     ------
Total interest bearing deposits                       183      1,056      1,239
Short-term borrowings                                   2        137        139
Other borrowings                                      174        (81)        93
                                                    -----     ------     ------
Total interest bearing liabilities                    359      1,112      1,471
                                                    -----     ------     ------
Net interest income (tax-equivalent basis)          $ 379     $  146     $  525
                                                    =====     ======     ======




COMPARISON OF OPERATING  RESULTS FOR SIX MONTHS ENDED JUNE 30, 2006 AND JUNE 30,
- --------------------------------------------------------------------------------
2005
- ----

GENERAL
- -------
           Net income for the six months ended June 30, 2006 totaled $2,809,000,
increasing $236,000, or 9.2% over the $2,573,000 earned in the similar period in
2005. Basic and diluted earnings per share were $1.00 and $.98, respectively, in
the 2006 period compared to $.92 and $.90, respectively,  for the similar period
in 2005.  The resulting  annualized  return on average assets for the six months
ended June 30, 2006 was 1.30%,  with an annualized  return on average  equity of
11.60% improving from 1.27% and 11.22% , respectively, for the similar period in
2005.

                                       23



The following table sets forth changes in net income:


(dollars in thousands)
Net income six months ended June 30, 2005                               $ 2,573
                                                                        -------

Net interest income                                                         589
Provision for loan losses                                                    65
Net realized gains on sales of securities                                   (59)
Gains on sales of mortgage loans and servicing rights                        52
All other income                                                             49
Salaries and employee benefits                                             (141)
All other expenses                                                         (138)
Income tax effect                                                          (181)
                                                                        -------

Net income six months ended  June 30, 2006                              $ 2,809
                                                                        =======


NET INTEREST INCOME
- -------------------
           Net interest  income on a fte basis for the six months ended June 30,
2006 totaled  $8,219,000 an increase of $525,000,  or 6.8%,  over $7,694,000 for
the similar period in 2005. The fte net interest  spread and net interest margin
were 3.44% and 3.96%, respectively compared to 3.58% and 3.95%, respectively, in
2005.

           Interest  income (fte) totaled  $12,610,000  with an average yield of
6.08% for the six months ended June 30, 2006  increasing  from  $10,614,000  and
5.45% for the similar period in 2005. The increase was  principally due to $28.1
million  growth in average  loans.  For the 2006 period  average  loans  totaled
$293.1 million and represented  70.7% of total average earning assets increasing
from $265.0  million and 68.0% for the similar period in 2005. The average yield
on loans also  increased to 6.98% for the 2006 period from 6.25% for the similar
period in 2005. The increase was  principally  due to the rise in the prime rate
of interest which was 8.25% as of June 30, 2006 compared to 6.25% as of June 30,
2005. The increase in prime rate  increases the yield on the Company's  floating
rate commercial loan portfolio and on home equity lines of credit.

           Interest  expense  for the six  months  ended June 30,  2006  totaled
$4,391,000 at an average cost of 2.64% compared to $2,920,000 at an average cost
of 1.87% for the similar  period in 2005.  The  increase is  principally  due to
rising  short-term  interest  rates which have caused  increased  costs in money
market  accounts,  time  deposits and  short-term  borrowings.  The cost of time
deposits  averaged  3.54% for the 2006 period  compared to 2.54% in 2005 period.
The Company expects the cost of time deposits to continue to increase in 2006 as
lower rate  instruments  mature and then reprice at the current higher  interest
rates.  Deposits  have also  shifted  to  higher  costing  instruments.  Average
savings,  at a cost of .46%,  decreased  $6.9  million,  and was offset by $11.4
million increase in higher costing time deposits.

OTHER INCOME
- ------------
           Other  income  totaled  $1,827,000  for the six months ended June 30,
2006 compared to $1,785,000 for the similar period in 2005. The increase was due
in part to a $52,000  increase in service  charges  and fees  related in part to
increase in debit card  activity of $19,000,  and an  overdraft  fee increase of
$17,000.  Gains on sales of mortgage loans and servicing rights totaled $107,000
in 2006 period compared  $55,000 in such gains in 2005 period.  The gain in 2006
was primarily due to the sale of $13.7 million of mortgage servicing rights to a
third party,  on laons  previously  sold in the  secondary  market to FNMA.  Net
realized gain on the sales of securities was $21,000  decreasing from such gains
of $80,000 for the 2005 period.

                                       24



OTHER EXPENSE
- -------------
           Other expense  totaled  $5,607,000  for the six months ended June 30,
2006, an increase of $279,000,  or 5.2%,  over $5,328,000 for the similar period
in  2005.  Salaries  and  employee  benefit  costs  increased  $141,000  due  to
escalating  health insurance,  $70,000,  and expense related to stock options of
$34,000.  The 2006 period included $50,000 robbery loss and $40,000 loss related
to a fraudulent check included in other expense.

INCOME TAX EXPENSE
- ------------------
           Income tax expense  totaled  $1,241,000  for an effective tax rate of
30.6% for the six months  ended June 30,  2006  compared  to  $1,060,000  and an
effective  tax rate of 29.2% for the  similar  period in 2005.  The  increase in
taxes was principally due to $417,000,  or 11.5%, increase in pre-tax income and
a lower  level of tax  exempt  income  The  decrease  in  tax-exempt  income was
principally due to maturites of tax-exempt municipal bonds.

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 June 30, 2006, 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 reflect
interest-sensitivity  gaps  measured as the  difference  between  rate-sensitive
assets and rate-sensitive liabilities. These are static gap measurements that do
not take into account any future  activity,  and as such are principally used as
early indications of potential interest rate exposures over specific intervals.

           As of  June  30,  2006,  the  Bank  had a  positive  90 day  interest
sensitivity gap of $47.2 million or 10.4% of total assets, increasing from $24.4
million,  5.6%  of  total  assets  as of  December  31,  2005.  The  change  was
principally  due to a $13.6  million  increase in federal funds sold. 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.

                                       25





June 30, 2006
- -------------
Rate Sensitivity Table
- ----------------------
(dollars in thousands)
                                                      3 Months       3-12 Months     1 to 3 Years     3 Years        Total
                                                      --------       -----------     ------------     -------        -----
                                                                                                  
Federal funds sold and interest bearing deposits      $ 13,794          $      -         $      -    $      -     $ 13,794
Securities                                              14,856            42,016           39,350      19,173      115,395
Loan Receivable                                         98,475            43,423           67,098      90,370      299,366
                                                      --------          --------          -------     -------      -------
  Total RSA                                            127,125            85,439          106,448     109,543      428,555

Non-maturity interest-bearing deposits                  24,894            27,593           72,416      34,037      158,940
Time deposits                                           21,716            78,507           27,366       7,400      134,989
Other                                                   33,333             4,610           10,744           -       48,687
                                                      --------          --------          -------     -------      -------
  Total RSL                                             79,943           110,710          110,526      41,437      342,616

Interest Sensitivity Gap                               $47,182          $(25,271)         $(4,078)    $68,106     $ 85,939
Cumulative gap                                          47,182            21,911           17,833      85,939
RSA/RSL-Cumulative                                      159.0%            111.5%           105.9%      125.1%

December 31, 2005
Interest Sensitivity Gap                               $24,402          $ (5,676)         $ 1,642     $56,582      $76,950
Cumulative gap                                          24,402            18,726           20,368      76,950
RSA/RSL-cumulative                                      126.6%            110.7%           107.1%      123.2%




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.

           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.

                                       26


PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 1A.  RISK FACTORS

There have been no significant changes in the risk factors affecting the Company
that were  identified  in Item 1A of Part I of the  Company's  Form 10-K for the
year ended December 31, 2005.

ITEM 2. CHANGES IN  SECURITIES,  USE OF PROCEEDS AND ISSUER  PURCHASES OF EQUITY
        SECURITIES



                                        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
                                   ---------         -----               -----------              -----------
                                                                                           
April 1 - April 30, 2006                 -                 -                       -                          -
May 1 - May 31, 2006                 5,732            $30.57                   5,732                    103,363
June 1 - June 30, 2006                   -                 -                       -                          -
                                     -----            ------                   -----                    -------
                                     5,732            $30.57                   5,732                    103,363
                                     =====            ======                   =====                    =======

(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.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

The Annual  Meeting of  Shareholders  of the Company was held on April 25, 2006.
The following  incumbent  directors were nominated and duly elected to the Board
of Directors for a three-year term expiring in 2009.

                                                           FOR          WITHHELD
                                                           ---          --------
                           William W. Davis, Jr.        2,290,539         20,475
                           John E. Marshall             2,164,201        146,813

There were no abstentions or broker non-votes.

Approve the Norwood Financial Corp 2006 Stock Option Plan

                                          FOR            AGAINST         ABSTAIN
                                          ---            -------         -------
                                       1,866,018         104,955         25,265

There were no broker non-votes.

Ratify the appointment of Beard Miller Company LLP as independent  accountant of
the Company for the fiscal year ending December 31, 2006.

                                          FOR            AGAINST         ABSTAIN
                                          ---            -------         -------
                                       2,304,120           307            6,587

There were no broker non-votes.

                                       27


ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS


                  
          (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    Consulting Agreement with Russell L. Ridd**
               10.5    Wayne Bank Stock Option Plan*
               10.6    Salary  Continuation  Agreement between the Bank and William W. Davis, Jr.***
               10.7    Salary Continuation  Agreement between the Bank and Lewis J. Critelli***
               10.8    Salary Continuation Agreement between the Bank and Edward C. Kasper***
               10.9    1999 Directors Stock Compensation Plan***
               10.10   Salary  Continuation  Agreement between the Bank and Joseph A. Kneller****
               10.11   Salary Continuation  Agreement between the Bank and John H. Sanders****
               10.12   2006 Stock Option Plan*****
               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      Section 1350 Certification


         ___________________________
*        Incorporated herein by reference into 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 into the identically numbered exhibits
         of the  Registrant's  Form 10-K filed with the  Commission on March 31,
         1997.

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

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

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

                                       28



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:    August 11, 2006             By:   /s/William W. Davis, Jr.
                                           -------------------------------------
                                           William W. Davis, Jr.
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)

Date:    August 11, 2006             By:   Lewis J. Critelli
                                           -------------------------------------
                                           Lewis J. Critelli
                                           Executive Vice President and
                                           Chief Financial Officer
                                           (Principal Financial Officer)



                                       29