**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, 2007





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
                  filer             o
              Accelerated
                  filer         o
              Non-accelerated
                  filer        ý





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


Yeso                     
             Noý





As
      of August 6, 2007, there were
      7,368,734 shares of the registrant’s common stock outstanding.





**NAUGATUCK
      VALLEY FINANCIAL CORPORATION**





**Table
      ofContents**





**Part
                I.**
            **Financial
                Information**
            **Page
                No.**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Statements of Financial Condition at June 30, 2007
                and December 31, 2006
            3Consolidated
                Statements of Income for the three and six months
                ended June 30, 2007 and 2006
            4Consolidated
                Statements of Cash Flows for the six months ended
                June 30, 2007 and 2006
            5Notes
                to Unaudited Consolidated Financial
                Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            10Liquidity
                and Capital Resources
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            16Item
                4.
            Controls
                and Procedures
            17**Part
                II.**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            17Item
                1A.
            Risk
                Factors
            18Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            18Item
                3.
            Defaults
                Upon Senior Securities
            18Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            18Item
                5.
            Other
                Information
            19Item
                6.
            Exhibits
            19**Signatures****Exhibits**


*Table
          of Contents*


**Item
      1.  Financial Statements.**


















2
 *Table
          of Contents*







**Condensed
      Consolidated Statements of Financial
      Condition**


*(In
      thousands, except share data)*








**June
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006***(Unaudited)***ASSETS**Cash
                  and due from depository institutions
              
              $
              8,958
              
              
              $
              7,911Investment
                  in federal funds
              
              
              2,626
              
              
              
              31Investment
                  securities
              
              
              63,781
              
              
              
              70,267Loans
                  receivable, net
              
              
              326,625
              
              
              
              308,376Deferred
                  income taxes
              
              
              1,636
              
              
              
              1,450Other
                  assets
              
              
              25,670
              
              
              
              25,820**Total
                  assets**
              
              $
              429,296
              
              
              $
              413,855**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**LiabilitiesDeposits
              
              $
              307,757
              
              
              $
              292,693Borrowed
                  funds
              
              
              69,742
              
              
              
              68,488Other
                  liabilities
              
              
              1,743
              
              
              
              1,590Total
                  liabilities
              
              
              379,242
              
              
              
              362,771Commitments
                  and contingenciesStockholders'
                  EquityCommon
                  stock, $.01 par value; 25,000,000 shares authorized;7,604,375
                  shares issued, 7,391,351 shares outstanding at June30,
                  2007 and 7,473,225 shares outstanding at December 31, 2006
              
              
              76
              
              
              
              76Preferred
                  stock, $.01 par value; 1,000,000 shares authorized;no
                  shares issued or outstanding
              
              
              -
              
              
              
              -Paid-in
                  capital
              
              
              33,378
              
              
              
              33,302Retained
                  earnings
              
              
              23,702
              
              
              
              23,415Unearned
                  ESOP shares
              
              
              (2,534
              )
              
              
              (2,534
              )Unearned
                  stock awards
              
              
              (1,278
              )
              
              
              (1,256
              )Treasury
                  stock, at cost (218,857 shares at June 30, 2007and
                  138,983 shares at December 31, 2006)
              
              
              (2,602
              )
              
              
              (1,593
              )Accumulated
                  other comprehensive loss
              
              
              (688
              )
              
              
              (326
              )Total
                  stockholders' equity
              
              
              50,054
              
              
              
              51,084**Total
                  liabilities and stockholders' equity**
              
              $
              429,296
              
              
              $
              413,855






3
 *Table
          of Contents*









**Consolidated
      Statements of Income**


*(In
      thousands, except per share data)*




**Three
                  Months Ended**
              
              
              **Six
                  Months Ended****June
                  30,**
              
              
              **June
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006***(Unaudited)***Interest
                  income**Interest
                  on loans
              
              $
              5,200
              
              
              $
              4,191
              
              
              $
              10,322
              
              
              $
              8,221Interest
                  and dividends on investments and deposits
              
              
              830
              
              
              
              799
              
              
              
              1,691
              
              
              
              1,556Total
                  interest income
              
              
              6,030
              
              
              
              4,990
              
              
              
              12,013
              
              
              
              9,777**Interest
                  expense**Interest
                  on deposits
              
              
              2,399
              
              
              
              1,437
              
              
              
              4,653
              
              
              
              2,710Interest
                  on borrowed funds
              
              
              790
              
              
              
              660
              
              
              
              1,632
              
              
              
              1,302Total
                  interest expense
              
              
              3,189
              
              
              
              2,097
              
              
              
              6,285
              
              
              
              4,012**Net
                  interest income**
              
              
              2,841
              
              
              
              2,893
              
              
              
              5,728
              
              
              
              5,765**Provision
                  for loan losses**
              
              
              -
              
              
              
              68
              
              
              
              51
              
              
              
              130**Net
                  interest income after provision for loan losses**
              
              
              2,841
              
              
              
              2,825
              
              
              
              5,677
              
              
              
              5,635**Noninterest
                  income**Fees
                  for services related to deposit accounts
              
              
              232
              
              
              
              207
              
              
              
              441
              
              
              
              415Fees
                  for other services
              
              
              139
              
              
              
              135
              
              
              
              258
              
              
              
              225Income
                  from investment advisory services, net
              
              
              85
              
              
              
              19
              
              
              
              148
              
              
              
              51Income
                  from bank owned life insurance
              
              
              77
              
              
              
              76
              
              
              
              154
              
              
              
              152Gain
                  on sale of investments
              
              
              21
              
              
              
              -
              
              
              
              27
              
              
              
              -Other
                  income
              
              
              52
              
              
              
              33
              
              
              
              102
              
              
              
              62Total
                  noninterest income
              
              
              606
              
              
              
              470
              
              
              
              1,130
              
              
              
              905**Noninterest
                  expense**Compensation,
                  taxes and benefits
              
              
              1,743
              
              
              
              1,590
              
              
              
              3,484
              
              
              
              3,124Office
                  occupancy
              
              
              473
              
              
              
              388
              
              
              
              986
              
              
              
              787Computer
                  processing
              
              
              180
              
              
              
              152
              
              
              
              359
              
              
              
              294Advertising
              
              
              159
              
              
              
              174
              
              
              
              255
              
              
              
              300Directors
                  compensation
              
              
              115
              
              
              
              99
              
              
              
              284
              
              
              
              198(Gain)
                  loss on foreclosed real estate, net
              
              
              (1
              )
              
              
              12
              
              
              
              (1
              )
              
              
              9Other
                  expenses
              
              
              427
              
              
              
              397
              
              
              
              792
              
              
              
              740Total
                  noninterest expense
              
              
              3,096
              
              
              
              2,812
              
              
              
              6,159
              
              
              
              5,452**Income
                  before provision****for
                  income taxes**
              
              
              351
              
              
              
              483
              
              
              
              648
              
              
              
              1,088**Provision
                  for income taxes**
              
              
              39
              
              
              
              70
              
              
              
              61
              
              
              
              204**Net
                  Income**
              
              $
              312
              
              
              $
              413
              
              
              $
              587
              
              
              $
              884**Earnings
                  per common share - Basic and Diluted**
              
              $
              0.04
              
              
              $
              0.06
              
              
              $
              0.08
              
              
              $
              0.12


4
 *Table
          of Contents*







**Consolidated
      Statements of Cash Flows**


*(In
      thousands)*




**Six
                  Months Ended****June
                  30,****2007**
              
              
              **2006****Cash
                  flows from operating activities**
              
              *(Unaudited)*Net
                  income
              
              $
              587
              
              
              $
              884Adjustments
                  to reconcile net income to cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              51
              
              
              
              130Depreciation
                  and amortization expense
              
              
              388
              
              
              
              292Stock-based
                  compensation
              
              
              356
              
              
              
              326Provision
                  for deferred taxes
              
              
              -
              
              
              
              -Net
                  gain on sale of real estate owned
              
              
              -
              
              
              
              (4
              )Gain
                  on sale of investments
              
              
              (27
              )
              
              
              -Increase
                  in accrued income receivable
              
              
              (34
              )
              
              
              (110
              )Increase
                  in deferred loan fees
              
              
              24
              
              
              
              6Increase
                  in bank owned life insurance asset
              
              
              (153
              )
              
              
              (152
              )Decrease
                  in other assets
              
              
              210
              
              
              
              38Decrease
                  in other liabilities
              
              
              (125
              )
              
              
              (1,744
              )**Net
                  cash provided (used) by operating activities**
              
              
              1,277
              
              
              
              (334
              )**Cash
                  flows from investing activities**Proceeds
                  from maturities and repayments of available-for-sale
                  securities
              
              
              3,898
              
              
              
              8,757Proceeds
                  from sale of available-for-sale securities
              
              
              4,113
              
              
              
              -Proceeds
                  from maturities of held-to-maturity securities
              
              
              1,010
              
              
              
              1,995Purchase
                  of available-for-sale securities
              
              
              (2,792
              )
              
              
              (13,078
              )Purchase
                  of held-to-maturity securities
              
              
              (250
              )
              
              
              -Purchase
                  of Federal Home Loan Bank stock
              
              
              (159
              )
              
              
              (282
              )Loan
                  originations net of principal payments
              
              
              (18,324
              )
              
              
              (14,083
              )Proceeds
                  from the sale of foreclosed real estate
              
              
              -
              
              
              
              51Proceeds
                  from sale of property and equipment
              
              
              -
              
              
              
              2Purchase
                  of property and equipment
              
              
              (115
              )
              
              
              (1,236
              )**Net
                  cash used by investing activities**
              
              
              (12,619
              )
              
              
              (17,874
              )**Cash
                  flows from financing activities**Net
                  change in time deposits
              
              
              14,099
              
              
              
              15,752Net
                  change in other deposit accounts
              
              
              677
              
              
              
              5,452Net
                  change in mortgagors' escrow deposits
              
              
              288
              
              
              
              258Advances
                  from Federal Home Loan Bank
              
              
              8,998
              
              
              
              26,250Repayment
                  of advances from Federal Home Loan Bank
              
              
              (7,858
              )
              
              
              (28,657
              )Net
                  change in Repurchase Agreements
              
              
              114
              
              
              
              -Treasury
                  stock acquired
              
              
              (1,038
              )
              
              
              (635
              )Dividends
                  paid to stockholders
              
              
              (299
              )
              
              
              (314
              )Options
                  exercised
              
              
              3
              
              
              
              -**Net
                  cash provided by financing activities**
              
              
              14,984
              
              
              
              18,106Increase
                  (decrease) in cash and cash equivalents
              
              
              3,642
              
              
              
              (102
              )Cash
                  and cash equivalents at beginning of period
              
              
              7,942
              
              
              
              8,951**Cash
                  and cash equivalents at end of period**
              
              $
              11,584
              
              
              $
              8,849Cash
                  paid during the period for:Interest
              
              $
              6,281
              
              
              $
              4,022Income
                  taxes
              
              
              146
              
              
              
              145


5
 *Table
          of Contents*


**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, 2007 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2007.





These
      financial statements should be read in conjunction with the consolidated
      financial statements and notes thereto included in the Company’s 2006 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.  For the
      three and six months ended June 30, 2007, anti-dilutive options excluded from
      the calculations totaled 7,500 options (with an exercise price of
      $12.49).  For the three and six months ended June 30, 2006,
      anti-dilutive options excluded from the calculations totaled 354,880 options
      (with an exercise price of $11.10).   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,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006***(Dollars
                  in thousands,except share data)*Net
                  income
              
              $
              312
              
              
              $
              413
              
              
              $
              587
              
              
              $
              884Weighted-average
                  common shares outstanding:Basic
              
              
              7,146,802
              
              
              
              7,314,985
              
              
              
              7,165,702
              
              
              
              7,322,990Effect
                  of dilutive stock optionsand
                  restrictive stock awards
              
              
              26,875
              
              
              
              -
              
              
              
              22,563
              
              
              
              -Diluted
              
              
              7,173,677
              
              
              
              7,314,985
              
              
              
              7,188,265
              
              
              
              7,322,990Net
                  income per common share:Basic
              
              $
              0.04
              
              
              $
              0.06
              
              
              $
              0.08
              
              
              $
              0.12Diluted
              
              $
              0.04
              
              
              $
              0.06
              
              
              $
              0.08
              
              
              $
              0.12


6
 *Table
          of Contents*


**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 provide 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.





**Three
                  Months Ended**
              
              
              **Six
                  Months Ended****June
                  30,**
              
              
              **June
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006***(In
                  thousands)*Net
                  income
              
              $
              312
              
              
              $
              413
              
              
              $
              587
              
              
              $
              884Net
                  unrealized loss onsecurities
                  available for saleduring
                  the period, net of tax
              
              
              (444
              )
              
              
              (425
              )
              
              
              (362
              )
              
              
              (567
              )**Total
                  Comprehensive Income (Loss)**
              
              $
              (132
              )
              
              $
              (12
              )
              
              $
              225
              
              
              $
              317














**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.








7
 *Table
          of Contents*


**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.





The
      amounts and terms of the awards granted under the Incentive Plan are summarized
      in the following table.





**Grant
                  date****March
                  20,**
              
              
              **March
                  21,**
              
              
              **July
                  26,****2007**
              
              
              **2006**
              
              
              **2005**Option
                  awardsAwarded
              
              
              7,500
              
              
              
              6,500
              
              
              
              354,580Exercise
                  price *
              
              $
              12.49
              
              
              $
              11.10
              
              
              $
              11.10Maximum
                  term
              
              
              10
              
              
              
              10
              
              
              
              10Restricted
                  stock awardsAwarded
              
              
              2,000
              
              
              
              1,500
              
              
              
              139,712





*
      Stock
      option awards were granted with an exercise price equal to the market price
      of
      the Company’s stock at the date of grant with the exception of those granted on
      March 21, 2006, which have 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).  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 as described
      below.  The Company recorded share-based compensation expense of
      $117,750 and $234,238 for the three and six months ended June 30, 2007,
      respectively, compared to $109,479 and $218,855 for the three and six months
      ended June 30, 2006, in connection with the stock option and 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.  In determining the expected term of the option awards,
      the Company elected to follow the simplified method as permitted by the SEC
      Staff Accounting Bulletin 107, which was issued to provide guidance on the
      implementation of SFAS 123(R). Under this method, the Company has estimated
      the
      expected term of the options as being equal to the average of the vesting term
      plus the original contractual term. The Company estimated its volatility using
      the historical volatility of other, similar companies during a period of time
      equal to the expected life of the options. The risk-free rate for the periods
      within the contractual life of the options is based upon the U.S. Treasury
      yield
      curve in effect at the time of grant.  Assumptions used to determine
      the weighted-average fair value of stock options granted were as
      follows:








8
 *Table
          of Contents*


**March
                  20,**
              
              
              **March
                  21,**
              
              
              **July
                  26,****Grant
                  date**
              **2007**
              
              
              **2006**
              
              
              **2005**Dividend
                  yield
              
              
              1.60
              %
              
              
              1.89
              %
              
              
              1.44
              %Expected
                  volatility
              
              
              10.49
              %
              
              
              11.20
              %
              
              
              11.47
              %Risk-free
                  rate
              
              
              4.48
              %
              
              
              4.61
              %
              
              
              4.18
              %Expected
                  life in years
              
              
              6.5
              
              
              
              6.5
              
              
              
              6.5Weighted
                  average fair value of options at grant date
              
              $
              2.55
              
              
              $
              2.25
              
              
              $
              2.47











**NOTE
      6 - DIVIDENDS**





On
      April
      17, 2007, the Company's Board of Directors declared a cash dividend of $0.05
      per
      outstanding common share, which was paid on June 1, 2007, to stockholders of
      record as of the close of business on May 7, 2007.





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











**NOTE
      7 – RECENT ACCOUNTING PRONOUNCEMENTS**





The
      Company adopted FASB Statement No. 156 (SFAS No. 156), “Accounting for
      Servicing of Financial Assets – an amendment of FASB Statement No. 140,”
effective January 1, 2007. SFAS No. 156 requires that all separately
      recognized servicing rights be initially measured at fair value, if practicable.
      For each class of separately recognized servicing assets and liabilities, the
      Company must choose to report servicing assets and liabilities either at 1)
      fair
      value or 2) amortized cost (amortized cost is consistent with how the Company
      has historically recognized servicing rights). Under the fair value approach,
      servicing assets and liabilities will be recorded at fair value at each
      reporting date with changes in fair value recorded in earnings in the period
      in
      which the changes occur. Under the amortized cost method, servicing assets
      and
      liabilities are amortized in proportion to and over the period of estimated
      net
      servicing income or net servicing loss and are assessed for impairment based
      on
      fair value at each reporting date. The adoption of SFAS No. 156 did not
      have a material impact on the Consolidated Financial Statements of the Company.
      At June 30, 2007, the Company had no servicing assets recorded in the
      Consolidated Financial Statements.





The
      Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
      Taxes – an interpretation of FASB Statement No. 109,” effective
      January 1, 2007. FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. This interpretation
      also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure, and transition. The Company does
      not
      anticipate any changes in its current accounting policies associated with the
      adoption of FIN 48. The adoption of FIN 48 did not have a material financial
      impact on the consolidated financial statements of the Company.





The
      Company adopted EITF Issue No. 06-5, “Accounting for Purchases of Life
      Insurance – Determining the Amount That Could Be Realized in Accordance with
      FASB Technical Bulletin No. 85-4,” effective January 1, 2007. EITF
      Issue No. 06-5 includes various considerations regarding what should be
      included in the determination of the amount that could be realized under the
      insurance contracts. The adoption of EITF 06-5 did not have a material impact
      on
      the financial statements of the Company.





In
      July
      of 2006, the Emerging Issues Task Force (“EITF”) of FASB issued a draft abstract
      for EITF Issue No. 06-4, “Accounting for Deferred Compensation and
      Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
      Arrangements.” The EITF reached a consensus that for an endorsement split-dollar
      life insurance arrangement within the scope of this Issue, an employer should
      recognize a liability for future benefits. The Company has purchased bank-owned
      life insurance on certain of its employees. The cash surrender value of these
      policies is carried as an asset on the consolidated statements of financial
      condition in other assets, and the present


9
 *Table
          of Contents*


value
      of
      the projected liability is included in other liabilities. Some of these life
      insurance policies are generally subject to endorsement split-dollar life
      insurance arrangements. These arrangements were designed to provide a pre-and
      postretirement benefit for certain officers of the Company and its subsidiaries.
      The Company is required to apply EITF Issue No. 06-4 beginning
      January 1, 2008, and does not expect the effect the implementation of EITF
      Issue No. 06-4 to have a material effect on its consolidated financial
      statements.





In
      September of 2006, the FASB issued Statement No. 157 (SFAS No. 157),
“Fair Value Measurements.” This statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles,
      and expands disclosures about fair value measurements. The Company is required
      to apply SFAS No. 157 beginning January 1, 2008, and is currently
      evaluating the effect the implementation of SFAS No. 157 will have on its
      consolidated financial statements.





In
      February of 2007, the FASB issued Statement No. 159 (SFAS No. 159),
“The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115.” This statement permits
      the measurement of many financial instruments and certain other assets and
      liabilities at fair value on an instrument-by-instrument, irrevocable basis.
      The
      Company is required to apply SFAS No. 159 beginning January 1, 2008,
      and is currently evaluating the effect the implementation of SFAS No. 159
      will have on its consolidated financial statements.











**Item
      2. Management’sDiscussion 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, 2006 included in the
      Company’s 2006 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 2006
      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, 2007 and December 31,
      2006**





Total
      assets increased by $15.4 million, or 3.7%, to $429.3 million during the period
      from December 31, 2006 to June 30, 2007, primarily due to an increase of $18.2
      million in loans and an increase in investment in federal funds of $2.6 million,
      partially offset by a decrease in investment securities of $6.5.  The
      increase in loans primarily reflects an increase in our commercial real estate
      loans and one-to-four family mortgages, partially offset by a decrease in home
      equity loans.  These increases were primarily funded by increases in
      deposits and to a lesser degree, increases in Federal Home Loan Bank
      advances.





Total
      liabilities were $379.2 million at June 30, 2007 compared to $362.8 million
      at
      December 31, 2006.  Deposits at June 30, 2007 increased $15.1 million,
      or 5.2%, over December 31, 2006 due to more aggressive pricing and the addition
      of three new branch offices during the third quarter of
      2006.  Advances from the Federal Home Loan Bank


10
 *Table
          of Contents*


of
      Boston
      increased $1.2 million, from $68.5 million to $69.7 million.  The
      increases in deposits and borrowings were used primarily to fund the growth
      in
      loans.





Total
      stockholders’ equity decreased $1.0 million, from $51.1 million at December 31,
      2006 to $50.1 million at June 30, 2007.  The decrease in equity was
      due to stock repurchases of $1.0 million, a net increase to the unrealized
      loss
      on available-for-sale securities of $362,000 and dividends of $299,000 paid
      to
      stockholders, partially offset by net income of $587,000 for the six month
      period and $82,000 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, 2007 and
      2006**





***General***.     For
      the three months ended June 30, 2007, the Company had net income of $312,000
      compared to $413,000 for the three months ended June 30, 2006, a decrease of
      $101,000.  Net income decreased $297,000 to $587,000 for the six
      months ended June 30, 2007 from $884,000 for the six months ended June 30,
      2006.  The decreases in both the three and six month periods were
      primarily due to increases in noninterest expenses related to branch expansion
      and compensation, along with small decreases in net interest income, partially
      offset by small increases in noninterest income in both periods.








***Net
      Interest Income*****.******Net
      interest income decreased $52,000, or 1.8%, to $2.84 million for the three
      months ended June 30, 2007 and decreased by $37,000, or 0.6%, to $5.7 million
      for the six months ended June 30, 2007.  Net interest income was
      relatively flat in both the three and six month periods ended June 30, 2007,
      however the Company experienced an increase in the average balances of interest
      earning assets of 16.1% in the three month period and an increase of 16.8%
      in
      the six month period, combined with an increase in the average rate earned
      on
      these assets of 24 basis points in the three month period and 31 basis points
      in
      the six month period, over the rates for the comparative periods in
      2006.  The increase in interest earning assets for the three and six
      month periods is attributed primarily to an increase in the loan
      portfolio.  The average balance in the loan portfolio increased by
      19.6% in the three month period and by 19.9% in the six month period, primarily
      in the commercial and residential mortgage portfolios.  The increase
      in interest income was offset by an increase in interest
      expense.  Interest expense increased by $1.1 million, or 52.1% in the
      three month period and increased by $2.3 million, or 56.7% 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 average balances
      of deposits increased by 18.8% and 19.7% in the three and six month periods
      respectively.  The largest increases in deposits were in certificates
      of deposit, checking accounts and money market accounts, partially offset by
      a
      decrease in savings accounts.  The average balance of borrowings
      increased by 15.1% and 16.3% over the same periods.



















11
 *Table
          of Contents*


The
      following table summarizes changes in interest income and interest expense
      for
      the three and six months ended June 30, 2007 and 2006.





**Three
                  months**
              
              
              
              
              
              **Six
                  Months****Ended
                  June 30,**
              
              
              
              
              
              **Ended
                  June 30,****2007**
              
              
              **2006**
              
              
              **%
                  change**
              
              
              **2007**
              
              
              **2006**
              
              
              **%
                  change***(Dollars
                  in thousands)***Interest
                  income:**Loans
              
              $
              5,200
              
              
              $
              4,191
              
              
              
              24.08
              %
              
              $
              10,322
              
              
              $
              8,221
              
              
              
              25.56
              %Fed
                  Funds sold
              
              
              35
              
              
              
              20
              
              
              
              75.00
              %
              
              
              71
              
              
              
              30
              
              
              
              136.67
              %Investment
                  securities
              
              
              728
              
              
              
              734
              
              
              
              -0.82
              %
              
              
              1,487
              
              
              
              1,438
              
              
              
              3.41
              %Federal
                  Home Loan Bank stock
              
              
              67
              
              
              
              45
              
              
              
              48.89
              %
              
              
              133
              
              
              
              88
              
              
              
              51.14
              %Total
                  interest income
              
              
              6,030
              
              
              
              4,990
              
              
              
              20.84
              %
              
              
              12,013
              
              
              
              9,777
              
              
              
              22.87
              %**Interest
                  expense:**Certificate
                  accounts
              
              
              2,048
              
              
              
              1,251
              
              
              
              63.71
              %
              
              
              3,935
              
              
              
              2,326
              
              
              
              69.17
              %Regular
                  savings accounts
              
              
              67
              
              
              
              107
              
              
              
              -37.38
              %
              
              
              140
              
              
              
              222
              
              
              
              -36.94
              %Checking
                  and NOW accounts
              
              
              153
              
              
              
              35
              
              
              
              337.14
              %
              
              
              342
              
              
              
              77
              
              
              
              344.16
              %Money
                  market savings accounts
              
              
              131
              
              
              
              44
              
              
              
              197.73
              %
              
              
              236
              
              
              
              85
              
              
              
              177.65
              %Total
                  interest-bearing deposits
              
              
              2,399
              
              
              
              1,437
              
              
              
              66.95
              %
              
              
              4,653
              
              
              
              2,710
              
              
              
              71.70
              %FHLB
                  advances
              
              
              787
              
              
              
              657
              
              
              
              19.79
              %
              
              
              1,627
              
              
              
              1,297
              
              
              
              25.44
              %Other
                  borrowings
              
              
              3
              
              
              
              3
              
              
              
              0.00
              %
              
              
              5
              
              
              
              5
              
              
              
              0.00
              %Total
                  interest expense
              
              
              3,189
              
              
              
              2,097
              
              
              
              52.07
              %
              
              
              6,285
              
              
              
              4,012
              
              
              
              56.66
              %Net
                  interest income
              
              $
              2,841
              
              
              $
              2,893
              
              
              
              -1.80
              %
              
              $
              5,728
              
              
              $
              5,765
              
              
              
              -0.64
              %





The
      following table summarizes average balances and average yields and costs for
      the
      three and six months ended June 30, 2007 and 2006.




**Three
                  months ended June 30,**
              
              
              **Six
                  Months Ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****Average**
              
              
              **Yield/**
              
              
              **Average**
              
              
              **Yield/**
              
              
              **Average**
              
              
              **Yield/**
              
              
              **Average**
              
              
              **Yield/****Balance**
              
              
              **Cost**
              
              
              **Balance**
              
              
              **Cost**
              
              
              **Balance**
              
              
              **Cost**
              
              
              **Balance**
              
              
              **Cost***(Dollars
                  in thousands)*
              
              
              
              
              
              
              
              
              *(Dollars
                  in thousands)***Interest-earning
                  assets**Loans
              
              $
              320,470
              
              
              
              6.49
              %
              
              $
              267,893
              
              
              
              6.26
              %
              
              $
              317,124
              
              
              
              6.51
              %
              
              $
              264,594
              
              
              
              6.21
              %Fed
                  Funds sold
              
              
              2,461
              
              
              
              5.69
              %
              
              
              1,425
              
              
              
              5.61
              %
              
              
              2,481
              
              
              
              5.72
              %
              
              
              1,117
              
              
              
              5.37
              %Investment
                  securities
              
              
              66,557
              
              
              
              4.38
              %
              
              
              66,191
              
              
              
              4.44
              %
              
              
              67,781
              
              
              
              4.39
              %
              
              
              66,165
              
              
              
              4.35
              %Federal
                  Home Loan Bank stock
              
              
              4,057
              
              
              
              6.61
              %
              
              
              3,441
              
              
              
              5.23
              %
              
              
              4,032
              
              
              
              6.60
              %
              
              
              3,381
              
              
              
              5.21
              %Total
                  interest-earning assets
              
              $
              393,545
              
              
              
              6.13
              %
              
              $
              338,950
              
              
              
              5.89
              %
              
              $
              391,418
              
              
              
              6.14
              %
              
              $
              335,257
              
              
              
              5.83
              %**Interest-bearing
                  liabilities**Certificate
                  accounts
              
              $
              176,299
              
              
              
              4.65
              %
              
              $
              136,274
              
              
              
              3.67
              %
              
              $
              172,140
              
              
              
              4.57
              %
              
              $
              131,896
              
              
              
              3.53
              %Regular
                  savings accounts & escrow
              
              47,675
              
              
              
              0.56
              %
              
              
              54,226
              
              
              
              0.79
              %
              
              
              47,501
              
              
              
              0.59
              %
              
              
              54,042
              
              
              
              0.82
              %Checking
                  and NOW accounts
              
              
              59,268
              
              
              
              1.03
              %
              
              
              50,130
              
              
              
              0.28
              %
              
              
              60,457
              
              
              
              1.13
              %
              
              
              48,604
              
              
              
              0.32
              %Money
                  market savings accounts
              
              
              23,375
              
              
              
              2.24
              %
              
              
              17,527
              
              
              
              1.00
              %
              
              
              22,351
              
              
              
              2.11
              %
              
              
              18,136
              
              
              
              0.94
              %Total
                  interest-bearing deposits
              
              
              306,617
              
              
              
              3.13
              %
              
              
              258,157
              
              
              
              2.23
              %
              
              
              302,449
              
              
              
              3.08
              %
              
              
              252,678
              
              
              
              2.15
              %FHLB
                  advances
              
              
              64,552
              
              
              
              4.88
              %
              
              
              56,146
              
              
              
              4.68
              %
              
              
              66,996
              
              
              
              4.86
              %
              
              
              57,598
              
              
              
              4.50
              %Other
                  borrowings
              
              
              339
              
              
              
              3.54
              %
              
              
              226
              
              
              
              5.31
              %
              
              
              257
              
              
              
              3.89
              %
              
              
              207
              
              
              
              4.83
              %Total
                  interest-bearing liabilities
              
              $
              371,508
              
              
              
              3.43
              %
              
              $
              314,529
              
              
              
              2.67
              %
              
              $
              369,702
              
              
              
              3.40
              %
              
              $
              310,483
              
              
              
              2.58
              %


12
 *Table
          of Contents*


Interest
      income increased $1.0 million, or 20.8%, for the three months ended June 30,
      2007 as a result of a 16.1% increase in the average balance of interest-earning
      assets to $393.5 million from $339.0 million along with an increase in the
      average yield on interest-earning assets from 5.89% to
      6.13%.  Interest income also increased for the six month period by
      22.9%, from $9.8 million to $12.0 million, again as a result of an increase
      in
      the average balance of interest-earning assets from $335.3 million to $391.4
      million, along with an increase in the average yield to 6.14% from
      5.83%.





Interest
      expense increased by $1.1 million for the three months ended June 30, 2007,
      due
      to an increase of $48.5 million in the average balance of interest-bearing
      deposits along with an increase in the average cost of these deposits from
      2.23%
      to 3.13%.  The average balance of Federal Home Loan Bank advances also
      increased by $8.4 million with a 20 basis point increase in the average cost
      from 4.68% to 4.88%.  Interest expense also increased in the six month
      period ended June 30, 2007 by $2.3 million, or 56.7%, again as a result of
      an
      increase in the average balance of interest-bearing liabilities of $59.2
      million, or 19.1%, in the six month period.  The average cost rose 82
      basis points from 2.58% to 3.40% over this period.








***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, 2007
      and
      2006.





**Three
                  Months Ended**
              
              
              **Six
                  Months Ended****June
                  30,**
              
              
              **June
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006***(In
                  thousands)*Allowance
                  at beginning of period
              
              $
              2,072
              
              
              $
              1,940
              
              
              $
              2,071
              
              
              $
              1,878Provision
                  for loan losses
              
              
              -
              
              
              
              68
              
              
              
              51
              
              
              
              130Charge-offs
              
              
              -
              
              
              
              (1
              )
              
              
              (51
              )
              
              
              (1
              )Recoveries
              
              
              1
              
              
              
              2
              
              
              
              2
              
              
              
              2Net
                  recoveries (charge-offs)
              
              
              1
              
              
              
              1
              
              
              
              (49
              )
              
              
              1Allowance
                  at end of period
              
              $
              2,073
              
              
              $
              2,009
              
              
              $
              2,073
              
              
              $
              2,009








The
      Company did not record a provision for loan losses in the three month period
      ended June 30, 2007, compared to a provision of $68,000 for the three month
      period ended June 30, 2006.  Provisions of $51,000 and $130,000 were
      recorded for the six months ended June 30, 2007 and 2006,
      respectively.  The provisions in the 2007 periods were less than the
      2006 periods due to management’s analysis of the allowance based on loss
      experience.  The charge-off in the six month period ended June 30,
      2007 was due to one home equity loan and two personal 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,****2007**
              
              
              **2006**
              
              
              **%
                  change***(Dollars
                  in thousands)*Nonaccrual
                  loans
              
              $
              889
              
              
              $
              2,010
              
              
              
              -55.77
              %Total
                  nonperforming assets
              
              $
              889
              
              
              $
              2,010
              
              
              
              -55.77
              %Total
                  nonperforming loans to total loans
              
              
              0.27
              %
              
              
              0.65
              %
              
              
              -58.46
              %Total
                  nonperforming loans to total assets
              
              
              0.21
              %
              
              
              0.49
              %
              
              
              -57.14
              %Total
                  nonperforming assets to total assets
              
              
              0.21
              %
              
              
              0.49
              %
              
              
              -57.14
              %





13
 *Table
          of Contents*


***Noninterest
      Income*****.**The following table summarizes
      noninterest income for the three and six months ended June 30, 2007 and
      2006.





**Three
                  Months**
              
              
              
              
              
              **Six
                  Months****Ended
                  June 30,**
              
              
              
              
              
              **Ended
                  June 30,****2007**
              
              
              **2006**
              
              
              **%
                  Change**
              
              
              **2007**
              
              
              **2006**
              
              
              **%
                  Change***(Dollars
                  in thousands)*Fees
                  for services related to deposit accounts
              
              $
              232
              
              
              $
              207
              
              
              
              12.08
              %
              
              $
              441
              
              
              $
              415
              
              
              
              6.27
              %Fees
                  for other services
              
              
              139
              
              
              
              135
              
              
              
              2.96
              %
              
              
              258
              
              
              
              225
              
              
              
              14.67
              %Income
                  from investment advisory services, net
              
              
              85
              
              
              
              19
              
              
              
              347.37
              %
              
              
              148
              
              
              
              51
              
              
              
              190.20
              %Income
                  from bank owned life insurance
              
              
              77
              
              
              
              76
              
              
              
              1.32
              %
              
              
              154
              
              
              
              152
              
              
              
              1.32
              %Gain
                  on sale of investments
              
              
              21
              
              
              
              -
              
              
              
              0.00
              %
              
              
              27
              
              
              
              -
              
              
              
              0.00
              %Other
                  income
              
              
              52
              
              
              
              33
              
              
              
              57.58
              %
              
              
              102
              
              
              
              62
              
              
              
              64.52
              %Total
              
              $
              606
              
              
              $
              470
              
              
              
              
              
              
              $
              1,130
              
              
              $
              905
              
              
              
              24.86
              %








The
      increases in both the three and six month periods were primarily caused by
      an
      increase in income earned from investment advisory services due to a higher
      level of referrals from bank employees and general economic
      conditions.  The Company also experienced an increase in fees for
      services over the same periods, primarily related to fees from checking accounts
      due to new product offerings.








***Noninterest
      Expense*****.**  The following table
      summarizes noninterest expense for the three and six months ended June 30,
      2007
      and 2006.





**Three
                  Months**
              
              
              
              
              
              **Six
                  Months****Ended
                  June 30,**
              
              
              
              
              
              **Ended
                  June 30,****2007**
              
              
              **2006**
              
              
              **%
                  Change**
              
              
              **2007**
              
              
              **2006**
              
              
              **%
                  Change***(Dollars
                  in thousands)*Compensation,
                  taxes and benefits
              
              $
              1,743
              
              
              $
              1,590
              
              
              
              9.62
              %
              
              $
              3,484
              
              
              $
              3,124
              
              
              
              11.52
              %Office
                  occupancy
              
              
              473
              
              
              
              388
              
              
              
              21.91
              %
              
              
              986
              
              
              
              787
              
              
              
              25.29
              %Computer
                  processing
              
              
              180
              
              
              
              152
              
              
              
              18.42
              %
              
              
              359
              
              
              
              294
              
              
              
              22.11
              %Advertising
              
              
              159
              
              
              
              174
              
              
              
              -8.62
              %
              
              
              255
              
              
              
              300
              
              
              
              -15.00
              %Directors
                  compensation
              
              
              115
              
              
              
              99
              
              
              
              16.16
              %
              
              
              284
              
              
              
              198
              
              
              
              43.43
              %(Gain)
                  loss on foreclosed real estate, net
              
              
              (1
              )
              
              
              12
              
              
              
              -108.33
              %
              
              
              (1
              )
              
              
              9
              
              
              
              -111.11
              %Other
                  expenses
              
              
              427
              
              
              
              397
              
              
              
              7.56
              %
              
              
              792
              
              
              
              740
              
              
              
              7.03
              %Total
              
              $
              3,096
              
              
              $
              2,812
              
              
              
              10.10
              %
              
              $
              6,159
              
              
              $
              5,452
              
              
              
              12.97
              %








Noninterest
      expense increased in the three and six months ended June 30, 2007 primarily
      as a
      result of an increase in compensation costs, office occupancy costs and computer
      processing costs over the 2006 periods.  These increases were largely
      related to the three new branch offices opened in the third quarter of
      2006.  The increases were partially offset by small decreases in
      advertising expenses.











**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 from the Federal Home Loan Bank of Boston.  While
      maturities and scheduled amortization of loans and securities are predictable
      sources of funds, deposit flows and mortgage prepayments are greatly influenced
      by general interest rates, economic conditions and competition.


14
 *Table
          of Contents*


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 and auction pass-through certificates.





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, 2007, cash and cash equivalents totaled $11.6
      million, including federal funds of $2.6 million.  Securities
      classified as available-for-sale, which provide additional sources of liquidity,
      totaled $61.2 million at June 30, 2007.  At June 30, 2007, the Company
      had the ability to borrow a total of $132.7 million from the Federal Home Loan
      Bank of Boston, of which $69.7 million in borrowings was
      outstanding.  At June 30, 2007, 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, 2007, the
      Company had the ability to borrow $3.5 million from a correspondent
      bank.  The Company had no advances outstanding on this line at June
      30, 2007.





At
      June
      30, 2007, the Company had commitments of $22.2 million in unadvanced
      construction mortgages, $21.3 million in unused home equity lines of credit,
      $16.0 million in mortgage commitments, $6.3 million in commercial loan
      commitments, $5.9 million in unadvanced commercial lines, $4.9 million in
      letters of credit, $3.8 million in commitments to purchase a participation
      interest in loans, $1.3 million in unadvanced commitments on other loans, and
      $88,000 in overdraft line of credit availability.  Certificates of
      deposit due within one year of June 30, 2007 totaled $162.6 million, or 52.8%
      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, 2008.  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.  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, 2007, the
      Company originated $34.5 million of loans, including renewals and refinances,
      and purchased $3.0 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 $9.0 million and an increase of deposits
      of
      $15.1 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 $15.1 million for the six months ended June 30,
      2007.  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
      deposits to be competitive 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 increase in Federal Home Loan Bank advances of $1.1 million
      for the six months ended June 30, 2007.  The increases in deposit
      accounts and Federal Home Loan Bank advances primarily funded our lending
      activities.





The
      Company is not subject to separate regulatory capital
      requirements.  At June 30, 2007, 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


15
 *Table
          of Contents*


weighted
      assets by assigning balance sheet assets and off-balance sheet items to broad
      risk categories.  At June 30, 2007, 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, 2007.





*(Dollars
                  in Thousands)*
              
              Amount
              
              
              RatioTier
                  I  Capital (to Adjusted Total Assets)
              
              $
              39,588
              
              
              
              9.35
              %Total
                  Risk-Based Capital (to Risk-Weighted Assets)
              
              
              41,661
              
              
              
              13.87
              %Tier
                  I Risk-Based Capital (to Risk-Weighted Assets)
              
              
              39,588
              
              
              
              13.18
              %Tangible
                  Equity Capital (to Tangible Assets)
              
              
              39,588
              
              
              
              9.35
              %





**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, 2007, 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.





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 changes in net portfolio value of the Bank’s cash flows from
      assets, liabilities and off-balance sheet items in the event of a range of
      assumed changes in market interest rates.  Net portfolio value
      represents the market value of portfolio equity and is equal to the market
      value
      of assets minus the market value of liabilities, with adjustments made for
      off-balance sheet items.  This analysis assesses the risk of loss in
      market risk sensitive instruments in the event of a sudden and sustained 100
      to
      300 basis point increase or 100 to 200 basis point decrease in market interest
      rates with no effect given to any steps that we might take to counter the effect
      of that interest rate movement.  The


16
 *Table
          of Contents*


Bank
      measures interest rate risk by modeling the changes in net portfolio value
      over
      a variety of interest rate scenarios.  The following table, which is
      based on information that the Bank provides to the Office of Thrift Supervision,
      presents the change in the Bank’s net portfolio value at March 31, 2007 (the
      most current information available) that would occur in the event of an
      immediate change in interest rates based on Office of Thrift Supervision
      assumptions, with no effect given to any steps that the Bank might take to
      counteract that change.  The Bank expects that its net portfolio value
      at June 30, 2007 is consistent with the table below.





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
              
              
              
              29,160
              
              
              
              (23,360
              )
              
              
              -44
              %
              
              
              7.24
              %
              
              
              -4.95
              %200
              
              
              
              37,282
              
              
              
              (15,238
              )
              
              
              -29
              %
              
              
              9.04
              %
              
              
              -3.15
              %100
              
              
              
              45,189
              
              
              
              (7,331
              )
              
              
              -14
              %
              
              
              10.72
              %
              
              
              -1.47
              %0
              
              
              
              52,520
              
              
              
              -
              
              
              
              -
              
              
              
              12.19
              %
              
              
              -(100)
              
              
              
              57,251
              
              
              
              4,731
              
              
              
              9
              %
              
              
              13.09
              %
              
              
              0.90
              %(200)
              
              
              
              58,775
              
              
              
              6,255
              
              
              
              12
              %
              
              
              13.34
              %
              
              
              1.15
              %








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.











**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 legal
      proceedings, in the aggregate, are believed by management to be immaterial
      to
      its financial condition and results of operations.


17
 *Table
          of Contents*





**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, 2006, 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, 2007, the Company repurchased 17,000
      shares of common stock for $205,310, at an average cost of $12.08 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
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              183,954May
              
              
              17,000
              
              
              $
              12.08
              
              
              
              17,000
              
              
              
              166,954June
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              166,954Total
              
              
              17,000
              
              
              $
              12.08
              
              
              
              17,000
              
              
              
              166,954








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. – DefaultsUpon 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 3,
      2007.  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
                WITHHELDJames
                A. Mengacci
            6,965,698
            43,516Michael
                S. Plude
            6,982,537
            26,677Jane
                H. Walsh
            6,985,686
            23,528





2.
            The
                appointment of Whittlesey & Hadley, P.C. as independent auditors of
                the Company for the year ended December 31, 2007 was ratified by
                the
                stockholders by the following vote:





FOR
            AGAINST
            ABSTAIN6,931,132
            57,544
            20,538





18
 *Table
          of Contents*


**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.


19
 *Table
          of Contents*





**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
                8, 2007
            
            by:
            /s/
                John C. RomanJohn
                C. RomanPresident
                and Chief Executive OfficerDate:
            August
                8, 2007
            
            by:
            /s/
                Lee R. SchlesingerLee
                R. SchlesingerVice
                President and Treasurer(Principal
                Financial Officer)








20