**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 March 31, 2007





OR





 ̈
            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     ̈





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           ̈
            Accelerated
                filer         ̈
            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).


Yes          ̈                           No        ý





As
      of May 3, 2007, there were 7,406,111
      shares of the registrant’s common stock outstanding.


*Table
          of Contents*


**NAUGATUCK
      VALLEY FINANCIAL CORPORATION**





**Table
      of Contents**




**Part
                    I.**
                **Financial
                  Information**Item
                    1.
                Financial
                    Statements (Unaudited)Consolidated
                    Statements of Financial Condition at March 31,
                    2007 and  December 31, 2006
                3Consolidated
                    Statements of Income for the three months ended
                    March 31, 2007 and 2006
                4Consolidated
                    Statements of Cash Flows for the three months
                    ended March 31, 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
                17Item
                    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
                18Item
                    6.
                Exhibits
                18**Signatures****Exhibits**


*Table
          of Contents*


**Item
      1.  Financial
      Statements.**





*Table
          of Contents*
 2


Naugatuck Valley Financial Corporation


**Condensed
      Consolidated Statements of Financial
      Condition**


*(In
      thousands, except share data)*


**March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006***(Unaudited)***ASSETS**Cash
                and due from depository institutions
            
            $
            9,237
            
            
            $
            7,911Investment
                in federal funds
            
            
            4,766
            
            
            
            31Investment
                securities
            
            
            68,030
            
            
            
            70,267Loans
                receivable, net
            
            
            315,115
            
            
            
            308,376Deferred
                income taxes
            
            
            1,407
            
            
            
            1,450Other
                assets
            
            
            25,550
            
            
            
            25,820**Total
                assets**
            
            $
            424,105
            
            
            $
            413,855**LIABILITIES
                AND STOCKHOLDERS' EQUITY**LiabilitiesDeposits
            
            $
            305,037
            
            
            $
            289,198Borrowed
                funds
            
            
            65,140
            
            
            
            68,488Other
                liabilities
            
            
            3,429
            
            
            
            5,085Total
                liabilities
            
            
            373,606
            
            
            
            362,771Commitments
                and contingenciesStockholders'
                EquityCommon
                stock, $.01 par value; 25,000,000 shares authorized;7,604,375
                shares issued, 7,408,111 shares outstanding at March31,
                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
            
            
            33,340
            
            
            
            33,302Retained
                earnings
            
            
            23,538
            
            
            
            23,415Unearned
                ESOP shares
            
            
            (2,534
            )
            
            
            (2,534
            )Unearned
                stock awards
            
            
            (1,278
            )
            
            
            (1,256
            )Treasury
                stock, at cost (202,097 shares at March 31, 2007and
                138,983 shares at December 31, 2006)
            
            
            (2,399
            )
            
            
            (1,593
            )Accumulated
                other comprehensive loss
            
            
            (244
            )
            
            
            (326
            )Total
                stockholders' equity
            
            
            50,499
            
            
            
            51,084**Total
                liabilities and stockholders' equity**
            
            $
            424,105
            
            
            $
            413,855






*Table
          of Contents*
 3








**Consolidated
      StatementsofIncome**


*(In
      thousands, except per share data)*


**Three
                  Months Ended****March
                  31,****2007**
              
              
              **2006***(Unaudited)***Interest
                  and dividend income**Interest
                  on loans
              
              $
              5,123
              
              
              $
              4,030Interest
                  and dividends on investments and deposits
              
              
              861
              
              
              
              757Total
                  interest income
              
              
              5,984
              
              
              
              4,787**Interest
                  expense**Interest
                  on deposits
              
              
              2,254
              
              
              
              1,273Interest
                  on borrowed funds
              
              
              843
              
              
              
              643Total
                  interest expense
              
              
              3,097
              
              
              
              1,916**Net
                  interest income**
              
              
              2,887
              
              
              
              2,871**Provision
                  for loan losses**
              
              
              51
              
              
              
              62**Net
                  interest income after provision for loan losses**
              
              
              2,836
              
              
              
              2,809**Noninterest
                  income**Fees
                  for services related to deposit accounts
              
              
              209
              
              
              
              208Fees
                  for other services
              
              
              119
              
              
              
              89Income
                  from bank owned life insurance
              
              
              76
              
              
              
              76Income
                  from investment advisory services, net
              
              
              63
              
              
              
              32Gain
                  on sale of investments
              
              
              6
              
              
              
              -Other
                  income
              
              
              51
              
              
              
              29Total
                  noninterest income
              
              
              524
              
              
              
              434**Noninterest
                  expense**Compensation,
                  taxes and benefits
              
              
              1,741
              
              
              
              1,533Office
                  occupancy
              
              
              513
              
              
              
              400Computer
                  processing
              
              
              179
              
              
              
              142Directors
                  compensation
              
              
              170
              
              
              
              99Advertising
              
              
              96
              
              
              
              125Gain
                  on foreclosed real estate, net
              
              
              -
              
              
              
              (2
              )Other
                  expenses
              
              
              365
              
              
              
              342Total
                  noninterest expense
              
              
              3,064
              
              
              
              2,639**Income
                  before provision****for
                  income taxes**
              
              
              296
              
              
              
              604**Provision
                  for income taxes**
              
              
              22
              
              
              
              134**Net
                  Income**
              
              $
              274
              
              
              $
              470**Earnings
                  per common share - Basic and Diluted**
              
              $
              0.04
              
              
              $
              0.06


*Table
          of Contents*
 4


**Consolidated
      Statements of Cash Flows**


*(In
      thousands)*


**Three
                  Months Ended****March
                  31,****2007**
              
              
              **2006****Cash
                  flows from operating activities**
              
              *(Unaudited)*Net
                  income
              
              $
              274
              
              
              $
              470Adjustments
                  to reconcile net income to cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              51
              
              
              
              62Depreciation
                  and amortization expense
              
              
              192
              
              
              
              155Stock-based
                  compensation
              
              
              179
              
              
              
              162Provision
                  for deferred taxes
              
              
              -
              
              
              
              -Net
                  gain on sale of real estate owned
              
              
              -
              
              
              
              (4
              )Gain
                  on sale of investments
              
              
              (6
              )
              
              
              -Decrease
                  (increase) in accrued income receivable
              
              
              91
              
              
              
              (11
              )Decrease
                  in deferred loan fees
              
              
              (2
              )
              
              
              (12
              )Increase
                  in bank owned life insurance asset
              
              
              (76
              )
              
              
              (76
              )Decrease
                  in other assets
              
              
              108
              
              
              
              28Decrease
                  in other liabilities
              
              
              (99
              )
              
              
              (1,867
              )**Net
                  cash provided by operating activities**
              
              
              712
              
              
              
              (1,093
              )**Cash
                  flows from investing activities**Proceeds
                  from maturities and repayments of available-for-sale
                  securities
              
              
              2,037
              
              
              
              4,861Proceeds
                  from sale of available-for-sale securities
              
              
              979
              
              
              
              -Proceeds
                  from maturities of held-to-maturity securities
              
              
              95
              
              
              
              285Purchase
                  of available-for-sale securities
              
              
              (484
              )
              
              
              (9,247
              )Purchase
                  of held-to-maturity securities
              
              
              (250
              )
              
              
              -Purchase
                  of Federal Home Loan Bank stock
              
              
              (159
              )
              
              
              (282
              )Loan
                  originations net of principal payments
              
              
              (6,789
              )
              
              
              (3,860
              )Proceeds
                  from the sale of foreclosed real estate
              
              
              -
              
              
              
              51Proceeds
                  from sale of property and equipment
              
              
              -
              
              
              
              2Purchase
                  of property and equipment
              
              
              (52
              )
              
              
              (467
              )**Net
                  cash used by investing activities**
              
              
              (4,623
              )
              
              
              (8,657
              )**Cash
                  flows from financing activities**Net
                  change in time deposits
              
              
              9,076
              
              
              
              9,804Net
                  change in other deposit accounts
              
              
              6,764
              
              
              
              4,504Advances
                  from Federal Home Loan Bank
              
              
              1,000
              
              
              
              18,650Repayment
                  of advances from Federal Home Loan Bank
              
              
              (4,461
              )
              
              
              (19,203
              )Net
                  change in Repurchase Agreements
              
              
              112
              
              
              
              -Net
                  change in mortgagors' escrow accounts
              
              
              (1,536
              )
              
              
              (1,414
              )Treasury
                  stock acquired
              
              
              (832
              )
              
              
              -Dividends
                  paid to stockholders
              
              
              (151
              )
              
              
              (157
              )**Net
                  cash provided by financing activities**
              
              
              9,972
              
              
              
              12,184Increase
                  in cash and cash equivalents
              
              
              6,061
              
              
              
              2,434Cash
                  and cash equivalents at beginning of period
              
              
              7,942
              
              
              
              8,951**Cash
                  and cash equivalents at end of period**
              
              $
              14,003
              
              
              $
              11,385Cash
                  paid during the period for:Interest
              
              $
              3,097
              
              
              $
              1,923Income
                  taxes
              
              
              -
              
              
              
              -


*Table
          of Contents*
 5





**NOTE
      1 - BASISOF 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 months ended March 31, 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.  The Company
      had no anti-dilutive common shares outstanding for the three months ended March
      31, 2007. For the three months ended March 31, 2006, anti-dilutive options
      excluded from the calculations totaled 358,380 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****March
                  31,****2007**
              
              
              **2006***(Dollars
                  in thousands,except share data)*Net
                  income
              
              $
              274
              
              
              $
              470Weighted-average
                  common shares outstanding:Basic
              
              
              7,184,811
              
              
              
              7,331,084Effect
                  of dilutive stock optionsand
                  restrictive stock awards
              
              
              40,250
              
              
              
              -Diluted
              
              
              7,225,061
              
              
              
              7,331,084Net
                  income per common share:Basic
              
              $
              0.04
              
              
              $
              0.06Diluted
              
              $
              0.04
              
              
              $
              0.06


*Table
          of Contents*
 6








**NOTE
      3 - COMPREHENSIVE INCOME**





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





**Three
                    Months Ended****March
                    31,****2007**
                
                
                **2006**Net
                    income
                
                $
                274
                
                
                $
                470Net
                    unrealized gain (loss) onsecurities
                    available for saleduring
                    the period, net of tax
                
                
                82
                
                
                
                (142
                )**Total
                    Comprehensive Income**
                
                $
                356
                
                
                $
                328





**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.


*Table
          of Contents*
 7











**NOTE
      5 - EQUITY INCENTIVE PLAN**





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





On
      July
      26, 2005, the Company awarded 354,580 options to purchase the Company’s common
      stock and 139,712 shares of restricted stock.  Stock option awards
      were granted with an exercise price equal to the market price of the Company’s
      stock at the date of grant ($11.10 per share) with a maximum term of ten
      years.  On March 21, 2006, the Company awarded an additional 6,500
      options to purchase the Company’s common stock and 1,500 additional shares of
      restricted stock.  These additional stock option awards were granted
      with an exercise price equal to those granted on July 26, 2005 ($11.10 which
      was
      higher than the market price of $10.56 on March 21, 2006) with a maximum term
      of
      ten years.  On March 20, 2007, the Company awarded an additional 7,500
      options to purchase the Company’s common stock and 2,000 additional shares of
      restricted stock.  These additional stock option awards were granted
      with an exercise price equal to the market price of the Company’s stock at the
      date of grant ($12.49 per share) with a maximum term of ten
      years.  Both stock options and restricted stock awards vest at 20% per
      year beginning on the first anniversary of the date of grant.





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





The
      Company adopted Financial Accounting Standards Board’s SFAS No.123(R), “Share
      Based Payment”, beginning with the period ended September 30,
      2005.  In accordance with Statement No.123 (R), the Company is
      recording share-based compensation expense related to outstanding stock option
      and restricted stock awards based upon the fair value at the date of grant
      over
      the vesting period of such awards on a straight-line basis.  The fair
      value of each restricted stock allocation, based on the market price at the
      date
      of grant, is recorded to unearned stock awards.  Compensation expenses
      related to unearned restricted shares are amortized to compensation, taxes
      and
      benefits expense over the vesting period of the restricted stock
      awards.  The Company recorded share-based compensation expense of
      $116,487 for the three months ended March 31, 2007, compared with $109,376
      for
      the three months ended March 31, 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:




**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


*Table
          of Contents*
 8





**NOTE
      6 - DIVIDENDS**





On
      January 16, 2007, the Company's Board of Directors declared a cash dividend
      of
      $0.05 per outstanding common share, which was paid on March 1, 2007, to
      stockholders of record as of the close of business on February 5,
      2007.





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








**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 March 31, 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 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.


*Table
            of Contents*
 9


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.






**Item2. Management’s Discussion and Analysis of Financial Condition and
      Results of Operations.**





This
      discussion should be read in conjunction with the Company’s Consolidated
      Financial Statements for the year ended December 31, 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 March 31, 2007 and December 31,
      2006**





Total
      assets increased by $10.3 million, or 2.5%, to $424.1 million during the period
      from December 31, 2006 to March 31, 2007, primarily due to an increase of $6.7
      million in loans and an increase in the investment in federal funds of $4.7
      million, partially offset by a decrease in investments of $2.2
      million.  The increase in loans primarily reflects an increase in our
      commercial construction and commercial permanent mortgages, partially offset
      by
      a decrease in home equity loans.  These increases were primarily
      funded by increases in deposits.





Total
      liabilities were $373.6 million at March 31, 2007 compared to $362.8 million
      at
      December 31, 2006.  Deposits at March 31, 2007 increased $15.8
      million, or 5.5%, over December 31, 2006 due to increased advertising and more
      aggressive pricing.  Borrowed funds decreased $3.4 million, from $68.5
      million to $65.1 million.  The increases in deposits were used
      primarily to fund loans and, to a lesser extent, repay advances and fund
      disbursements from mortgage tax escrow accounts.


Total
      stockholders’ equity decreased  from $51.1 million at December 31,
      2006 to $50.5 million at March 31, 2007.  The decrease in equity was
      due to net income of $274,000 for the three month period, a net decrease to
      the
      unrealized loss on available-for-sale securities of $82,000 and $41,000 in
      capital adjustments related to the Company’s 2005 Equity Incentive Plan, offset
      by stock repurchases of $832,000 and dividends of $151,000 paid to
      stockholders.








**Comparison
      of Operating Results For the Three Months Ended March 31,
      2007**





***General***.     For
      the three months ended March 31, 2007, the Company had net income of $274,000
      compared to $470,000 for the three months ended March 30, 2006, a decrease
      of
      $196,000.  The decrease was primarily due to tightening margins and
      increases in noninterest expenses, partially offset by an increase in
      noninterest income.


*Table
            of Contents*
 10





***Net
      Interest Income*****.******Net
      interest income increased $16,000, or 0.6%, to $2.9 million for the three months
      ended March 31, 2007.  Although net interest income was relatively
      flat, the Company experienced an increase in the average balances of interest
      earning assets of 17.4%, combined with a 37 basis point increase in the average
      rate earned on these assets in the three month period ended March 31, 2007
      over
      the rates for the comparative period in 2006.  The increase in
      interest earning assets is attributed primarily to an increase in the loan
      portfolio.  The average balance of loan portfolio increased by 20.1%
      in the three month period, primarily in the commercial real estate
      portfolio.  The increase in interest income was partially offset by an
      increase in interest expense.  Interest expense increased by 61.6%
      over this 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 20.7% and the average balance of advances from the Federal
      Home Loan Bank increased by 17.6% for the three month period.  The
      largest increases in deposits were primarily in certificates of deposit and
      checking accounts.





The
      following table summarizes changes in interest income and interest expense
      for
      the three months ended March 31, 2007 and 2006.





**Three
                    months****Ended
                    March 31,****2007**
                
                
                **2006**
                
                
                **%
                    change***(Dollars
                    in thousands)***Interest
                    income:**Loans
                
                $
                5,123
                
                
                $
                4,030
                
                
                
                27.12
                %Fed
                    Funds sold
                
                
                36
                
                
                
                10
                
                
                
                260.00
                %Investment
                    securities
                
                
                759
                
                
                
                704
                
                
                
                7.81
                %Federal
                    Home Loan Bank stock
                
                
                66
                
                
                
                43
                
                
                
                53.49
                %Total
                    interest income
                
                
                5,984
                
                
                
                4,787
                
                
                
                25.01
                %**Interest
                    expense:**Certificate
                    accounts
                
                
                1,887
                
                
                
                1,075
                
                
                
                75.53
                %Regular
                    savings accounts
                
                
                73
                
                
                
                116
                
                
                
                -37.07
                %Checking
                    and NOW accounts
                
                
                189
                
                
                
                41
                
                
                
                360.98
                %Money
                    market savings accounts
                
                
                105
                
                
                
                41
                
                
                
                156.10
                %Total
                    interest-bearing deposits
                
                
                2,254
                
                
                
                1,273
                
                
                
                77.06
                %FHLB
                    advances
                
                
                841
                
                
                
                641
                
                
                
                31.20
                %Other
                    borrowings
                
                
                2
                
                
                
                2
                
                
                
                0.00
                %Total
                    interest expense
                
                
                3,097
                
                
                
                1,916
                
                
                
                61.64
                %Net
                    interest income
                
                $
                2,887
                
                
                $
                2,871
                
                
                
                0.56
                %





*Table
          of Contents*
 11




The
      following table summarizes average balances and average yields and costs for
      the
      three months ended March 31, 2007 and 2006.





**Three
                  months ended March 31,****2007**
              
              
              **2006****Average**
              
              
              **Yield/**
              
              
              **Average**
              
              
              **Yield/****Balance**
              
              
              **Cost**
              
              
              **Balance**
              
              
              **Cost***(Dollars
                  in thousands)***Interest-earning
                  assets**Loans
              
              $
              313,742
              
              
              
              6.53
              %
              
              $
              261,258
              
              
              
              6.17
              %Fed
                  Funds sold
              
              
              2,500
              
              
              
              5.76
              %
              
              
              804
              
              
              
              4.98
              %Investment
                  securities
              
              
              69,019
              
              
              
              4.40
              %
              
              
              66,139
              
              
              
              4.26
              %Federal
                  Home Loan Bank stock
              
              
              4,006
              
              
              
              6.59
              %
              
              
              3,320
              
              
              
              5.18
              %Total
                  interest-earning assets
              
              $
              389,267
              
              
              
              6.15
              %
              
              $
              331,521
              
              
              
              5.78
              %**Interest-bearing
                  liabilities**Certificate
                  accounts
              
              $
              167,935
              
              
              
              4.49
              %
              
              $
              127,469
              
              
              
              3.37
              %Regular
                  savings accounts & escrow
              
              
              47,325
              
              
              
              0.62
              %
              
              
              53,856
              
              
              
              0.86
              %Checking
                  and NOW accounts
              
              
              61,659
              
              
              
              1.23
              %
              
              
              47,061
              
              
              
              0.35
              %Money
                  market savings accounts
              
              
              21,316
              
              
              
              1.97
              %
              
              
              18,752
              
              
              
              0.87
              %Total
                  interest-bearing deposits
              
              
              298,235
              
              
              
              3.02
              %
              
              
              247,138
              
              
              
              2.06
              %FHLB
                  advances
              
              
              69,468
              
              
              
              4.84
              %
              
              
              59,067
              
              
              
              4.34
              %Other
                  borrowings
              
              
              174
              
              
              
              4.60
              %
              
              
              187
              
              
              
              4.28
              %Total
                  interest-bearing liabilities
              
              $
              367,877
              
              
              
              3.37
              %
              
              $
              306,392
              
              
              
              2.50
              %





Interest
      and dividend income increased $1.2 million, or 25.0%, for the three months
      ended
      March 31, 2007 as a result of a 17.4% increase in the average balance of
      interest-earning assets to $389.3 million from $331.5 million along with an
      increase in the average yield on interest-earning assets from 5.78% to
      6.15%.





Interest
      expense increased by $1.2 million for the three months ended March 31, 2007,
      due
      to an increase of $51.1 million in the average balance of interest-bearing
      deposits along with an increase in the average cost of these deposits from
      2.06%
      to 3.02%.  The average balance of Federal Home Loan Bank advances also
      increased by $10.4 million with a 50 basis point increase in the average cost
      from 4.34% to 4.84%.








***Provision
      for Loan Losses*****.**  The
      following table summarizes the activity in the allowance for loan losses and
      provision for loan losses for the three months ended March 31, 2007 and
      2006.




**Three
                  Months Ended****March
                  31,****2007**
              
              
              **2006***(In
                  thousands)*Allowance
                  at beginning of period
              
              $
              2,071
              
              
              $
              1,878Provision
                  for loan losses
              
              
              51
              
              
              
              62Charge-offs
              
              
              (51
              )
              
              
              -Recoveries
              
              
              1
              
              
              
              -Net
                  charge-offs
              
              
              (50
              )
              
              
              -Allowance
                  at end of period
              
              $
              2,072
              
              
              $
              1,940


*Table
          of Contents*
 12





The
      Company recorded a provision for loan losses of $51,000 for the three month
      period ended March 31, 2007, compared to a provision of $62,000 for the three
      month period ended March 31, 2006.  The provision in the 2007 period
      was less than the 2006 period due to management’s analysis of the allowance
      based on loss experience.





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, real estate owned or any accruing loans past due 90 days
      or
      more at the dates presented.





**At
                  March 31,**
              
              
              **At
                  December 31,****2007**
              
              
              **2006**
              
              
              **%
                  change***(Dollars
                  in thousands)*Nonaccrual
                  loans
              
              $
              977
              
              
              $
              2,010
              
              
              
              -51.39
              %Total
                  nonperforming assets
              
              $
              977
              
              
              $
              2,010
              
              
              
              -51.39
              %Total
                  nonperforming loans to total loans
              
              
              0.31
              %
              
              
              0.65
              %
              
              
              -52.31
              %Total
                  nonperforming loans to total assets
              
              
              0.23
              %
              
              
              0.49
              %
              
              
              -53.06
              %Total
                  nonperforming assets to total assets
              
              
              0.23
              %
              
              
              0.49
              %
              
              
              -53.06
              %





***Noninterest
      Income*****.**The following table summarizes
      noninterest income for the three months ended March 31, 2007 and
      2006.





**Three
                  Months****Ended
                  March 31,****2007**
              
              
              **2006**
              
              
              **%
                  Change***(Dollars
                  in thousands)*Fees
                  for services related to deposit accounts
              
              $
              209
              
              
              $
              208
              
              
              
              0.48
              %Fees
                  for other services
              
              
              119
              
              
              
              89
              
              
              
              33.71
              %Income
                  from bank owned life insurance
              
              
              76
              
              
              
              76
              
              
              
              0.00
              %Income
                  from investment advisory services, net
              
              
              63
              
              
              
              32
              
              
              
              96.88
              %Gain
                  on sale of investments
              
              
              6
              
              
              
              -
              
              
              
              0.00
              %Other
                  income
              
              
              51
              
              
              
              29
              
              
              
              75.86
              %Total
              
              $
              524
              
              
              $
              434
              
              
              
              20.74
              %


Noninterest
      income increased $90,000 or 20.7% during the three months ended March 31, 2007
      as a result of a $31,000, or 96.9% increase in income from investment advisory
      services due to a higher level of referrals from bank employees and general
      economic conditions, and a $30,000, or 33.7% increase in fees for services,
      largely related to the origination of reverse mortgages.  The Company
      also experienced an increase in other income due to 80% of the rentable space
      in
      a branch office being rented beginning January 1, 2007.





*Table
          of Contents*
 13




***Noninterest
      Expense*****.**  The following table
      summarizes noninterest expense for the three months ended March 31, 2007 and
      2006.


**Three
                  Months****Ended
                  March 31,****2007**
              
              
              **2006**
              
              
              **%
                  Change***(Dollars
                  in thousands)*Compensation,
                  taxes and benefits
              
              $
              1,741
              
              
              $
              1,533
              
              
              
              13.57
              %Office
                  occupancy
              
              
              513
              
              
              
              400
              
              
              
              28.25
              %Computer
                  processing
              
              
              179
              
              
              
              142
              
              
              
              26.06
              %Directors
                  compensation
              
              
              170
              
              
              
              99
              
              
              
              71.72
              %Advertising
              
              
              96
              
              
              
              125
              
              
              
              -23.20
              %Gain
                  on foreclosed real estate, net
              
              
              -
              
              
              
              (2
              )
              
              
              -100.00
              %Other
                  expenses
              
              
              365
              
              
              
              342
              
              
              
              6.73
              %Total
              
              $
              3,064
              
              
              $
              2,639
              
              
              
              16.10
              %





Noninterest
      expense increased in the three months ended March 31, 2007 primarily as a result
      of an increase of $208,000 in compensation costs and an increase of $113,000
      in
      office occupancy expenses over the 2006 period.  Both of these
      increases are largely related to the opening of three new branch offices in
      the
      third quarter of 2006.  The Company also experienced a $71,000
      increase in Director’s compensation during this period, primarily associated
      with payments made under the new Directors Deferred Compensation
      Plan.   These increases were partially offset by a small decrease
      in advertising expenditures due to timing differences in billings.








**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.





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


The
      Company’s most liquid assets are cash and cash equivalents and interest-bearing
      deposits.  The levels of these assets depend on our operating,
      financing, lending and investing activities during any given
      period.  At March 31, 2007, cash and cash equivalents totaled $14.0
      million, including federal funds of $4.8 million.  Securities
      classified as available-for-sale, which provide additional sources of liquidity,
      totaled $64.8 million at March 31, 2007.  At March 31, 2007, the
      Company had the ability to borrow a total of $130.4 million from the Federal
      Home Loan Bank of Boston, of which $65.0 million in borrowings was
      outstanding.  At March 31, 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 at March 31, 2007.  In addition, at
      March 31, 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 March 31, 2007.





At
      March
      31, 2007, the Company had commitments of $21.0 million in unused home equity
      lines of credit, $6.1 million in unadvanced commercial lines, $5.0 million
      in
      mortgage commitments, $5.8 million in commercial loan commitments, $21.1 million
      in unadvanced construction mortgage commitments, $906,000 in unadvanced
      commitments on other loans, $6.5 million in letters of credit and $92,000 in
      overdraft line of credit availability.  Certificates of deposit due
      within one year of March 31, 2007 totaled $158.4 million, or 51.9% of total
      deposits.  If





*Table
            of Contents*
 14




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 March 31,
      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 three months ended March 31, 2007,
      the Company originated $15.6 million of loans, including renewals and
      refinances, and purchased $734,000 of securities.  These activities
      were funded primarily by the proceeds from sales and maturities of
      available-for-sale and held-to-maturity securities of $3.1 million and an
      increase of deposits of $15.8 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 $15.8 million for the three months ended March 31,
      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 our
      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 decrease in Federal Home Loan Bank advances of $3.7 million
      for the three months ended March 31, 2007.  The increases in deposit
      accounts primarily funded our investing and lending activities and, to a lesser
      extent, repayment of Federal Home Loan Bank advances.





At
      March
      31, 2007, the Bank was subject to the regulatory capital requirements of the
      Office of Thrift Supervision, including a risk-based capital
      measure.  The risk-based capital guidelines include both a definition
      of capital and a framework for calculating risk-weighted assets by assigning
      balance sheet assets and off-balance sheet items to broad risk
      categories.  At March 31, 2007, the Bank exceeded all of its
      regulatory capital requirements.  The Bank is considered “well
      capitalized” under regulatory guidelines.  The Company is not subject
      to separate regulatory capital requirements.





The
      following table is a summary of the Bank’s actual capital as computed under the
      standards established by the OTS at March 31, 2007.


*(Dollars
                        in Thousands)*
              
              Amount
              
              
              RatioTier
                  I  Capital (to Adjusted Total Assets)
              
              $
              39,224
              
              
              
              9.37
              %Total
                  Risk-Based Capital (to Risk-Weighted Assets)
              
              
              41,296
              
              
              
              14.11
              %Tier
                  I Risk-Based Capital (to Risk-Weighted Assets)
              
              
              39,224
              
              
              
              13.40
              %Tangible
                  Equity Capital (to Tangible Assets)
              
              
              39,224
              
              
              
              9.37
              %





**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







*Table
            of Contents*
 15




due
      on
      construction loans, amounts due on commercial loans, commercial letters of
      credit and commitments to sell loans.





For
      the
      three months ended March 31, 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 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 December 31, 2006 (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
      believes that its net portfolio value at March 31, 2007 is not materially
      different from the analysis set forth in 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
              
              
              
              29,864
              
              
              
              (21,889
              )
              
              
              -42
              %
              
              
              7.61
              %
              
              
              -4.72
              %200
              
              
              
              37,503
              
              
              
              (14,250
              )
              
              
              -28
              %
              
              
              9.34
              %
              
              
              -2.99
              %100
              
              
              
              45,004
              
              
              
              (6,749
              )
              
              
              -13
              %
              
              
              10.95
              %
              
              
              -1.38
              %0
              
              
              
              51,753
              
              
              
              -
              
              
              
              -
              
              
              
              12.33
              %
              
              
              -(100)
              
              
              
              56,260
              
              
              
              4,507
              
              
              
              9
              %
              
              
              13.20
              %
              
              
              0.87
              %(200)
              
              
              
              57,498
              
              
              
              5,745
              
              
              
              11
              %
              
              
              13.38
              %
              
              
              1.05
              %





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







*Table
            of Contents*
 16




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.





**Item
      1A. –RiskFactors.**





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.





*Table
            of Contents*
 17





**Item2.– Unregistered Sales of Equity Securities and Use of
      Proceeds**.





During
      the three month period ended March 31, 2007, the Company repurchased 65,114
      shares of common stock for $832,274, at an average cost of $12.78 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
                  ProgramsJanuary
              
              
              15,000
              
              
              $
              12.69
              
              
              
              15,000
              
              
              
              234,068February
              
              
              45,000
              
              
              $
              12.82
              
              
              
              45,000
              
              
              
              189,068March
              
              
              5,114
              
              
              $
              12.74
              
              
              
              5,114
              
              
              
              183,954Total
              
              
              65,114
              
              
              $
              12.78
              
              
              
              65,114
              
              
              
              183,954





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. – Defaults Upon Senior Securities.**  Not
      applicable





**Item
      4. – Submission of Matters to a Vote of Security
      Holders.**  Not applicable





**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)


10.1
            Naugatuck
                Valley Financial Corporation and Naugatuck
                Valley Savings Deferred Compensation Plan for
                Directors*


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


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


32
            Section
                1350
                Certifications.


____________________


*Management
      contract or compensation plan arrangement.


(1)  Incorporated
      by reference to the Company’s Form 10-Q for the period 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.




*Table
            of Contents*
 18
  
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 Naugatuck
                  Valley Financial CorporationDate:
                  May 14, 2007
              by:
              /s/
                  John C. RomanJohn
                  C. RomanPresident
                  and Chief Executive OfficerDate:
                  May 14, 2007
              by:
              /s/
                  Lee R. SchlesingerLee
                  R. SchlesingerVice
                  President and Treasurer(Principal
                  Financial Officer)






20