**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**____________**





**FORM
      10-Q**


(Mark
      One)





ý
            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





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





For
      the
      transition period from ______________ to _____________




Commission
      file number: 0-50876







**NAUGATUCK
      VALLEY FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





**UNITED
                STATES**
            **65-1233977**(State
                or other jurisdiction of incorporation or
            (I.R.S.
                Employer Identification No.)organization)**333
                CHURCH STREET, NAUGATUCK, CONNECTICUT**
            **06770**(Address
                of principal executive offices)
            (Zip
                Code)








**(203)
      720-5000**


(Registrant’s
      telephone number, including area code)




**N/A**


(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or 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 ý  No o




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


Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filerý





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o  No ý





As
      of
      August 4, 2006, there were 7,516,325 shares
      of the registrant’s common stock outstanding.





**NAUGATUCK
      VALLEY FINANCIAL CORPORATION**





**Table
      of Contents**




**Part
                I.**
            **Financial
                Information**
            **Page
                No.**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Statements of Financial Condition at June 30,
                2006 andDecember
                31, 2005
            3Consolidated
                Statements of Income for the three and
                six months endedJune
                30, 2006 and 2005
            4Consolidated
                Statements of Cash Flows for the six months
                endedJune
                30, 2006 and 2005
            5Notes
                to Unaudited Consolidated Financial
                Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Resultsof
                Operations
            9Liquidity
                and Capital Resources
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            15Item
                4.
            Controls
                and Procedures
            16**Part
                II.**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            17Item
                1A.
            Risk
                Factors
            17Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            17Item
                3.
            Defaults
                Upon Senior Securities
            17Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            17Item
                5.
            Other
                Information
            18Item
                6.
            Exhibits
            18**Signatures****Exhibits**








**Item
      1. Financial Statements.**








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          to Index*
 2







**Condensed
      Consolidated Statements of Financial
      Condition**


*(In
      thousands, except share data)*





**June
                  30,**
              
              **December
                  31,****2006**
              
              **2005***(Unaudited)***ASSETS**Cash
                  and due from depository institutions
              
              $
              8,527
              
              $
              8,922Investment
                  in federal funds
              
              
              322
              
              
              29Investment
                  securities
              
              
              64,527
              
              
              63,049Loans
                  receivable, net
              
              
              273,374
              
              
              259,427Deferred
                  income taxes
              
              
              1,731
              
              
              1,331Other
                  assets
              
              
              23,869
              
              
              22,588**Total
                  assets**
              
              $
              372,350
              
              $
              355,346**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**LiabilitiesDeposits
              
              $
              262,050
              
              $
              240,846Advances
                  from Federal Home Loan Bank of Boston
              
              
              54,652
              
              
              57,059Other
                  liabilities
              
              
              5,254
              
              
              6,477Total
                  liabilities
              
              
              321,956
              
              
              304,382Commitments
                  and contingenciesStockholders'
                  EquityCommon
                  stock, $.01 par value; 25,000,000 shares authorized;7,604,375
                  shares issued and outstanding at December 31, 2005and
                  7,549,375 outstanding at June 30, 2006
              
              
              76
              
              
              76Preferred
                  stock, $.01 par value; 1,000,000 shares authorized;no
                  shares issued or outstanding
              
              
              -
              
              
              -Paid-in
                  capital
              
              
              33,220
              
              
              33,157Retained
                  earnings
              
              
              23,154
              
              
              22,588Unearned
                  ESOP shares
              
              
              (2,733
              )
              
              (2,733
              )Unearned
                  stock awards
              
              
              (1,567
              )
              
              (1,551
              )Treasury
                  stock, at cost (62,833 shares at June 30, 2006and
                  9,333 shares at December 31, 2005)
              
              
              (738
              )
              
              (122
              )Accumulated
                  other comprehensive loss
              
              
              (1,018
              )
              
              (451
              )Total
                  stockholders' equity
              
              
              50,394
              
              
              50,964**Total
                  liabilities and stockholders' equity**
              $
              372,350
              
              $
              355,346




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          to Index*
 3







**Consolidated
      Statements of Income**


*(In
      thousands, except per share data)*




**Six
                  Months Ended**
              
              **Three
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(Unaudited)***Interest
                  and dividend income**Interest
                  on loans
              
              $
              8,221
              
              $
              6,262
              
              $
              4,191
              
              $
              3,233Interest
                  and dividends on investments and deposits
              
              
              1,556
              
              
              977
              
              
              799
              
              
              574Total
                  interest income
              
              
              9,777
              
              
              7,239
              
              
              4,990
              
              
              3,807**Interest
                  expense**Interest
                  on deposits
              
              
              2,710
              
              
              1,321
              
              
              1,437
              
              
              733Interest
                  on borrowed funds
              
              
              1,302
              
              
              584
              
              
              660
              
              
              360Total
                  interest expense
              
              
              4,012
              
              
              1,905
              
              
              2,097
              
              
              1,093**Net
                  interest income**
              
              
              5,765
              
              
              5,334
              
              
              2,893
              
              
              2,714**Provision
                  for loan losses**
              
              
              130
              
              
              32
              
              
              68
              
              
              17**Net
                  interest income after provision for loan losses**
              
              
              5,635
              
              
              5,302
              
              
              2,825
              
              
              2,697**Noninterest
                  income**Fees
                  for services
              
              
              660
              
              
              442
              
              
              349
              
              
              234Income
                  from bank owned life insurance
              
              
              152
              
              
              97
              
              
              76
              
              
              49Income
                  from investment advisory services, net
              
              
              51
              
              
              91
              
              
              19
              
              
              32Gain
                  on sale of investments
              
              
              -
              
              
              47
              
              
              -
              
              
              47Other
                  income
              
              
              62
              
              
              43
              
              
              33
              
              
              22Total
                  noninterest income
              
              
              925
              
              
              720
              
              
              477
              
              
              384**Noninterest
                  expense**Compensation,
                  taxes and benefits
              
              
              3,322
              
              
              2,815
              
              
              1,689
              
              
              1,428Office
                  occupancy
              
              
              787
              
              
              759
              
              
              388
              
              
              361Advertising
              
              
              300
              
              
              305
              
              
              174
              
              
              174Computer
                  processing
              
              
              294
              
              
              303
              
              
              152
              
              
              160Loss
                  (gain) on foreclosed real estate, net
              
              
              9
              
              
              (33
              )
              
              12
              
              
              4Other
                  expenses
              
              
              760
              
              
              751
              
              
              404
              
              
              396Total
                  noninterest expense
              
              
              5,472
              
              
              4,900
              
              
              2,819
              
              
              2,523**Income
                  before provision****for
                  income taxes**
              
              
              1,088
              
              
              1,122
              
              
              483
              
              
              558**Provision
                  for income taxes**
              
              
              204
              
              
              301
              
              
              70
              
              
              140**Net
                  Income**
              
              $
              884
              
              $
              821
              
              $
              413
              
              $
              418**Earnings
                  per common share - Basic and Diluted**
              $
              0.12
              
              $
              0.11
              
              $
              0.06
              
              $
              0.06


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          to Index*
 4







**Consolidated
      Statements of Cash Flows**


*(In
      thousands)*




**Six
                  Months Ended****June
                  30,****2006**
              
              **2005****Cash
                  flows from operating activities**
              
              *(Unaudited)*Net
                  income
              
              $
              884
              
              $
              821Adjustments
                  to reconcile net income to cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              130
              
              
              32Depreciation
                  and amortization expense
              
              
              292
              
              
              343Stock-based
                  compensation
              
              
              326
              
              
              -Provision
                  for deferred taxes
              
              
              -
              
              
              (69
              )Net
                  gain on sale of real estate owned
              
              
              (4
              )
              
              (46
              )Gain
                  on sale of investments
              
              
              -
              
              
              (47
              )Increase
                  in accrued income receivable
              
              
              (110
              )
              
              (133
              )Increase
                  (decrease) in deferred loan fees
              
              
              6
              
              
              (39
              )Increase
                  in bank owned life insurance asset
              
              
              (152
              )
              
              (97
              )Decrease
                  in other assets
              
              
              38
              
              
              194Decrease
                  in other liabilities
              
              
              (1,744
              )
              
              (367
              )**Net
                  cash (used) provided by operating activities**
              
              
              (334
              )
              
              592**Cash
                  flows from investing activities**Proceeds
                  from maturities and repayments of available-for-sale
                  securities
              
              
              8,757
              
              
              3,520Proceeds
                  from sale of available-for-sale securities
              
              
              -
              
              
              3,742Proceeds
                  from maturities of held-to-maturity securities
              
              
              1,995
              
              
              285Purchase
                  of available-for-sale securities
              
              
              (13,078
              )
              
              (28,723
              )Purchase
                  of Federal Home Loan Bank stock
              
              
              (282
              )
              
              (323
              )Loan
                  originations net of principal payments
              
              
              (14,083
              )
              
              (21,396
              )Additions
                  to foreclosed real estate
              
              
              -
              
              
              (47
              )Proceeds
                  from the sale of foreclosed real estate
              
              
              51
              
              
              113Proceeds
                  from sale of property and equipment
              
              
              2
              
              
              -Purchase
                  of property and equipment
              
              
              (1,236
              )
              
              (1,517
              )**Net
                  cash used by investing activities**
              
              
              (17,874
              )
              
              (44,346
              )**Cash
                  flows from financing activities**Net
                  change in time deposits
              
              
              15,752
              
              
              14,687Net
                  change in other deposit accounts
              
              
              5,452
              
              
              5,641Advances
                  from Federal Home Loan Bank
              
              
              26,250
              
              
              48,338Repayment
                  of advances from Federal Home Loan Bank
              
              
              (28,657
              )
              
              (25,764
              )Net
                  change in mortgagors' escrow accounts
              
              
              258
              
              
              176Treasury
                  stock acquired
              
              
              (635
              )
              
              -Dividends
                  paid to stockholders
              
              
              (314
              )
              
              (250
              )**Net
                  cash provided by financing activities**
              
              
              18,106
              
              
              42,828Decrease
                  in cash and cash equivalents
              
              
              (102
              )
              
              (926
              )Cash
                  and cash equivalents at beginning of period
              
              
              8,951
              
              
              7,575**Cash
                  and cash equivalents at end of period**
              $
              8,849
              
              $
              6,649Cash
                  paid during the period for:Interest
              
              $
              4,022
              
              $
              1,330Income
                  taxes
              
              
              145
              
              
              508







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          to Index*
 5


**NOTE
      1 - BASIS OF PRESENTATION**




The
      accompanying condensed consolidated interim financial statements are unaudited
      and include the accounts of Naugatuck Valley Financial Corporation (the
“Company”), Naugatuck Valley Savings and Loan (the “Bank”), and Naugatuck Valley
      Mortgage Servicing Corporation, a wholly owned subsidiary of the Bank. The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America
      (“GAAP”) for interim financial information and with the instructions to SEC Form
      10-Q. Accordingly, they do not include all the information and footnotes
      required by GAAP for complete financial statements. All significant intercompany
      accounts and transactions have been eliminated in the consolidation. These
      financial statements reflect, in the opinion of Management, all adjustments,
      consisting only of normal recurring adjustments, necessary for a fair
      presentation of the Company’s financial position and the results of its
      operations and its cash flows for the periods presented.





Operating
      results for the three and six months ended June 30, 2006 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2006.





These
      financial statements should be read in conjunction with the consolidated
      financial statements and notes thereto included in the Company’s 2005 Annual
      Report to Stockholders. The year-end condensed balance sheet data was derived
      from audited financial statements, but does not include all disclosures required
      by GAAP.







**NOTE
      2 - EARNINGS PER SHARE**





Basic
      net
      income per common share is calculated by dividing the net income available
      to
      common stockholders by the weighted-average number of common shares outstanding
      during the period. Diluted net income per common share is computed in a manner
      similar to basic net income per common share except that the weighted-average
      number of common shares outstanding is increased to include the incremental
      common shares (as computed using the treasury stock method) that would have
      been
      outstanding if all potentially dilutive common stock equivalents were issued
      during the period. The Company's common stock equivalents relate solely to
      stock
      option and restricted stock awards. Anti-dilutive shares are common stock
      equivalents with weighted-average exercise prices in excess of the
      weighted-average market value for the periods presented. At June 30, 2006,
      354,880 options
      (all with an exercise price of $11.10 per share) were considered anti-dilutive
      and were excluded from the calculations for the three and six months then ended.
      There were no options issued as of June 30, 2005. Unallocated common shares
      held
      by the ESOP are not included in the weighted-average number of common shares
      outstanding for purposes of calculating either basic or diluted net income
      per
      common share.




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(Dollars
                  in thousands, except per share data)*Net
                  income
              
              $
              413
              
              $
              418
              
              $
              884
              
              $
              821Weighted-average
                  common shares outstanding:Basic
              
              
              7,331,084
              
              
              7,311,195
              
              
              7,331,084
              
              
              7,311,195Effect
                  of dilutive stock optionsand
                  restrictive stock awards
              
              
              -
              
              
              -
              
              
              -
              
              
              -Diluted
              
              
              7,331,084
              
              
              7,311,195
              
              
              7,331,084
              
              
              7,311,195Net
                  income per common share:Basic
              
              $
              0.06
              
              $
              0.06
              
              $
              0.12
              
              $
              0.11Diluted
              
              $
              0.06
              
              $
              0.06
              
              $
              0.12
              
              $
              0.11





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          to Index*
 6





**NOTE
      3 - COMPREHENSIVE INCOME**




Statement
      of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
      Income," establishes standards for disclosure of comprehensive income, which
      includes net income and any changes in equity from non-owner sources that are
      not recorded in the income statement (such as changes in the net unrealized
      gain/loss on available-for-sale securities). The purpose of reporting
      comprehensive income is to report a measure of all changes in equity that result
      from recognized transactions and other economic events of the period other
      than
      transactions with owners in their capacity as owners. The Company’s sole source
      of other comprehensive income is the net unrealized gain (loss) on its
      available-for-sale securities.


**Six
                  Months Ended**
              
              **Three
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(In
                  thousands)*Net
                  income
              
              $
              884
              
              $
              821
              
              $
              413
              
              $
              418Net
                  unrealized (loss) gain onsecurities
                  available for saleduring
                  the period, net of tax
              
              
              (567
              )
              
              (37
              )
              
              (425
              )
              
              168**Total
                  Comprehensive Income (Loss)**
              $
              317
              
              $
              784
              
              $
              (12
              )
              $
              586







**NOTE
      4 -** **CRITICAL
      ACCOUNTING POLICIES**





The
      Company considers accounting policies involving significant judgments and
      assumptions by management that have, or could have, a material impact on the
      carrying value of certain assets or on income to be critical accounting
      policies. The Company considers the following to be critical accounting
      policies: allowance for loan losses and deferred income taxes.





***Allowance
      for Loan Losses*** **.** Determining the amount of the allowance for loan losses necessarily involves
      a
      high degree of judgment. Management reviews the level of the allowance on a
      quarterly basis, at a minimum, and establishes the provision for loan losses
      based on the composition of the loan portfolio, delinquency levels, loss
      experience, economic conditions, and other factors related to the collectibility
      of the loan portfolio.





Although
      the Company believes that it uses the best information available to establish
      the allowance for loan losses, future additions to the allowance may be
      necessary based on estimates that are susceptible to change as a result of
      changes in economic conditions and other factors. The Company engages an
      independent review of its commercial loan portfolio annually and adjusts its
      loan ratings based upon this review. In addition, the Company’s regulatory
      authorities, as an integral part of their examination process, periodically
      review the Company’s allowance for loan losses. Such an agency may require the
      Company to recognize adjustments to the allowance based on its judgments about
      information available to it at the time of its examination.





***Deferred
      Income Taxes*** **.** The
      Company uses the asset and liability method of accounting for income taxes.
      Under this method, deferred tax assets and liabilities are recognized for the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases. If current available information raises doubt as to the
      realization of the deferred tax assets, a valuation allowance is established.
      Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The Company exercises
      significant judgment in evaluating the amount and timing of recognition of
      the
      resulting tax liabilities and assets, including projections of future taxable
      income. These judgments and estimates are reviewed continually as regulatory
      and
      business factors change.







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          to Index*
 7


**NOTE
      5 - EQUITY
      INCENTIVE PLAN**




At
      the
      annual meeting of stockholders on May 5, 2005, stockholders of the Company
      approved the Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan
      (the “Incentive Plan”). Under the Incentive Plan, the Company may grant up to
      372,614 stock options and 149,045 shares of restricted stock to its employees,
      officers and directors for an aggregate amount of up to 521,659 shares of the
      Company’s common stock for issuance upon the grant or exercise of awards. Both
      incentive stock options and non-statutory stock options may be granted under
      the
      Incentive Plan.





On
      July
      26, 2005, the Company awarded 354,580 options to purchase the Company’s common
      stock and 139,712 shares of restricted stock. Stock option awards were granted
      with an exercise price equal to the market price of the Company’s stock at the
      date of grant ($11.10 per share) with a maximum term of ten years. On March
      21,
      2006, the Company awarded an additional 6,500 options to purchase the Company’s
      common stock and 1,500 additional shares of restricted stock. The additional
      stock option awards were granted with an exercise price equal to those granted
      on July 26, 2005 ($11.10 which was higher than the market price of $10.56 on
      March 21, 2006) with a maximum term of ten years. Both stock options and
      restricted stock awards vest at 20% per year beginning on the first anniversary
      of the date of grant.





Stock
      options and restricted stock awards are considered common stock equivalents
      for
      the purpose of computing earnings per share on a diluted basis.





The
      Company adopted Financial Accounting Standards Board’s SFAS No.123(R), “Share
      Based Payment”, beginning with the period ended September 30, 2005. In
      accordance with Statement No.123 (R), the Company is recording share-based
      compensation expense related to outstanding stock option and restricted stock
      awards based upon the fair value at the date of grant over the vesting period
      of
      such awards on a straight-line basis. The fair value of each restricted stock
      allocation, based on the market price at the date of grant, is recorded to
      unearned stock awards. Compensation expenses related to unearned restricted
      shares are amortized to compensation, taxes and benefits expense over the
      vesting period of the restricted stock awards. The fair value of each stock
      option award is estimated on the date of grant using the Black-Scholes option
      pricing method which includes several assumptions such as volatility, expected
      dividends, expected term and risk-free rate for each stock option award. The
      Company recorded share-based compensation expense of $109,479 and $218,855
      for
      the three and six months ended June 30, 2006, respectively, in connection with
      the stock option and restricted stock awards.





The
      weighted-average fair value of stock options granted and the assumptions used
      in
      the Black-Scholes option pricing method are shown in the following table.


**March
                  21,**
              
              **July
                  26,****Grant
                  date**
              **2006**
              
              **2005***(Unaudited)*Dividend
                  yield
              
              
              1.89
              %
              
              1.44
              %Expected
                  volatility
              
              
              11.20
              %
              
              11.47
              %Risk-free
                  rate
              
              
              4.61
              %
              
              4.18
              %Expected
                  life in years
              
              
              6.5
              
              
              6.5Weighted
                  average fair value of options at grant date
              
              $
              2.25
              
              $
              2.47







**NOTE
      6 - DIVIDENDS**





On
      April
      27, 2006, the Company's Board of Directors declared a cash dividend of $0.05
      per
      outstanding common share, which was paid on June 1, 2006, to stockholders of
      record as of the close of business on May 8, 2006.





Naugatuck
      Valley Mutual Holding Company, the Company's mutual holding company parent,
      waived receipt of its dividend upon non-objection from the Office of Thrift
      Supervision ("OTS").




*Back
          to Index*
 8


NOTE
      7 - RECENT ACCOUNTING
      PRONOUNCEMENTS




In
      March,
      2006 the Financial Accounting Standards Board (“FASB”) issued an Exposure Draft,*Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans,*which
      includes proposed amendments to Statements 87, 106, and 132 (R).The
      comment period is closed and the FASB staff expects that a final Statement
      will
      be issued at the end of the third quarter of 2006. Implementation of the new
      standard, when final, will be required for fiscal years ending after December
      15, 2006.





The
      proposed Statement will require a calendar year-end company that sponsors a
      postretirement benefit plan to fully recognize, as an asset or liability, the
      over-funded or under-funded status of its benefit plan in its 2006 year-end
      balance sheet. This will result in the immediate recognition (on the balance
      sheet) of amounts that would have been recognized in subsequent years
      (off-balance sheet). Unrecognized prior service costs and credits and
      unrecognized net actuarial gains or losses will be recorded as components of
      other comprehensive income. Further, any unrecognized transition obligation
      or
      asset is recorded as an adjustment to the opening balance of retained earnings
      upon initial adoption of the Statement.





At
      this time, the Company is uncertain as to how the application of the
      new Standard, when finalized, will impact its financial
      statements.





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**





This
      discussion should be read in conjunction with the Company’s Consolidated
      Financial Statements for the year ended December 31, 2005 included in the
      Company’s 2005 Annual Report to Stockholders.





**Forward-Looking
      Statements**





This
      report contains forward-looking statements that are based on assumptions and
      may
      describe future plans, strategies and expectations of the Company. These
      forward-looking statements are generally identified by use of the words
“believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar
      expressions. The Company’s ability to predict results or the actual effect of
      future plans or strategies is inherently uncertain. Factors which could have
      a
      material adverse effect on the operations of the Company and its subsidiaries
      include, but are not limited to, changes in interest rates, national and
      regional economic conditions, legislative and regulatory changes, monetary
      and
      fiscal policies of the U.S. government, including policies of the U.S. Treasury
      and the Federal Reserve Board, the quality and composition of the loan or
      investment portfolios, demand for loan products, deposit flows, competition,
      demand for financial services in the Company’s market area, changes in real
      estate market values in the Company’s market area, and changes in relevant
      accounting principles and guidelines. Additional factors are discussed in the
      Company’s 2005 Annual Report on Form 10-K under “Item 1A - Risk Factors”. These
      risks and uncertainties should be considered in evaluating forward-looking
      statements and undue reliance should not be placed on such statements. Except
      as
      required by applicable law or regulation, the Company does not undertake, and
      specifically disclaims any obligation, to release publicly the result of any
      revisions that may be made to any forward-looking statements to reflect events
      or circumstances after the date of the statements or to reflect the occurrence
      of anticipated or unanticipated events.





**Comparison
      of Financial Condition at June 30, 2006 and December 31, 2005**





Total
      assets increased by $17.0 million, or 4.8%, to $372.3 million during the period
      from December 31, 2005 to June 30, 2006, primarily due to an increase of $13.9
      million in loans and an increase in investments of $1.5 million. The balance
      of
      the increase was due to the expansion of the Bank’s branch network with
      additions to fixed assets. The increase in loans primarily reflects an increase
      in our one-to-four family mortgages and, to a lesser extent, commercial loans
      and home equity loans. These increases were primarily funded by increases in
      deposits.





Total
      liabilities were $322.0 million at June 30, 2006 compared to $304.4 million
      at
      December 31, 2005. Deposits at June 30, 2006 increased $21.2 million, or 8.8%,
      over December 31, 2005 due to increased advertising and more aggressive pricing.
      Advances from the Federal Home Loan Bank of Boston decreased $2.4 million,
      from
      $57.1 million to $54.7 million. The increases in deposits were used primarily
      to
      fund loans and investments and, to a lesser extent, repay advances and fund
      increases in fixed assets.







*Back
          to Index*
 9


Total
      stockholders’ equity decreased $570,000, from $51.0 million at December 31, 2005
      to $50.4 million at June 30, 2006. The decrease in equity was due to net income
      of $884,000 for the six month period, partially offset by stock repurchases
      of
      $635,000, dividends of $314,000 paid to stockholders, a net increase to the
      unrealized loss on available-for-sale securities of $567,000 and $63,000 in
      capital adjustments related to the Company’s 2005 Equity Incentive
      Plan.








**Comparison
      of Operating Results For the Three and Six Months Ended June 30, 2006 and
      2005**





***General*** .   
      For the three months ended June 30, 2006, the Company had net income of $413,000
      compared to $418,000 for the three months ended June 30, 2005, a decrease of
      $5,000. Net income increased $63,000 to $884,000 for the six months ended June
      30, 2006 from $821,000 for the six months ended June 30, 2005. The decrease
      in
      the three month period was primarily due to tightening margins and increases
      in
      noninterest expenses. The increase in the six month period was primarily due
      to
      an increase in net interest income and an increase in noninterest income,
      partially offset by an increase in noninterest expense.








***Net
      Interest Income*** **.** **** Net
      interest income increased $179,000, or 6.6%, to $2.9 million for the three
      months ended June 30, 2006 and increased by $431,000 or 8.1%, to $5.8 million
      for the six months ended June 30, 2006. The increase in net interest income
      in
      both periods was the result of an increase in the average balances of interest
      earning assets of 23.4% and 28.4% in the three and six month periods
      respectively. The Company also experienced a 35 basis point increase in the
      average rate earned on these assets in the three month period and a 29 basis
      point increase in the six month period over the 2005 rates. The increase in
      interest earning assets for the three and six month periods is attributed
      primarily to an increase in the loan and investment portfolios. The average
      balance of investments increased by 24.4% in the three month period and by
      44.6%
      in the six month period while the average balances in the loan portfolio
      increased by 24.0% and 25.4% over the same periods. The increase in interest
      income was partially offset by an increase in interest expense. Interest expense
      increased by 91.9% in the three month period and by 110.6% in the six month
      period due to rising rates on deposits and borrowings, along with increases
      in
      the average balances of deposits and borrowings.





The
      following table summarizes changes in interest income and interest expense
      for
      the three and six months ended June 30, 2006 and 2005.




**Three
                      months**
                  
                  
                  
                  
                  **Six
                      Months****Ended
                      June 30,**
                  
                  
                  
                  
                  **Ended
                      June 30,****2006**
                  
                  **2005**
                  
                  **%
                      change**
                  
                  **2006**
                  
                  **2005**
                  
                  **%
                      change***(Dollars
                      in thousands)***Interest
                      income:**Loans
                  
                  $
                  4,191
                  
                  $
                  3,233
                  
                  
                  29.63
                  %
                  
                  $
                  8,221
                  
                  $
                  6,262
                  
                  
                  31.28
                  %Fed
                      Funds sold
                  
                  
                  20
                  
                  
                  24
                  
                  
                  -16.67
                  %
                  
                  
                  30
                  
                  
                  31
                  
                  
                  -3.23
                  %Investment
                      securities
                  
                  
                  734
                  
                  
                  525
                  
                  
                  39.81
                  %
                  
                  
                  1,438
                  
                  
                  899
                  
                  
                  59.96
                  %Federal
                      Home Loan Bank stock
                  
                  
                  45
                  
                  
                  25
                  
                  
                  80.00
                  %
                  
                  
                  88
                  
                  
                  47
                  
                  
                  87.23
                  %Total
                      interest income
                  
                  
                  4,990
                  
                  
                  3,807
                  
                  
                  31.07
                  %
                  
                  
                  9,777
                  
                  
                  7,239
                  
                  
                  35.06
                  %**Interest
                      expense:**Certificate
                      accounts
                  
                  
                  1,251
                  
                  
                  578
                  
                  
                  116.44
                  %
                  
                  
                  2,326
                  
                  
                  1,035
                  
                  
                  124.73
                  %Regular
                      savings accounts
                  
                  
                  107
                  
                  
                  82
                  
                  
                  30.49
                  %
                  
                  
                  222
                  
                  
                  127
                  
                  
                  74.80
                  %Checking
                      and NOW accounts
                  
                  
                  35
                  
                  
                  10
                  
                  
                  250.00
                  %
                  
                  
                  77
                  
                  
                  21
                  
                  
                  266.67
                  %Money
                      market savings accounts
                  
                  
                  44
                  
                  
                  63
                  
                  
                  -30.16
                  %
                  
                  
                  85
                  
                  
                  138
                  
                  
                  -38.41
                  %Total
                      interest-bearing deposits
                  
                  
                  1,437
                  
                  
                  733
                  
                  
                  96.04
                  %
                  
                  
                  2,710
                  
                  
                  1,321
                  
                  
                  105.15
                  %FHLB
                      advances
                  
                  
                  657
                  
                  
                  360
                  
                  
                  82.50
                  %
                  
                  
                  1,297
                  
                  
                  583
                  
                  
                  122.47
                  %Other
                      borrowings
                  
                  
                  3
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  1
                  
                  
                  400.00
                  %Total
                      interest expense
                  
                  
                  2,097
                  
                  
                  1,093
                  
                  
                  91.86
                  %
                  
                  
                  4,012
                  
                  
                  1,905
                  
                  
                  110.60
                  %Net
                      interest income
                  
                  $
                  2,893
                  
                  $
                  2,714
                  
                  
                  6.60
                  %
                  
                  $
                  5,765
                  
                  $
                  5,334
                  
                  
                  8.08
                  %







*Back
          to Index*
 10







The
      following table summarizes average balances and average yields and costs for
      the
      three and six months ended June 30, 2006 and 2005.




**Three
                  months ended June 30,**
              
              **Six
                  Months Ended June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Average**
              
              **Yield/**
              
              **Average**
              
              **Yield/**
              
              **Average**
              
              **Yield/**
              
              **Average**
              
              **Yield/****Balance**
              
              **Cost**
              
              **Balance**
              
              **Cost**
              
              **Balance**
              
              **Cost**
              
              **Balance**
              
              **Cost***(Dollars
                  in thousands)***Interest-earning
                  assets**Loans
              
              $
              267,893
              
              
              6.26
              %
              
              $
              216,049
              
              
              5.99
              %
              
              $
              264,594
              
              
              6.21
              %
              
              $
              211,077
              
              
              5.93
              %Fed
                  Funds sold
              
              
              1,425
              
              
              5.61
              %
              
              
              3,037
              
              
              3.16
              %
              
              
              1,117
              
              
              5.37
              %
              
              
              2,043
              
              
              3.03
              %Investment
                  securities
              
              
              66,191
              
              
              4.44
              %
              
              
              53,219
              
              
              3.95
              %
              
              
              66,165
              
              
              4.35
              %
              
              
              45,767
              
              
              3.93
              %Federal
                  Home Loan Bank stock
              
              
              3,441
              
              
              5.23
              %
              
              
              2,389
              
              
              4.19
              %
              
              
              3,381
              
              
              5.21
              %
              
              
              2,285
              
              
              4.11
              %Total
                  interest-earning assets
              
              $
              338,950
              
              
              5.89
              %
              
              $
              274,694
              
              
              5.54
              %
              
              $
              335,257
              
              
              5.83
              %
              
              $
              261,172
              
              
              5.54
              %**Interest-bearing
                  liabilities**Certificate
                  accounts
              
              $
              136,274
              
              
              3.67
              %
              
              $
              90,569
              
              
              2.55
              %
              
              $
              131,896
              
              
              3.53
              %
              
              $
              86,443
              
              
              2.39
              %Regular
                  savings accounts & escrow
              
              
              54,226
              
              
              0.79
              %
              
              
              51,285
              
              
              0.64
              %
              
              
              54,042
              
              
              0.82
              %
              
              
              48,630
              
              
              0.52
              %Checking
                  and NOW accounts
              
              
              50,130
              
              
              0.28
              %
              
              
              39,120
              
              
              0.10
              %
              
              
              48,604
              
              
              0.32
              %
              
              
              37,031
              
              
              0.11
              %Money
                  market savings accounts
              
              
              17,527
              
              
              1.00
              %
              
              
              25,906
              
              
              0.97
              %
              
              
              18,136
              
              
              0.94
              %
              
              
              27,769
              
              
              0.99
              %Total
                  interest-bearing deposits
              
              
              258,157
              
              
              2.23
              %
              
              
              206,880
              
              
              1.42
              %
              
              
              252,677
              
              
              2.15
              %
              
              
              199,873
              
              
              1.32
              %FHLB
                  advances
              
              
              56,146
              
              
              4.68
              %
              
              
              38,801
              
              
              3.71
              %
              
              
              57,598
              
              
              4.50
              %
              
              
              31,500
              
              
              3.70
              %Other
                  borrowings
              
              
              226
              
              
              5.31
              %
              
              
              19
              
              
              2.27
              %
              
              
              207
              
              
              4.84
              %
              
              
              54
              
              
              3.69
              %Total
                  interest-bearing liabilities
              
              $
              314,529
              
              
              2.67
              %
              
              $
              245,700
              
              
              1.78
              %
              
              $
              310,483
              
              
              2.58
              %
              
              $
              231,427
              
              
              1.65
              %




Interest
      and dividend income increased $1.2 million, or 31.1%, for the three months
      ended
      June 30, 2006 as a result of a 23.4% increase in the average balance of
      interest-earning assets to $339.0 million from $274.7 million along with an
      increase in the average yield on interest-earning assets from 5.54% to 5.89%.
      Interest and dividend income also increased for the six month period by 35.1%,
      from $7.2 million to $9.8 million, again as a result of an increase in the
      average balance of interest-earning assets from $261.2 million to $335.3
      million, along with an increase in the average yield to 5.83% from
      5.54%.





Interest
      expense increased by $1.0 million for the three months ended June 30, 2006,
      due
      to an increase of $51.3 million in the average balance of interest-bearing
      deposits along with an increase in the average cost of these deposits from
      1.42%
      to 2.23%. The average balance of Federal Home Loan Bank advances also increased
      by $17.3 million with a 97 basis point increase in the average cost from 3.71%
      to 4.68%. Interest expense also increased in the six month period ended June
      30,
      2006 by $2.1 million, or 110.6%, again as a result of an increase in the average
      balance of interest-bearing liabilities of $79.1 million, or 34.2%, in the
      six
      month period. The average cost rose 93 basis points from 1.65% to 2.58% over
      this period.






*Back
          to Index*
 11




***Provision
      for Loan Losses*.**The
      following table summarizes the activity in the allowance for loan losses and
      provision for loan losses for the three and six months ended June 30, 2006
      and
      2005.




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(In
                  thousands)*Allowance
                  at beginning of period
              
              $
              1,940
              
              $
              1,842
              
              $
              1,878
              
              $
              1,829Provision
                  for loan losses
              
              
              68
              
              
              17
              
              
              130
              
              
              32Charge-offs
              
              
              (1
              )
              
              (1
              )
              
              (1
              )
              
              (3
              )Recoveries
              
              
              2
              
              
              19
              
              
              2
              
              
              19Net
                  charge-offs
              
              
              1
              
              
              18
              
              
              1
              
              
              16Allowance
                  at end of period
              
              $
              2,009
              
              $
              1,877
              
              $
              2,009
              
              $
              1,877




The
      Company recorded a provision for loan losses of $68,000 and $130,000 for the
      three and six month periods ended June 30, 2006, compared to provisions of
      $17,000 and $32,000 for the three and six month periods ended June 30, 2005.
      The
      increased provisions in the 2006 periods are due to the increasing size of
      the
      loan portfolio and a change in the mix of the portfolio towards commercial
      loans
      which are generally riskier than one-to-four family loans.







The
      following table provides information with respect to the Company’s nonperforming
      assets at the dates indicated. The Company did not have any troubled debt
      restructurings or any accruing loans past due 90 days or more at the dates
      presented.




**At
                  June 30,**
              
              **At
                  December 31,****2006**
              
              **2005**
              
              **%
                  change***(Dollars
                  in thousands)*Nonaccrual
                  loans
              
              $
              866
              
              $
              294
              
              
              194.56
              %Real
                  estate owned
              
              
              -
              
              
              47
              
              
              -100.00
              %Total
                  nonperforming assets
              
              $
              866
              
              $
              341
              
              
              153.96
              %Total
                  nonperforming loans to total loans
              
              
              0.31
              %
              
              0.11
              %
              
              181.82
              %Total
                  nonperforming loans to total assets
              
              
              0.23
              %
              
              0.08
              %
              
              187.50
              %Total
                  nonperforming assets to total assets
              
              
              0.23
              %
              
              0.10
              %
              
              130.00
              %




*Back
          to Index*
 12







***Noninterest
      Income*.**The
      following table summarizes noninterest income for the three and six months
      ended
      June 30, 2006 and 2005.




**Three
                  Months**
              
              
              
              
              **Six
                  Months****Ended
                  June 30,**
              
              
              
              
              **Ended
                  June 30,****2006**
              
              **2005**
              
              **%
                  Change**
              
              **2006**
              
              **2005**
              
              **%
                  Change***(Dollars
                  in thousands)*Fees
                  for services
              
              $
              349
              
              $
              234
              
              
              49.15
              %
              
              $
              660
              
              $
              442
              
              
              49.32
              %Income
                  from bank owned life insurance
              
              
              76
              
              
              49
              
              
              55.10
              %
              
              
              152
              
              
              97
              
              
              56.70
              %Gain
                  on sale of investments
              
              
              -
              
              
              47
              
              
              -100.00
              %
              
              
              -
              
              
              47
              
              
              -100.00
              %Income
                  from investment advisory services
              
              
              19
              
              
              32
              
              
              -40.63
              %
              
              
              51
              
              
              91
              
              
              -43.96
              %Other
                  income
              
              
              33
              
              
              22
              
              
              50.00
              %
              
              
              62
              
              
              43
              
              
              44.19
              %Total
              
              $
              477
              
              $
              384
              
              
              24.22
              %
              
              $
              925
              
              $
              720
              
              
              28.47
              %




Noninterest
      income increased 24.2% during the three months and by 28.5% in the six months
      ended June 30, 2006. The increases in both the three and six month periods
      were
      caused by an increase in fees for services of $115,000, or 49.2%, in the three
      month period and $218,000, or 49.3%, in the six month period, primarily related
      to fees from checking accounts due to new product offerings. The Company also
      experienced an increase in income earned from investments in Bank Owned Life
      Insurance of 55.1% and 56.7% over the same periods due to the purchase of
      additional policies in the fourth quarter of 2005. These increases were
      partially offset by decreases of 40.6% in the three month period and 44.0%
      in
      the six month period in fees from investment advisory services. The decrease
      in
      this type of fee is attributed to greater rate competition on deposit products
      in the local market.




***Noninterest
      Expense*** **.** The
      following table summarizes noninterest expense for the three and six months
      ended June 30, 2006 and 2005.




**Three
                  Months**
              
              
              
              
              **Six
                  Months****Ended
                  June 30,**
              
              
              
              
              **Ended
                  June 30,****2006**
              
              **2005**
              
              **%
                  Change**
              
              **2006**
              
              **2005**
              
              **%
                  Change***(Dollars
                  in thousands)*Compensation,
                  taxes and benefits
              
              $
              1,689
              
              $
              1,428
              
              
              18.28
              %
              
              $
              3,322
              
              $
              2,815
              
              
              18.01
              %Office
                  occupancy
              
              
              388
              
              
              361
              
              
              7.48
              %
              
              
              787
              
              
              759
              
              
              3.69
              %Advertising
              
              
              174
              
              
              174
              
              
              0.00
              %
              
              
              300
              
              
              305
              
              
              -1.64
              %Computer
                  processing
              
              
              152
              
              
              160
              
              
              -5.00
              %
              
              
              294
              
              
              303
              
              
              -2.97
              %Loss
                  (gain) on foreclosed real estate, net
              
              
              12
              
              
              4
              
              
              200.00
              %
              
              
              9
              
              
              (33
              )
              
              -127.27
              %Other
                  expenses
              
              
              404
              
              
              396
              
              
              2.02
              %
              
              
              760
              
              
              751
              
              
              1.20
              %Total
              
              $
              2,819
              
              $
              2,523
              
              
              11.73
              %
              
              $
              5,472
              
              $
              4,900
              
              
              11.67
              %





Noninterest
      expense increased in the three and six months ended June 30, 2006 primarily
      as a
      result of an increase in compensation costs over the 2005 period. Increases
      in
      compensation costs resulted primarily from increased expenses related to the
      awards made under the equity incentive plan previously approved by shareholders.
      Share-based compensation expenses of $109,000 for the three month period and
      $219,000 for the six months ended June 30, 2006 were recorded, compared to
      none
      for the periods ended June 30, 2005. In addition, the 2006 periods reflect
      normal annual salary increases for existing staff, as well as higher staffing
      levels related to branch expansion. There were small increases in office
      occupancy expenses in both the three and six month periods which were largely
      related to the three new branch offices which are scheduled to open in the
      third
      quarter of 2006. These increases were partially offset by small decreases in
      computer processing costs.





*Back
            to Index*
 13


**Liquidity
        and Capital Resources**
 
 Liquidity
        is the ability to meet current and future short-term financial obligations.
        The
        Company’s primary sources of funds consist of deposit inflows, loan repayments,
        maturities and sales of investment securities and advances





Each
      quarter the Company projects liquidity availability and demands on this
      liquidity for the next 90 days. The Company regularly adjusts its investments
      in
      liquid assets based upon our assessment of (1) expected loan demand,
      (2) expected deposit flows, (3) yields available on interest-earning
      deposits and securities, and (4) the objectives of our asset/liability
      management program. Excess liquid assets are invested generally in
      interest-earning deposits, federal funds, short- and intermediate-term U.S.
      Government agency obligations and to a lesser extent, municipal
      securities.





The
      Company’s most liquid assets are cash and cash equivalents and interest-bearing
      deposits. The levels of these assets depend on our operating, financing, lending
      and investing activities during any given period. At June 30, 2006, cash and
      cash equivalents totaled $8.8 million, including federal funds of $322,000.
      Securities classified as available-for-sale, which provide additional sources
      of
      liquidity, totaled $61.5 million at June 30, 2006. At June 30, 2006, the Company
      had the ability to borrow a total of $119.1 million from the Federal Home Loan
      Bank of Boston, of which $54.7 million in borrowings was outstanding. At June
      30, 2006, the Company had arranged overnight lines of credit of $2.5 million
      with the Federal Home Loan Bank of Boston. The Company had no overnight advances
      outstanding with the Federal Home Loan Bank of Boston. In addition, at June
      30,
      2006, the Company had the ability to borrow $2.5 million from a correspondent
      bank. The Company had no advances outstanding on this line at June 30,
      2006.





At
      June
      30, 2006, the Company had commitments of $21.5 million in unused home equity
      lines of credit, $4.0 million in unadvanced commercial lines, $11.0 million
      in
      mortgage commitments, $5.1 million in commercial loan commitments, $21.9 million
      in unadvanced construction mortgage commitments, $4.9 million in letters of
      credit and $97,000 in overdraft line of credit availability. Certificates of
      deposit due within one year of June 30, 2006 totaled $99.6 million, or 38.0%
      of
      total deposits. If these deposits do not remain with us, the Company will be
      required to seek other sources of funds, including other certificates of deposit
      and our available lines of credit. Depending on market conditions, the Company
      may be required to pay higher rates on such deposits or other borrowings than
      are currently paid on the certificates of deposit due on or before June 30,
      2007. Based on past experience, however, the Company believes that a significant
      portion of our certificates of deposit will remain with us. The Company has
      the
      ability to attract and retain deposits by adjusting the interest rates
      offered.





Historically,
      the Company has remained highly liquid, with our liquidity position increasing
      substantially over the past two fiscal years. The Company is not aware of any
      trends and/or demands, commitments, events or uncertainties that could result
      in
      a material decrease in liquidity. The Company expects that all of our liquidity
      needs, including the contractual commitments stated above, the estimated costs
      of our branch expansion plans and increases in loan demand can be met by our
      currently available liquid assets and cash flows. In the event loan demand
      was
      to increase at a pace greater than expected, or any unforeseen demand or
      commitment were to occur, we could access our borrowing capacity with the
      Federal Home Loan Bank of Boston. The Company expects that our currently
      available liquid assets and our ability to borrow from the Federal Home Loan
      Bank of Boston would be sufficient to satisfy our liquidity needs without any
      material adverse effect on our liquidity.





The
      Company’s primary investing activities are the origination of loans and the
      purchase of securities. For the six months ended June 30, 2006, the Company
      originated $33.8 million of loans, including renewals and refinances, and
      purchased $13.1 million of securities. These activities were funded primarily
      by
      the proceeds from sales and maturities of available-for-sale and
      held-to-maturity securities of $10.8 million and an increase of deposits of
      $21.2 million.





Financing
      activities consist primarily of activity in deposit accounts and in Federal
      Home
      Loan Bank advances. The Company experienced a net increase in total deposits
      of
      $21.2 million for the six months ended June 30, 2006. Deposit flows are affected
      by the overall level of interest rates, the interest rates and products offered
      by us and our local competitors and other factors. The Company generally manages
      the pricing of our deposits to be competitive


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 14


and
      to
      increase core deposit relationships. Occasionally, the Company offers
      promotional rates on certain deposit products in order to attract deposits.
      The
      Company experienced a net decrease in Federal Home Loan Bank advances of $2.4
      million for the six months ended June 30, 2006. The increases in deposit
      accounts primarily funded our investing and lending activities and, to a lesser
      extent, repayment of Federal Home Loan Bank advances and increases in fixed
      assets.





The
      Company is not subject to separate regulatory capital requirements. At June
      30,
      2006, the Bank was subject to the regulatory capital requirements of the Office
      of Thrift Supervision (OTS), including a risk-based capital measure. The
      risk-based capital guidelines include both a definition of capital and a
      framework for calculating risk-weighted assets by assigning balance sheet assets
      and off-balance sheet items to broad risk categories. At June 30, 2006, the
      Bank
      exceeded all of its regulatory capital requirements. The Bank is considered
      “well capitalized” under regulatory guidelines.





The
      following table is a summary of the Bank’s actual capital as computed under the
      standards established by the OTS at June 30, 2006.




*(Dollars
                  in Thousands)*
              Amount
              
              RatioTier
                  I Capital (to Adjusted Total Assets)
              
              $
              38,307
              
              
              10.43
              %Total
                  Risk-Based Capital (to Risk-Weighted Assets)
              
              
              40,316
              
              
              16.02
              %Tier
                  I Risk-Based Capital (to Risk-Weighted Assets)
              
              
              38,307
              
              
              15.22
              %Tangible
                  Equity Capital (to Tangible Assets)
              
              
              38,307
              
              
              10.43
              %








**Off-Balance
      Sheet Arrangements**





In
      the
      normal course of operations, the Company engages in a variety of financial
      transactions that, in accordance with generally accepted accounting principles,
      are not recorded in our financial statements. These transactions involve, to
      varying degrees, elements of credit, interest rate, and liquidity risk. Such
      transactions are used primarily to manage customers’ requests for funding and
      take the form of loan commitments, unused lines of credit, amounts due on
      construction loans, amounts due on commercial loans, commercial letters of
      credit and commitments to sell loans.





For
      the six months ended June 30, 2006, the Company did not engage in
      any off-balance-sheet transactions reasonably likely to have a material effect
      on its financial condition, results of operations or cash
      flows.







**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**





**Qualitative
      Aspects of Market Risk.** **** The
      Company’s most significant form of market risk is interest rate risk. The
      Company manages the interest rate sensitivity of its interest-bearing
      liabilities and interest-earning assets in an effort to minimize the adverse
      effects of changes in the interest rate environment. Deposit accounts typically
      react more quickly to changes in market interest rates than mortgage loans
      because of the shorter maturities of deposits. As a result, sharp increases
      in
      interest rates may adversely affect the Company’s earnings while decreases in
      interest rates may beneficially affect the Company’s earnings. To reduce the
      potential volatility of the Company’s earnings, the Company has sought to
      improve the match between assets and liability maturities (or rate adjustment
      periods), while maintaining an acceptable interest rate spread, by originating
      adjustable-rate mortgage loans for retention in the loan portfolio,
      variable-rate home equity lines and variable-rate commercial loans and by
      purchasing variable-rate investments and investments with expected maturities
      of
      less than 10 years. The Company currently does not participate in hedging
      programs, interest rate swaps or other activities involving the use of
      off-balance sheet derivative financial instruments.





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 15


The
        Bank’s Asset/Liability Committee communicates, coordinates and controls all
        aspects of asset/liability management. The committee establishes and monitors
        the volume and mix of assets and funding sources with the objective of managing
        assets and funding sources.
 
 **Quantitative
        Aspects of Market Risk.** The Bank
        uses an interest rate sensitivity analysis prepared by the Office of Thrift
        Supervision to review its level of interest rate risk. This analysis measures
        interest rate risk by computing


Net
                  Portfolio Value as % ofBasis
                  Point ("bp")
              
              Net
                  Portfolio Value
              
              Present
                  Value of AssetsChange
                  in Rates
              
              $
                  Amount
              
              $
                  Change
              
              %
                  Change
              
              NPV
                  Ratio
              
              Change*(Dollars
                  in thousands)*300
                  bp
              
              
              33,275
              
              
              (18,969
              )
              
              -36
              %
              
              9.66
              %
              
              -4.49
              %200
              
              
              39,498
              
              
              (12,746
              )
              
              -24
              %
              
              11.21
              %
              
              -2.94
              %100
              
              
              45,941
              
              
              (6,303
              )
              
              -12
              %
              
              12.73
              %
              
              -1.42
              %0
              
              
              52,244
              
              
              -
              
              
              -
              
              
              14.15
              %
              
              -(100)
              
              
              57,166
              
              
              4,922
              
              
              9
              %
              
              15.20
              %
              
              1.05
              %(200)
              
              
              57,999
              
              
              5,755
              
              
              11
              %
              
              15.29
              %
              
              1.14
              %




The
      Office of Thrift Supervision uses certain assumptions in assessing the interest
      rate risk of savings associations. These assumptions relate to interest rates,
      loan prepayment rates, deposit decay rates, and the market values of certain
      assets under differing interest rate scenarios, among others. As with any method
      of measuring interest rate risk, certain shortcomings are inherent in the method
      of analysis presented in the foregoing table. For example, although certain
      assets and liabilities may have similar maturities or periods to repricing,
      they
      may react in different degrees to changes in market interest rates. Also, the
      interest rates on certain types of assets and liabilities may fluctuate in
      advance of changes in market interest rates, while interest rates on other
      types
      may lag behind changes in market rates. Additionally, certain assets, such
      as
      adjustable-rate mortgage loans, have features that restrict changes in interest
      rates on a short-term basis and over the life of the asset. Further, in the
      event of a change in interest rates, expected rates of prepayments on loans
      and
      early withdrawals from certificates could deviate significantly from those
      assumed in calculating the table.








**Item
      4. Controls and Procedures.**





The
      Company’s management, including the Company’s principal executive
      officer and principal financial officer, have evaluated the effectiveness of
      the
      Company’s “disclosure controls and procedures,” as such term is defined in Rule
      13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
      (the “Exchange Act”). Based upon that evaluation, the principal executive
      officer and principal financial officer concluded that, as of the end of the
      period covered by this report, the Company’s disclosure controls and procedures
      were effective for the purpose of ensuring that the information required to
      be
      disclosed in the reports that the Company files or submits under the Exchange
      Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
      processed, summarized and reported within the time periods specified in the
      SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
      management, including its principal executive and principal financial officers,
      as appropriate to allow timely decisions regarding required
      disclosure.





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 16


**Part
        II - OTHER INFORMATION**
 
 **Item
        1. - Legal Proceedings** .
 
 The
        Company is not involved in any pending legal proceedings. The Bank is not
        involved in any pending legal proceedings other than routine legal proceedings
        occurring in the ordinary course of business. Such routine legalproceedings, in the aggregate, are believed by management to be
        immaterial to its financial condition and results of operations.





**Item
      1A. - Risk Factors.**





In
      addition to the other information set forth in this report, you
      should carefully consider the factors discussed in Part I, “Item 1.A. Risk
      Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005,
      which could materially affect our business, financial condition or future
      results. The risks described in our Annual Report on Form 10-K are not the
      only
      risks that we face. Additional risks and uncertainties not currently known
      to us
      or that we currently deem to be immaterial also may materially adversely affect
      our business, financial condition and/or operating results.





**Item
      2. - Unregistered Sales of Equity Securities and Use of
      Proceeds** .





During
      the three month period ended June 30, 2006, the Company
      repurchased 55,000 shares of common stock for $635,450, at an average cost
      of
      $11.55 per share as detailed in the following table:


Total
                  Number of
              
              Maximum
                  NumberShares
                  Purchased as
              
              of
                  Shares that MayTotal
                  Number
              
              Average
                  Price
              
              Part
                  of Publicly
              
              Yet
                  Be Purchasedof
                  Shares
              
              Paid
              
              Announced
                  Plans
              
              Under
                  the PlansPeriod
              
              Purchased
              
              per
                  Share
              
              or
                  Programs
              
              or
                  ProgramsApril
              
              
              -
              
              
              
              
              
              -
              
              
              380,218May
              
              
              15,000
              
              $
              11.44
              
              
              15,000
              
              
              365,218June
              
              
              40,000
              
              $
              11.60
              
              
              55,000
              
              
              325,218Total
              
              55,000
              
              $
              11.55
              
              
              55,000
              
              
              325,218





On
      May 2,
      2006, the Company announced that the Board of Directors authorized the Company
      to repurchase up to 380,218 shares, or approximately 5%, of the outstanding
      shares held by persons other than Naugatuck Valley Mutual Holding Company.
      The
      repurchases will be conducted through open-market purchases or privately
      negotiated transactions and will be made from time to time depending on market
      conditions and other factors. No time limit was placed on the duration of the
      share repurchase program. Any repurchased shares will be held as treasury stock
      and will be available for general corporate purposes.





**Item
      3. - Defaults Upon Senior Securities.**Not applicable





**Item
      4. - Submission of Matters to a Vote of Security Holders.**





The
      Annual Meeting of the Stockholders of the Company was held on May
      4, 2006. The results of the vote on the items of business considered at the
      Annual Meeting were as follows:





1. The
      following individuals were elected as directors, each for a three year
      term:





VOTES
                FOR
            VOTES
                WITHHELDRichard
                M. Famiglietti
            7,010,484
            32,148Ronald
                D. Lengyel
            7,012,716
            29,916







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 17




2. The
        appointment of Whittlesey & Hadley, P.C. as independent auditors of the
        Company for the year ended December 31, 2006 was ratified by the stockholders
        by
        the following vote:
 
 FOR
              AGAINST
              ABSTAIN6,980,154
              40,585
              21,893


**Item
      5. - Other Information.**Not
      applicable





**Item
      6. - Exhibits.**





**Exhibits**-




3.1  Charter
      of Naugatuck Valley Financial Corporation (1)




3.2  Bylaws
      of
      Naugatuck Valley Financial Corporation (1)




4.1  Specimen
      Stock Certificate of Naugatuck Valley Financial Corporation (2)




31.1 Rule
      13a-14(a)/15d-14(a) Certification.




31.2 Rule
      13a-14(a)/15d-14(a) Certification.




32 Section
      1350 Certifications.


____________________


(1)
      Incorporated by reference to the Company’s Form 10-Q for the three months ended
      September 30, 2004.





(2)
      Incorporated herein by reference to the Exhibits to the Company’s Registration
      Statement on Form S-1, as amended, initially filed on June 18,
      2004.


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 18





**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.





Naugatuck
      Valley Financial Corporation








Date:August
                9, 2006
            by:
            /s/
                John C. RomanJohn
                C. RomanPresident
                and Chief Executive OfficerDate:August
                9, 2006
            by:
            /s/
                Lee R. SchlesingerLee
                R. SchlesingerVice
                President and Treasurer(Principal
                Financial Officer)









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19