**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**








(Mark
      One)





[**X**]           QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      quarterly period ended **September 30, 2007**





[  ]           TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT





For
      the
      transition period from _______ to ________





Commission
      file
      number:                                                      **000-52889**








**SOUND
      FINANCIAL, INC.**


(Exact
      name of small business issuer as specified in its charter)





**United
                States**
            
            **26-0776123**(State
                or other jurisdiction of incorporation of organization)
            
            (IRS
                Employer Identification No.)





**2005
      5th Avenue,
      Second Floor, Seattle, Washington 98121; (206)448-0884**


(Address
      of principal executive offices)





**Laura
      Lee Stewart, President and Chief Executive Officer**


**Sound
      Financial, Inc**


**2005
      5th Avenue,
      Second Floor, Seattle, Washington 98121; (206)448-0884**


(Issuer’s
      telephone number)








**None**


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







Check
      whether the issuer (1) filed all
      reports required to be filed by Section 13 and 15(d) of the Exchange Act during
      the past 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.Yes [  ]No [**X**]




Indicate
      by check mark whether the
      registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
      [  ]No [**X**]




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each issuer's classes of common equity, as
      of
      the latest practicable date:




**At
      December 21, 2007, there were no shares of the issuers' common stock
      outstanding.**





Transitional
      Small Business Disclosure
      Format (Check
      one):                                                                                                           Yes
      [  ]                      No
      [**X**]

















SOUND
      FINANCIAL, INC.





Index





Page
                Number**PART
                IFINANCIAL INFORMATION**Item
                1.                      Financial
                StatementsConsolidated
                Balance Sheets as
                of September 30, 2007 and December 31, 2006
            1Consolidated
                Statements of
                Income For the Three-Month and Nine-Month Periods ended September
                30, 2007
                and 2006
            3Consolidated
                Statements of Cash
                Flows For the Nine-Month Periods ended September 30, 2007 and
                2006
            4Consolidated
                Statements of
                Comprehensive Income For the Three-Month and Nine-Month Periods ended
                September 30, 2007 and 2006
            5Notes
                to Consolidated Financial Statements
            6Item
                2. Management's
                Discussion and
                Analysis
            10Item
                3.                  Controls
                and Procedures
            19**PART
                IIOTHER INFORMATION**Item
                1.                  Legal
                Proceedings
            20Item
                2. Unregistered
                Sales of
                Equity Securities and Use of Proceeds
            20Item
                3. Defaults
                Upon Senior
                Securities
            20Item
                4. Submission
                of Matters to a
                Vote of Security Holders
            20Item
                5. Other
                Information
            20Item
                6. Exhibits
            21SIGNATURESEXHIBITS








PART
      I                      FINANCIAL
      INFORMATION


Item
      1                                                                             Financial
      Statements





SOUND
      FINANCIAL, INC. AND SUBSIDIARY





Consolidated
      Balance Sheets





**ASSETS**





SEPTEMBER
                30,
            
            
            DECEMBER
                31,2007
            
            
            2006CASH
                AND CASH EQUIVALENTS
            
            $
            4,662,704
            
            
            $
            5,649,306SECURITIES
                AVAILABLE-FOR-SALE,
                at fair value
            
            
            113,538
            
            
            
            169,569FEDERAL
                HOME LOAN BANK(FHLB)
                STOCK, at cost
            
            
            1,319,500
            
            
            
            1,319,500LOANS
            
            
            222,839,595
            
            
            
            205,634,456Less
                allowance for loan losses
            
            
            (817,171
            )
            
            
            (822,393
            )Loans,
                net
            
            
            222,022,424
            
            
            
            204,812,063LOANS
                HELD FOR SALE
            
            
            725,135
            
            
            
            1,307,320ACCRUED
                INTEREST RECEIVABLE
            
            
            1,073,408
            
            
            
            895,382PREMISES
                AND EQUIPMENT, net
            
            
            1,262,835
            
            
            
            1,330,199CASH
                SURRENDER VALUE OFBANK
                OWNED LIFE INSURANCE
            
            
            3,996,433
            
            
            
            3,278,581MORTGAGE
                SERVICING RIGHTS
            
            
            855,279
            
            
            
            867,562OTHER
                ASSETS
            
            
            929,146
            
            
            
            1,033,363Total
                assets
            
            $
            236,960,402
            
            
            $
            220,662,845








*See
      notes to consolidated financial statements*


1





SOUND
      FINANCIAL, INC. AND SUBSIDIARY


Consolidated
      Balance Sheets





**LIABILITIES
      AND EQUITY**





SEPTEMBER
                30,
            
            DECEMBER
                31,2007
            
            2006DEPOSITSInterest-bearing
            
            $
            182,961,209
            
            $
            163,717,118Noninterest-bearing
                demand
            
            
            14,041,841
            
            
            17,250,876Total
                deposits
            
            
            197,003,050
            
            
            180,967,994FHLB
                ADVANCES
            
            
            21,019,355
            
            
            22,029,355ACCRUED
                INTEREST PAYABLE
            
            
            190,214
            
            
            121,561ACCOUNTS
                PAYABLE ANDOTHER
                LIABILITIES
            
            
            2,277,077
            
            
            1,717,551ADVANCE
                PAYMENTS FROMBORROWERS
                FOR TAXESAND
                INSURANCE
            
            
            416,363
            
            
            257,309Total
                liabilities
            
            
            222,906,059
            
            
            205,093,770EQUITYRetained
                earnings
            
            
            16,049,333
            
            
            15,566,031Accumulated
                other comprehensiveIncome,
                net
            
            
            5,010
            
            
            3,044Total
                equity
            
            
            16,054,343
            
            
            15,569,075Total
                liabilities and equity
            
            $
            236,960,402
            
            $
            220,662,845





*See
      notes to consolidated financial statements*


2





SOUND
      FINANCIAL, INC. AND SUBSIDIARY


Consolidated
      Statements of Income





THREE
                MONTHS ENDED
            
            
            NINE
                MONTHS ENDEDSEPTEMBER
                30,
            
            
            SEPTEMBER
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006INTEREST
                INCOMELoans,
                including fees
            
            $
            3,951,511
            
            
            $
            3,323,116
            
            
            $
            11,086,582
            
            
            $
            10,251,693Interest
                and dividends oninvestments,
                and cashequivalents
            
            
            19,927
            
            
            
            18,779
            
            
            
            35,401
            
            
            
            88,757Total
                interest income
            
            
            3,971,438
            
            
            
            3,341,895
            
            
            
            11,121,983
            
            
            
            10,340,450INTEREST
                EXPENSEDeposits
            
            
            1,780,738
            
            
            
            1,414,099
            
            
            
            4,778,078
            
            
            
            3,923,952FHLB
                advances
            
            
            331,685
            
            
            
            176,651
            
            
            
            1,061,394
            
            
            
            670,570Total
                interest expense
            
            
            2,112,423
            
            
            
            1,590,750
            
            
            
            5,839,472
            
            
            
            4,594,522NET
                INTEREST INCOME
            
            
            1,859,015
            
            
            
            1,751,145
            
            
            
            5,282,511
            
            
            
            5,745,928PROVISION
                FOR LOAN LOSSES
            
            
            175,000
            
            
            
            ---
            
            
            
            175,000
            
            
            
            258,924NET
                INTEREST INCOMEAFTER
                PROVISIONFOR
                LOAN LOSSES
            
            
            1,684,015
            
            
            
            1,751,145
            
            
            
            5,107,511
            
            
            
            5,487,004NONINTEREST
                INCOMEService
                charges and fee income
            
            
            359,145
            
            
            
            452,297
            
            
            
            1,257,652
            
            
            
            1,414,845Earnings
                on cash surrender valueof
                bank owned life insurance
            
            
            39,450
            
            
            
            29,032
            
            
            
            117,852
            
            
            
            87,616Mortgage
                servicing income
            
            
            80,672
            
            
            
            82,539
            
            
            
            222,701
            
            
            
            246,215Gain
                on sale of credit card portfolio
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            2,287,309Gain
                (loss) on sale of loans
            
            
            2,962
            
            
            
            (25,316
            )
            
            
            (12,853
            )
            
            
            (63,253
            )Total
                noninterest income
            
            
            482,229
            
            
            
            538,552
            
            
            
            1,585,352
            
            
            
            3,972,732NONINTEREST
                EXPENSESalaries
                and benefits
            
            
            990,445
            
            
            
            931,304
            
            
            
            2,949,067
            
            
            
            3,117,549Operations
            
            
            582,798
            
            
            
            500,539
            
            
            
            1,638,750
            
            
            
            1,769,348Occupancy
            
            
            242,286
            
            
            
            213,669
            
            
            
            654,640
            
            
            
            632,395Data
                processing
            
            
            275,365
            
            
            
            215,190
            
            
            
            788,604
            
            
            
            573,397Total
                noninterest expense
            
            
            2,090,894
            
            
            
            1,860,702
            
            
            
            6,031,061
            
            
            
            6,092,689INCOME
                BEFORE PROVISIONFOR
                INCOME TAXES
            
            
            75,350
            
            
            
            428,995
            
            
            
            661,802
            
            
            
            3,367,047PROVISION
                FOR INCOME TAXES
            
            
            3,320
            
            
            
            132,164
            
            
            
            178,500
            
            
            
            1,115,007NET
                INCOME
            
            $
            72,030
            
            
            $
            296,831
            
            
            $
            483,302
            
            
            $
            2,252,040








*See
      notes to consolidated financial statements*





3





SOUND
      FINANCIAL, INC. AND SUBSIDIARY


Consolidated
      Statements of Cash Flows





NINE
                MONTHS ENDEDSEPTEMBER
                30,2007
            
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income
            
            $
            483,302
            
            
            $
            2,252,040Adjustments
                to reconcile net income to net cashfrom
                operating activitiesAmortization
                of net premium on investments
            
            
            3,544
            
            
            
            24,241Provision
                for loan losses
            
            
            175,000
            
            
            
            258,924Depreciation
                and amortization
            
            
            249,523
            
            
            
            276,146Additions
                to mortgage servicing rights
            
            
            (175,990
            )
            
            
            (218,447
            )Amortization
                of mortgage servicing rights
            
            
            188,273
            
            
            
            193,545Earnings
                on cash surrender value ofbank
                owned life insurance
            
            
            (117,852
            )
            
            
            (87,616
            )Gain
                on sale of credit card portfolio
            
            
            ---
            
            
            
            (2,287,309
            )Proceeds
                from sales of mortgage loans
            
            
            18,397,103
            
            
            
            20,597,811Originations
                of mortgage loans held for sale
            
            
            (18,383,343
            )
            
            
            (20,586,295
            )Loss
                on sale of loans
            
            
            12,853
            
            
            
            63,253Increase
                (decrease) in operating assets and liabilitiesChange
                in accrued interest receivable
            
            
            (178,026
            )
            
            
            (17,670
            )Change
                in other assets
            
            
            104,217
            
            
            
            (243,043
            )Change
                in accrued interest payable
            
            
            68,653
            
            
            
            726Change
                in accounts payable and other liabilities
            
            
            559,526
            
            
            
            1,674,770Net
                cash from operating activities
            
            
            1,386,782
            
            
            
            1,901,076CASH
                FLOWS FROM INVESTING ACTIVITIESProceeds
                from maturities ofavailable-for-sale
                investments
            
            
            54,453
            
            
            
            23,553Purchase
                of Bank Owned Life Insurance
            
            
            (600,000
            )
            
            
            ---Proceeds
                from sale of credit card portfolio
            
            
            ---
            
            
            
            13,889,554Net
                increase in loans
            
            
            (16,829,788
            )
            
            
            (20,887,593
            )Purchases
                of premises and equipment
            
            
            (182,159
            )
            
            
            (134,250
            )Net
                cash from investing activities
            
            
            (17,557,494
            )
            
            
            (7,108,696
            )CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                increase in deposits
            
            
            16,035,056
            
            
            
            10,347,061Proceeds
                from FHLB advances
            
            
            ---
            
            
            
            ---Repayment
                of FHLB advances
            
            
            (1,010,000
            )
            
            
            (6,185,000
            )Net
                change in advances from borrowers fortaxes
                and insurance
            
            
            159,054
            
            
            
            178,543Net
                cash from financing activities
            
            
            15,184,110
            
            
            
            4,340,604INCREASE
                (DECREASE) IN CASHAND
                CASH EQUIVALENTS
            
            
            (986,602
            )
            
            
            (867,016
            )CASH
                AND CASH EQUIVALENTS, beginning of year
            
            
            5,649,306
            
            
            
            5,013,897CASH
                AND CASH EQUIVALENTS, end of year
            
            $
            4,662,704
            
            
            $
            4,146,881SUPPLEMENTAL
                CASH FLOW INFORMATIONCash
                paid for income taxes
            
            $
            120,000
            
            
            $
            495,000Interest
                paid on deposits and FHLB advances
            
            $
            5,770,819
            
            
            $
            4,593,796











*See
      notes to consolidated financial statements*


4


SOUND
      FINANCIAL, INC. AND SUBSIDIARY


Consolidated
      Statements of Comprehensive Income





Three
                Months Ended
              September 
                30,
            
            
            Nine
                Months Ended
              September 
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Net
                Income**
            
            $
            72,030
            
            
            $
            296,831
            
            
            $
            483,302
            
            
            $
            2,252,040Increase
                in unrealized gain (loss) on securities available-for-sale, net of
                tax
                expense (benefit) of $(47) and $2,203 for the three months ended
                September
                30, 2007, and 2006, respectively, and $668 and $4,320 for the nine
                months
                ended September 30, 2007, and 2006, respectively.
            
            
            (138
            )
            
            
            6,478
            
            
            
            1,966
            
            
            
            12,707**Comprehensive
                Income**
            
            $
            71,892
            
            
            $
            303,309
            
            
            $
            485,268
            
            
            $
            2,264,747

































































































*See
      notes to consolidated financial statements*











5


SOUND
      FINANCIAL, INC. AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements








1.           BASIS
      OF PRESENTATION:





The
      unaudited, consolidated financial statements include the consolidated results
      of
      operations of Sound Financial, Inc. ("Company"), Sound Community Bank ("Bank")
      and ORCA General, Inc., a wholly owned subsidiary of the Bank.  These
      financial statements do not include the accounts of the Company’s parent
      company, Sound Community, MHC.  These consolidated financial
      statements have been prepared in accordance with the instructions for Form
      10-QSB and Item 310(b) of Regulation S-B and do not include all disclosures
      required by generally accepted accounting principles for a complete presentation
      of the Company's financial condition and results of operations.  In
      the opinion of management, the information reflects all adjustments (consisting
      only of normal recurring adjustments) which are necessary in order to make
      the
      financial statements not misleading and for a fair representation of the results
      of operations for such periods.  The results for the three- and
      nine-month periods ended September 30, 2007 should not be considered as
      indicative of results for a full year.  For further information, refer
      to the consolidated financial statements and footnotes for the period ended
      December 31, 2006, included in the Company's Registration Statement on Form
      SB-2.





2.           RECENT
      ACCOUNTING DEVELOPMENTS:





In
      September 2006, the Financial
      Accounting Standards Board released Statement No. 157, “Fair Value
      Measurements,” which defines fair value, establishes a framework for measuring
      fair value in GAAP, and enhances disclosures about fair value
      measurements.  This Statement applies when other accounting
      pronouncements require fair value measurements; it does not require new fair
      value measurements.  This Statement is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those years.  SFAS No. 157 is not expected to
      have a material impact on the Company.




In
      September 2006, the Financial
      Accounting Standards Board issued SFAS No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans,” which is an amendment
      of Financial Accounting Standards Board Statements No. 87, 88, 106 and
      132-R.  SFAS No. 158 requires an entity to recognize in its
      statement of financial condition the funded status of its defined benefit
      pension and postretirement plans, measured as the difference between the fair
      value of the plan assets and the benefit
      obligation.  SFAS No. 158 also requires an entity to
      recognize changes in the funded status of a defined benefit pension and
      postretirement plan within accumulated other comprehensive income, net of tax,
      to the extent such changes are not recognized in earnings as components of
      periodic net benefit cost.  SFAS No. 158 is effective for
      public entities as of the end of the first fiscal year ending after
      December 15, 2006.  The adoption of SFAS No. 158 will
      not have a material effect on our financial condition, results of operations
      or
      cash flows.




In
      February 2007, the FASB issued SFAS
      No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,”
which is**an amendment of FASB Statement No. 115.  This
      Statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value.  The objective is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reporting earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. This statement is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007.  SFAS No. 159 is not
      expected to have a material impact on the Company.




6


On
      December 4, 2007, the FASB issued FASB Statement No. 141, “Business
      Combinations.”  Statement 141R will significantly change the
      accounting for business combinations.  Under Statement 141R, an
      acquiring entity will be required to recognize all the assets acquired and
      liabilities assumed in a transaction at the acquisition-date fair value with
      limited exceptions.  Statement 141R will change the accounting
      treatment for certain specific items, including:




·
            Acquisition
                costs will be generally expensed as
                incurred;




·
            Noncontrolling
                interests (formerly known as “minority interests” – see Statement 160
                discussion below) will be valued at fair value at the acquisition
                date;




·
            Acquired
                contingent liabilities will be recorded at fair value at the acquisition
                date and subsequently measured at either the higher of such amount
                or the
                amount determined under existing guidance for non-acquired
                contingencies;




·
            In-process
                research and development will be recorded at fair value as an
                indefinite-lived intangible asset at the acquisition
                date;




·
            Restructuring
                costs associated with a business combination will be generally expensed
                subsequent to acquisition date; and




·
            Changes
                in deferred tax asset valuation allowances and income tax uncertainties
                after acquisition date generally will affect income tax
                expense.




Statement
      141R also includes a substantial number of new disclosure
      requirements.  Statement 141 applies prospectively to business
      combination for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15,
      2008.  Earlier adoption is prohibited.  Accordingly, a
      calendar year-end company is required to record and disclose business
      combinations following existing GAAP until January 1, 2009.  The
      revision is intended to simplify existing guidance and converge rulemaking
      under
      U.S. GAAP with international accounting rules. The new standard also converges
      financial reporting under U.S. GAAP with international accounting rules. SFAS
      No. 141R is not expected to have a material impact on the Company.




On
      December 4, 2007, the FASB issued FASB statement No. 160, “Noncontrolling
      Interests in Consolidated Financial Statement,” which is an amendment of ARB No.
      51.**Statement 160 establishes new accounting and reporting
      standards for the noncontrolling interest in a subsidiary and for the
      deconsolidation of a subsidiary.  Specifically, this statement
      requires the recognition of a noncontrolling interest (minority interest) as
      equity in the consolidated financial statements and separate from the parent’s
      equity.  The amount of net income attributable to the noncontrolling
      interest will be included in consolidated net income on the face of the income
      statement.  Statement 160 clarifies that changes in a parent’s
      ownership interest in a subsidiary that do not result in deconsolidation are
      equity transactions if the parent retains its controlling financial
      interest.  In addition, this statement requires that a parent
      recognize a gain or loss in net income when a subsidiary is
      deconsolidated.  Such gain or loss will be measured using the fair
      value of the noncontrolling equity investment on the deconsolidation
      date.  Statement 160 also includes expanded disclosure requirements
      regarding the interests of the parent and its noncontrolling
      interest.  Statement 160 is effective for fiscal years beginning on or
      after December 15, 2008. Earlier adoption is prohibited.   The
      revision is intended to simplify existing guidance and converge rulemaking
      under
      U.S. GAAP with international accounting rules. The new standard also converges
      financial reporting under U.S. GAAP with international accounting rules. SFAS
      No. 160 is not expected to have a material impact on the Company.




7


The
      Company adopted FIN 48 “Accounting for Uncertainty in Income Taxes – An
      Interpretation of FASB Statement No, 109”, on January 1, 2007.  FIN 48
      is an interpretation of SFAS No. 109, “Accounting for Income Taxes,” and seeks
      to reduce the diversity in practice associated with certain aspects if
      measurement and recognition in accounting for income taxes.  In
      addition, FIN 48 provides guidance on derecognition, classification, interest
      and penalties, and accounting in interim periods and required expanded
      disclosure with respect to uncertainty in income taxes.  As a result
      of implementation of FIN 48, the Company recognized no material adjustments
      in
      the liability for unrecognized income tax expense, all of which would affect
      the
      Company’s effective income tax rate.





3.           COMMITMENT
      AND CONTINGENCIES:




In
      the
      normal course of operations, Sound Community Bank engages in a variety of
      financial transactions that are not recorded in our financial
      statements.  These transactions involve varying degrees of off-balance
      sheet credit, interest rate and liquidity risks.  These transactions
      are used primarily to manage customers’ requests for funding and take the form
      of loan commitments and lines of credit.  For  the nine
      months ended September 30, 2007, and the year ended December 31, 2006, we
      engaged in no off-balance sheet transactions likely to have a material effect
      on
      our financial condition, results of operations or cash flows.




At
      various times, the Bank may be the defendant in various legal proceedings
      arising in connection with its business. It is the opinion of management that
      the financial position and the results of operations of the Bank will not be
      materially adversely affected by the outcome of these legal proceedings and
      that
      adequate provision has been made in the accompanying consolidated financial
      statements.




4.           LOANS:




The
      composition of the loan portfolio was as follows:




SEPTEMBER
                30,
              2007
            
            
            DECEMBER
                31,
              2006Real
                estate loans
            
            $
            165,250,809
            
            
            $
            151,056,346Consumer
                loans
            
            
            47,527,165
            
            
            
            46,989,179Commercial
                business loans
            
            
            10,044,708
            
            
            
            7,600,362222,822,682
            
            
            
            205,645,887Deferred
                loan origination (fees) costs
            
            
            16,913
            
            
            
            (11,431
            )Allowance
                for loan losses
            
            
            (817,171
            )
            
            
            (822,393
            )Total
                loans, net
            
            $
            222,022,424
            
            
            $
            204,812,063







8







The
      following is an analysis of the
      change in the allowance for loan losses:




Three
                Months Ended
              September 
                30,
            
            
            Nine
                Months
              Ended
                September  30,2007
            
            
            2006
            
            
            2007
            
            
            2006Balance
                at beginning of period
            
            $
            674,180
            
            
            $
            850,427
            
            
            $
            822,393
            
            
            $
            1,321,061Provision
                charged to income
            
            
            175,000
            
            
            
            ---
            
            
            
            175,000
            
            
            
            258,924Recoveries
            
            
            48,199
            
            
            
            2,552
            
            
            
            187,578
            
            
            
            42,552Charge-offs
            
            
            (80,208
            )
            
            
            (85,964
            )
            
            
            (367,800
            )
            
            
            (855,522
            )Balance
                at end of period
            
            $
            817,171
            
            
            $
            767,015
            
            
            $
            817,171
            
            
            $
            767,015







5.           FHLB
      ADVANCES:




The
      Bank utilizes a loan agreement with
      the Federal Home Loan Bank (FHLB) of Seattle.  The terms of the
      agreement call for a blanket pledge of a portion of the Bank’s mortgage
      portfolio based on the outstanding balance.  At September 30, 2007,
      the amount available to borrow under this agreement is approximately 20% of
      total assets, conditional upon meeting certain collateral and stock ownership
      requirements.  The Bank had outstanding borrowings under this
      arrangement of $21,019,355 and $22,029,355 at September 30, 2007, and December
      31, 2006, respectively.




9


SOUND
      FINANCIAL, INC. AND SUBSIDIARY





Item
      2                    Management’s
      Discussion and Analysis





**Forward-Looking
      Statements**





This
      report contains certain ‘forward-looking statements’ that may be identified by
      the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,”
“estimated” with respect to our financial condition.  Results of
      operations and business are subject to various factors which could cause actual
      results to differ materially from these estimates and most other statements
      that
      are not historical in nature.  These factors include, but are not
      limited to, general and local economic conditions, changes in interest rates,
      deposit flows, demand for mortgage, consumer and other loans, real estate
      values, competition, changes in accounting principles, policies or guidelines,
      changes in legislation or regulation, and other economic, competitive,
      governmental, regulatory and technological factors affecting our operations,
      pricing, products and services.





**General**




On
      May
      19, 2003, Sound Community Bank converted its charter from a state-chartered
      credit union to a federally chartered savings bank.  On that date the
      name was changed from Credit Union of the Pacific to Sound Community Bank,
      and
      we became a taxable organization.




Our
      principal business consists of attracting retail deposits from the general
      public and investing those funds, along with borrowed funds, in loans secured
      by
      first and second mortgages on one- to four-family residences (including home
      equity loans and lines of credit), commercial real estate, consumer loans and,
      to a lesser extent, construction and development loans and commercial business
      loans.  We offer a wide variety of secured and unsecured consumer loan
      products, including manufactured home loans, direct automobile loans, and boat
      and recreational vehicle loans.  We intend to continue emphasizing our
      residential mortgage, home equity and consumer lending, while also expanding
      our
      emphasis in the commercial real estate, construction and development and
      commercial business lending areas.  In recent years, we have focused
      on expanding our commercial and construction and development lending; however,
      our commercial lending has been limited by our capital level and, until
      recently, an OTS supervisory directive that restricted our commercial loan
      portfolios to levels specified in our business plan submitted when we applied
      for a savings bank charter.  That supervisory directive was terminated
      on August 29, 2007.




As
      part
      of our business, we focus on mortgage loan originations, many of which we sell
      to Fannie Mae.  We sell these loans with servicing retained to
      maintain the direct customer relationship and promote our emphasis on strong
      customer service.  We originated $21.5 million and $38.7 million
      in fixed-rate one- to four-family residential mortgage loans during the nine
      months ended September 30, 2007 and the year ended December 31, 2006,
      respectively.  During these same periods, we sold $18.4 million and
      $26.2 million, respectively, of one- to four-family residential mortgage
      loans.




We
      offer
      a variety of deposit accounts, which are our primary source of funding for
      our
      lending activities.  In recent years, however, we have relied
      increasingly on Federal Home loan Bank advances to augment our deposits and
      fund
      our loan growth.  We have adopted a leverage strategy to use long-term
      Federal Home Loan Bank advances to fund asset and loan growth.  We
      adopted a plan of reorganization




10


and
      stock
      issuance, primarily to increase our capital to grow our loan portfolio and
      to
      continue to build our franchise.




Sound
      Community Bank is significantly affected by prevailing economic conditions
      as
      well as government policies and regulations concerning, among other things,
      monetary and fiscal affairs, housing and financial
      institutions.  Deposit flows are influenced by a number of factors,
      including interest rates paid on competing time deposits, other investments,
      account maturities, and the overall level of personal income and
      savings.  Lending activities are influenced by the demand for funds,
      the number and quality of lenders, and regional economic
      cycles.  Sources of funds for lending activities of Sound Community
      Bank include primarily deposits, borrowings, payments on loans and income
      provided from operations.




Sound
      Community Bank’s earnings are primarily dependent upon our net interest income,
      the difference between interest income and interest expense.  Interest
      income is a function of the balances of loans and investments outstanding during
      a given period and the yield earned on these loans and
      investments.  Interest expense is a function of the amount of deposits
      and borrowings outstanding during the same period and interest rates paid on
      these deposits and borrowings.  Sound Community Bank’s earnings are
      also affected by our provision for loan losses, service charges and fees, gains
      from sales of loans, commission income, other income, operating expenses and
      income taxes.




**Business
      and Operating Strategy and Goals**




Our
      primary objective is to continue to grow Sound Community Bank as a
      well-capitalized, profitable, independent, community-oriented financial
      institution serving customers in our primary market areas.  Our
      strategy is simply to provide innovative products and superior service to both
      individuals and small business in our primary market areas, which we currently
      provide through our five convenient full service banking centers located in
      the
      heart of downtown Seattle, Lakewood, Mountlake Terrace, Sequim and Tukwila,
      Washington.  We support these banking centers with 24/7 access to
      on-line banking and participation in a world wide ATM network.  During
      and after completion of the offering, we will pursue our basic operating
      strategy and goals, which are listed below.  This offering is a
      critical component of our business strategy because of the increased capital
      base it will provide Sound Community Bank.  To accomplish these
      objectives, we also need to motivate our employees and provide them with the
      tools necessary to compete effectively with other financial institutions
      operating in our market areas.




***Grow
      our franchise and meet competition in our market through our excellent customer
      service at our existing and new branch banking centers.***We operate
      with a service-oriented approach to banking by meeting our customers’ needs and
      emphasizing the delivery of a consistent and high-quality level of professional
      service.  In the reorganization and stock offering, we will retain our
      community-oriented charter and mutuality.  The proceeds of the
      offering will allow us to invest in loans and provide services consistent with
      the needs of customers in our market areas.  We have adopted a
      leverage strategy to use long-term Federal Home Loan Bank advances to fund
      asset
      and loan growth.  We will continue to expand our business by
      cross-selling our loan and deposit products and services to our customers and
      emphasizing our traditional strengths, which include residential mortgages,
      consumer loans, small business lending  and core
      deposits.  In addition, we will continue to sell a portion of our
      residential mortgage portfolio to Fannie Mae on a servicing retained
      basis.  We will also seek opportunities to sell loans we originate
      that are not saleable to Fannie Mae, but will only sell those loans if we can
      do
      so on a servicing retained basis.  This allows us to maintain our
      customer relationship while also having the funds from the sale of the loans
      available to make additional mortgage loans.   Our attention to
      client service and competitive rates allow us to attract and retain deposit
      and
      loan customers.  We expect to expand our banking operations with a new
      banking office in each of 2008, 2009 and 2010.  Our next branch is
      expected to be located in Clallam County, though no specific location has been
      selected.  No locations have been selected for additional future
      branch expansions.




11




***Emphasizing
      lower cost core deposits to reduce the funding costs of our loan
      growth.***   We offer personal and business checking
      accounts, NOW accounts and savings and money market accounts, which generally
      are lower-cost sources of funds than certificates of deposits, and are less
      sensitive to withdrawal when interest rates fluctuate. In order to build our
      core deposit base, we are pursuing a number of strategies.  First, we
      will continue to provide sales promotions on savings and checking accounts
      to
      encourage the growth of these types of deposits.  Second, we require
      all commercial loan customers to maintain a deposit relationship with us,
      generally a business checking account relationship to the extent practicable,
      for the term of their loans.  Finally, we have made, and will continue
      to make, available preferential loan and time deposit pricing to customers
      who
      maintain a qualifying checking account.






***Growing
      and diversifying our loan portfolio by emphasizing the origination of one-
      to
      four-family residential mortgage loans, home equity loans, commercial real
      estate and commercial business loans, construction and development
      loans,  and consumer loans.***   Our
      infrastructure, personnel and fixed operating base can support a substantially
      larger asset base.   Our strategy for increasing net income
      includes increasing our loan originations, particularly with higher yielding
      commercial, construction and development and consumer loans. Our business plan
      emphasizes the origination of loans secured by residential real estate and
      loans
      for business purposes, including commercial real estate and construction and
      development loans.  Our increased capital level following the offering
      will enable us to make larger commercial real estate and business loans to
      meet
      the demand for these loan products in our primary market area.  The
      addition of our Chief Credit Officer strengthens our ability to increase our
      commercial loan products, while maintaining asset quality.  Commercial
      real estate loans and commercial business loans generally are originated with
      higher interest rates compared to one- to four-family residential mortgage
      loans
      and, therefore, have a positive effect on our net interest rate spread and
      net
      interest income. In addition, most of these loans are originated with adjustable
      interest rates, which assist us in managing interest rate risk.






***Maintaining
      high asset quality***.    Our asset quality has
      improved in recent years, through managing credit risk, and is reflected by
      our
      low level of nonperforming assets.  Our percentage of non-performing
      assets to total assets was 0.29% and 0.18% at September 30, 2007 and December
      31, 2006, respectively.   We have introduced new loan products
      when we are confident that our staff has the necessary expertise and that sound
      underwriting and collection procedures are in place. We also underwrite all
      of
      our commercial loans centrally to ensure uniformity and consistency in
      underwriting decisions.




***Leveraging
      our capital***.  We plan to improve our overall efficiency
      and profitability by leveraging our increased capital base after the offering
      by
      increasing our borrowing capacity at the Federal Home Loan Bank of
      Seattle.  We also will access alternative funding sources, including
      lower cost deposits and loan sales.




***Improve
      earnings***.  Through product selection and pricing and
      lower cost funds, we will seek to optimize our interest rate margin while
      managing our interest rate risk.  We will seek new sources of
      non-interest income by emphasizing selective products and services that provide
      diversification of revenue sources, including fees and servicing
      income.  We also will control operating expenses while continuing to
      provide superior personal service to our customers.




12


**Critical
      Accounting Policies**




We
      consider 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. We consider
      our
      critical accounting policies to be those related to our allowance for loan
      losses, mortgage serving rights and deferred income taxes.  The
      allowance for loan losses is maintained to cover losses that are probable and
      can be estimated on the date of the evaluation in accordance with U.S. generally
      accepted accounting principles.  It is our estimate of probable
      incurred credit losses in our loan portfolio.  Our methodologies for
      analyzing the allowance for loan losses, mortgage serving rights and determining
      our net deferred tax assets is described in our Registration Statement on Form
      SB-2.







**Management's
      Discussion and Analysis of Recent Developments**





***Comparison
      of Financial Condition at September 30, 2007 and December 31,
      2006***




***General*****.**  Total
      assets increased by $16.3 million,
      or 7.4%, to $237.0
      million at
      September 30, 2007 from $220.7 million at
      December 31, 2006.  The increase was primarily the result of a $16.6 million,
      or
      8.1%,
      increase in our
      loan portfolio from $206.1 million at December 31, 2006 to $222.7
      million at September
      30, 2007.  The increase in total assets was funded primarilyby a $16.0
      million increase in deposits.




***Loans.***  Our
      loan portfolio,
      including loans held for sale, increased $16.6 million, or 8.1%, to $222.7
      million at
      September 30, 2007, from $206.1 million at December 31, 2006.  This
      increase in our loan portfolio consisted primarily of a $10.5 million (52.5%)
      increase in commercial real estate loans, a $4.2 million (10.6%) increase in
      home equity loans, a $2.4 million (12.3%) increase in manufactured home loans
      and a $2.4 million (32%) increase in commercial business loans, which was offset
      by a $1.2 million (1.2%) decrease in residential mortgage loans.  The
increases in our
      commercial real estate and commercial business loan portfolios are consistent
      with
      our decision to increase commercial lending.  The decline in our
      residential loan portfolio is primarily the result of a slowdown in housing
      purchases in our market area.  Recently, housing inventories have
      increased resulting in a longer marketing time and fewer purchase transactions.
      However, prices in the four-county area we serve have not
      deteriorated.  Despite the overall slowdown in the national housing
      market and the pressures of the sub-prime market failures, the housing and
      employment markets remain strong in the Puget Sound area.As a result of
      the decrease in residential loan originations, loans held for sale decreased
      $582,000, or 44.5%, from $1.3 million at December 31, 2006 to $725,000 at
      September 30, 2007.




***Allowance
      for Loan Losses.***  Our allowance for loan losses at
      September 30, 2007, was $817,000 or 0.37%
      of netloansreceivable, compared
      to $822,000 or 0.40% of netloansreceivable at
      December 31, 2006.  The decrease in the
      allowance for loan losses was due tonet charge-offs
      of
      non-performing loans of
      $180,000 offset by a provision for loan losses of $175,000 during
      the
      nine months ended September 30, 2007.  This provision was
      made
      during the quarter ended September 30, 2007,as a result of a small
      increases in our delinquencies and non-performing loans, a slowdown in the
      local
      residential housing market and increases in our commercial loan
      portfolios.Non-performing loans increased to $687,000 at
      September 30, 2007,from $292,000 at December 31, 2006, primarily as a result of four
      non-performing first and second mortgage loans, which make up $579,000 of the
      non-performing total.  Non-performing loans to total loans increased
      to 0.31% at September 30, 2007, from 0.14%
      at December 31,
      2006.




13


***Securities.***  Our
      securities portfolio consists of mortgage-backed securities, all of which are
      designated as available for sale.  The securities portfolio decreased
      $56,000, or 32.9%, to $114,000
      at
      September 30, 2007 from $170,000 at December 31, 2006.




***Deposits.***  Total
      deposits increased by $16.0 million,
      or 8.9%,
      to $197.0 million at September 30, 2007, from $181.0 million at December 31,
      2006.  During
      the nine months, time deposits increased $20.5 million and demand
      deposits and interest-bearing checking accounts increased $7.2 million, while
      savings and money market accounts decreased $11.0 million.  Total deposits
      increased as a result of our success in requiring our commercial borrowers
      to
      establish deposit accounts with us.  The increase in time
      deposits and the decrease in money market and savings accounts alsowas the result
      of
      depositors transferring funds between these accounts to achieve higher
      rates.




***Borrowings.***  Federal
      Home Loan Bank advances decreased $1.0 million, or 4.6%, to $21.0 million at
      September 30, 2007 from $22.0 million at December 31, 2006.  We
      continue to rely on Federal Home Loan Bank advances to fund loan growth when
      deposit growth is insufficient to fund loan growth.  This reliance on
      borrowings, rather than deposits, generally increases our overall cost of
      funds.




***Equity.***  Total
      equity increased $485,000, or 3.1%,
      to $16.1 million at
      September 30, 2007, from $15.6 million at December 31, 2006, primarily as a
      result of earnings of $483,000 for the nine
      months.




***Comparison
      of Results of Operation for the Three and Nine Months Ended September 30, 2007
      and 2006***




***General.***  Net
      income decreased $225,000 to $72,000
      for the three
      months ended September 30, 2007 from $297,000 for the three months ended
      September 30, 2006.  The primary reason
      for this
      decrease for the three-month period is the $175,000 provision for loan
      losses.Net income decreased $1.8 million
      to $483,000 for the nine
      months ended September 30, 2007 from $2.3 million for the nine months ended
      September 30, 2006.  The primary reason for this decrease for the nine-month periods
      was our change to a third-party provider for credit card services and the
      related June 2006 sale of our existing credit card portfolio at a gain of $2.3
      million (pre-tax).




***Interest
      Income.***  Interest income increased by $629,000, or
      18.8%, to $4.0 million for the three months ended September 30, 2007 from $3.3
      million for the three months ended September 30, 2006.  Interest
      income increased by $781,000, or 7.6%,
      to
      $11.1 million for the nine months ended September 30, 2007, from $10.3 million
      for the nine months ended September 30, 2006.  The increase in
      interest income for both periods was primarily related to the increased volume
      of loans outstanding during the period.




The
      weighted average yield on loans decreased from 7.01% for the nine months ended
      September 30, 2006, to 6.91% for the nine months ended September 30,
      2007.  The decrease was primarily the result of the sale of the relatively
      higher yielding credit card portfolio in September 2006.  We
      anticipate our weighted average yield on loans will improve as we continue
      to
      emphasize higher yielding commercial real estate and commercial business loans.




***Interest
      Expense.***  Interest expense increased $521,000, or 32.7%,
      to $2.1 million
      for the three months ended September 30, 2007, from $1.6 million for the three
      months ended September 30, 2006.  Interest expense increased $1.2
      million, or 27.1%, to $5.8 million for the nine months ended September 30,
      2007,
      from $4.6 million for the nine months ended September 30, 2006.  The
      increase in interest expense for both periods was primarily due to the increased
      levels of time deposits and Federal Home Loan Bank advances, and the higher
      interest rates paid on those funds as a result of the rising interest rate




14




environment.  Our
      weighted average cost of interest-bearing liabilities was 3.71% for the nine
      months ended September 30, 2007, compared to 3.20% for the same period in
      2006.




Interest
      paid on deposits increased $367,000, or 26.0%, to $1.8 million for the three
      months ended September 30, 2007, as compared to $1.4 million for the three
      months ended September 30, 2006.  Interest paid on deposits increased
      $854,000, or 21.8%, to $4.8 million for the nine months ended September 30,
      2007, as compared to $3.9 million for the nine months ended September 30,
      2006.  The increase for both periods resulted primarily from an
      increase in the average balance of time deposits.  Our average
      balance of time deposits was $103.0 million during the three months ended
      September 30, 2007, compared to $80.0 million during the three months ended
      September 30, 2006, and $93.4 million during the nine months ended September
      30,
      2007, compared to $78.0 million during the nine months ended September 30,
      2006.  We
      also experienced a 69 basis point increase in the average rate
      paid on deposits
      during thethree-month period, and a 71 basis point increase in the
      average rate paid on deposits during the
      nine-month period.  Thisincrease
      in average rates
      were offset partially by decreases in the average balance of outstanding
      savings and money market accounts of $14.0 million during the three
      month
      period and $14.7 million during the nine
      month
      period.




Interest
      expense on Federal Home Loan Bank advances increased $155,000, or 87.6%, to
      $332,000 for the three months ended September 30, 2007 from $177,000 for the
      three months ended September 30, 2006.  Interest expense on Federal
      Home Loan Bank advances increased $391,000, or 58.3%, to $1.1 million for the
      nine months ended September 30, 2007 from $671,000 for the nine months ended
      September 30, 2006.  The increase resulted from an increase in the
      average balance of outstanding Federal Home Loan Bank advances of $9.1 million,
      to $27.8 million for the nine months ended September 30, 2007, from $18.7
      million for the nine months ended September 30, 2006.  In addition,
      the cost of Federal Home Loan Bank advances increased 31 basis points from
      the
      2006 nine-month period to the 2007 nine-month period.




***Net
      Interest Income.***  Net interest income increased
      $108,000, or 6.2%, to $1.9 million for the three months ended September 30,
      2007, from $1.8 million for the three months ended September 30,
      2006.  The
      increase in net interest income for the three-month
      period primarily
      resulted from higher yields earned on our increasing commercial loan
      portfolios.Net interest income decreased $463,000, or 8.1%,
      to $5.3 million for the nine months ended
      September 30, 2007, from $5.7 million for the nine months ended
      September 30, 2006.  The decrease in net interest income for the nine-month
      period,
      primarily resulted from an increase in our cost of funds caused by the continued
      rising interest rate environment and a decrease in our average yield on loans
      as
      a result of the transfer of our relatively higher yielding credit card
      portfolio.  Our net interest margin was 3.27% for the nine months
      ended September 30, 2007, compared to 3.89% for the nine months ended September
      30, 2006.




***Provision
      for Loan Losses.***  A provision of $175,000
      was made
      during the three months ended September 30, 2007, and no provision was made
      during the three months ended September 30, 2006.  This was primarily
      attributable to small
      increases in delinquencies and non-performing loans, a decline in the local
      residential housing market and increases in our commercial loan
      portfolio,an
      increase in our overall loan portfolio and changing conditions in the
      real estate market in the Puget Sound area.  At September 30, 2007,
      the annualized ratio of net charge-offs to average loans decreased 11 basis
      points to 0.06% from 0.17% at September 30, 2006.  The ratio of
      non-performing loans to total loans increased from 0.28% at September 30, 2006
      to 0.31% at September 30, 2007, primarily due to the addition of four
      non-performing first and second mortgage loans.




***Noninterest
      Income.***  Noninterest income decreased $57,000, or 10.6%,
      to $482,000 for the three months ended September 30, 2007, from $539,000 for
      the
      three months ended September 30, 2006.  This decrease for
      the
      three-month period reflects a $93,000 or 20.6% decrease in fees and services
      charges,






15




from
      $452,000 for the 2006
      period to $359,000 for the 2007 period, primarily due to lower fees on deposit
      accounts.Noninterest income decreased $2.4 million, or 60.1%,
      to $1.6 million
      for the nine months ended September 30, 2007, from $4.0 million for the nine
      months ended September 30, 2006.  The overall decrease for the nine-month period
      is the result of the $2.3 million one-time gain resulting from the sale of
      the
      credit card portfolio in June 2006.




***Noninterest
      Expense.***  Noninterest expense increased $230,000, or
      12.4%, to $2.1 million for the three months ended September 30, 2007, compared
      to $1.9 million for the three months ended September 30,
      2006.  Noninterest expense decreased $62,000, or 1.0%, to $6.0 million
      for the nine months ended September 30, 2007, compared to $6.1 million for
      the
      nine months ended September 30, 2006.  The increase in the three-month
      period was primarily the result of higher data processing expensesdue to a change
      in service
      providers.  The decrease in the nine-month period was primarily
      the result of the elimination of the expenses of maintaining a credit card
      portfolio in the 2007 period.  In addition, a senior officer
      responsible for business lending left us late in 2006
      and
      was not replaced until May 2007.  This resulted in lower salary and
      benefits expense during the first four months of 2007, as compared to the same
      period in 2006.




***Income
      Tax Expense.***  In the first nine months of 2007, we
      incurred income tax expense of $179,000 on our pre-tax income as compared to
      $1.1 million for the first nine months of 2006.  The higher expense in
      2006 was a result of the gain on the sale of our credit card
      portfolio.  In addition, our effective tax rate decreased during the
      2007 period, because one of our larger loans qualified for tax exempt
      status.




**Off-Balance
      Sheet Arrangements**





In
      the normal course of operations,
      Sound Community Bank engages in a variety of financial transactions that are
      not
      recorded in our financial statements.  These transactions involve
      varying degrees of off-balance sheet credit, interest rate and liquidity
      risks.  These transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments and lines of
      credit.  For  the nine months ended September 30, 2007, and
      the year ended December 31, 2006, we engaged in no off-balance sheet
      transactions likely to have a material effect on our financial condition,
      results of operations or cash flows.




A
      summary of our off-balance sheet
      commitments to extend credit at September 30, 2007, is as follows:




**Off-balance
                sheet loan commitments**:Commitments
                to make
                loans
            
            $
            2,743,000Unfunded
                Letters of
                Credit
            
            
            1,075,000Undisbursed
                portion of loans closed
            
            
            3,296,000Unused
                lines of
                credit
            
            
            31,914,000Total
                loan
                commitments
            
            $
            39,028,000







16







**Capital**




Sound
      Community Bank is subject to minimum capital requirements imposed by the
      OTS.  Based on its capital levels at September 30, 2007, Sound
      Community Bank exceeded these requirements as of that date and continues to
      exceed them as of the date of this prospectus.  Consistent with our
      goals to operate a sound and profitable organization, our policy is for Sound
      Community Bank to maintain a “well-capitalized” status under the capital
      categories of the OTS.  Based on capital levels at September 30, 2007,
      Sound Community Bank was considered to be well-capitalized.




Actual
            
            
            Minimum Capital
                Requirements
            
            
            Minimum Required to
                Be Well Capitalized
                Under Prompt
                Corrective
                Action
                  ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio(Dollars
                in thousands)Risk-Based Capital
              (to risk-weighted
                assets)
            
            $
            16,871
            
            
            
            10.62
            %
            
            $
            12,706
            
            
            
            8.00
            %
            
            $
            15,883
            
            
            
            10.00
            %Core
                Capital
              (to risk-weighted assets)
            
            $
            16,049
            
            
            
            10.10
            %
            
            
            6,353
            
            
            
            6.00
            %
            
            $
            9,350
            
            
            
            6.00
            %Core Capital
              (to total
                adjusted 
                assets)
            
            $
            16,049
            
            
            
            6.77
            %
            
            $
            9,748
            
            
            
            4.00
            %
            
            $
            11,848
            
            
            
            5.00
            %





The
      capital raised in our pending stock offering, with net proceeds estimated to
      be
      between $10.1 million and $13.9 million, will significantly increase our
      regulatory capital levels and ratios.  Based upon our existing
      capital, and the capital to be raised in this offering, we believe that we
      will
      have sufficient capital to carry out our proposed business plan for at least
      the
      next year and to meet any applicable regulatory capital requirements during
      that
      period.




**Impact
      of Inflation**




The
      effects of price changes and inflation can vary substantially for most financial
      institutions.   While management believes that inflation affects
      the growth of total assets, it believes that it is difficult to assess the
      overall impact.   Management believes this to be the case due to
      the fact that generally neither the timing nor the magnitude of the inflationary
      changes in the consumer price index (“CPI”) coincides with changes in interest
      rates.   The price of one or more of the components of the CPI
      may fluctuate considerably and thereby influence the overall CPI without having
      a corresponding affect on interest rates or upon the cost of those good and
      services normally purchased by Sound Community Bank.   In years
      of high inflation and high interest rates, intermediate and long-term interest
      rates tend to increase, thereby adversely impacting the market values of
      investment securities, mortgage loans and other long-term fixed rate
      loans.   In addition, higher short-term interest rates caused by
      inflation tend to increase the cost of funds.   In other years,
      the opposite may occur.









17


Item
      3                    Controls
      and Procedures





An
      evaluation of the Company's disclosure controls and procedures as defined in
      Rule 13a -15(e) under the Securities Exchange Act of 1934 (the "Act") as of
      September 30, 2007, was carried out under the supervision and with the
      participation of the Company's Chief Executive Officer, Chief Financial Officer
      and several other members of the Company's senior management. The Chief
      Executive Officer and Chief Financial Officer concluded that, as of September
      30, 2007, the Company's disclosure controls and procedures were effective in
      ensuring that the information required to be disclosed by the Company in the
      reports it files or submits under the Act is: (i) accumulated and communicated
      to the Company's management (including the Chief Executive Officer and the
      Chief
      Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules and forms.
      There were no changes in our internal control over financial reporting (as
      defined in Rule 13a - 15(f) under the Act) that occurred during the quarter
      ended September 30, 2007, that has materially affected, or is likely to
      materially affect our internal control over financial reporting.




The
      Company intends to continually review and evaluate the design and effectiveness
      of its disclosure controls and procedures and to improve its controls and
      procedures over time and to correct any deficiencies that it may discover in
      the
      future. The goal is to ensure that senior management has timely access to all
      material financial and non-financial information concerning the Company's
      business. While the Company believes the present design of its disclosure
      controls and procedures is effective to achieve its goal, future events
      affecting its business may cause the Company to modify its disclosure controls
      and procedures.






The
      Company does not expect that its disclosure controls and procedures will prevent
      all error and all fraud. A control procedure, no matter how well conceived
      and
      operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control procedure are met. Because of the inherent limitations
      in all control procedures, no evaluation of controls can provide absolute
      assurance that all control issues and instances of fraud, if any, within the
      Company have been detected. These inherent limitations include the realities
      that judgments in decision-making can be faulty, and that breakdowns can occur
      because of simple error or mistake. Additionally, controls can be circumvented
      by the individual acts of some persons, by collusion of two or more people,
      or
      by management override of the control. The design of any control procedure
      is
      also based in part upon certain assumptions about the likelihood of future
      events, and there can be no assurance that any design will succeed in achieving
      its stated goals under all potential future conditions; over time, controls
      may
      become inadequate because of changes in conditions, or the degree of compliance
      with the policies and procedures may deteriorate. Because of the inherent
      limitations in a cost-effective control procedure, misstatements due to error
      or
      fraud may occur and not be detected.






18




PART
      II
      OTHER INFORMATION







Item
      1             Legal
      Proceedings





In
      the
      normal course of business, the Company occasionally becomes involved in various
      legal proceedings.  In the opinion of management, any liability from
      such proceedings would not have a material adverse effect on the business or
      financial condition of the Company.





Item
      2             Unregistered
      Sales of Equity Securities and use of Proceeds





(a)           Recent
      Sales of Unregistered Securities





Nothing
      to report.





(b)           Use
      of Proceeds





Nothing
      to report.





(c)           Stock
      Repurchases





Nothing
      to report.





Item
      3          Defaults Upon
      Senior Securities





Nothing
      to report.





Item
      4           Submission of
      Matters to a Vote of Security Holders





Nothing
      to report.






Item
        5.Other
        Information
  Nothing
          to report.












19


Item
                6
            Exhibits





**Regulation**
              **S–B**
              **Exhibit
                Number**
            **Document**
            **Reference
                to**
              **Prior
                Filing**
              **or
                Exhibit Number**
              **Attached
                Hereto**2
            Plan
                of Reorganization and Stock Issuance
            *3.1
            Charter
                for Sound Financial, Inc.
            *3.2
            Bylaws
                of Sound Financial, Inc.
            **4
            Form
                of Stock Certificate of Sound Financial, Inc.
            **10.1
            Employment
                Agreement with Laura Lee Stewart
            *10.2
            Executive
                Long Term Compensation Agreement with Laura Lee Stewart
            *10.3
            Executive
                Long Term Compensation Agreement with Patricia Floyd
            *10.4
            Sound
                Community Incentive Compensation Achievement Plan
            *10.5
            Summary
                of Annual Bonus Plan
            *10.6
            Summary
                of Quarterly Bonus Plan
            *10.7
            2007
                Director Fee Arrangements
            *10.8
            Letter Agreement regarding Appraisal Services
            *14
            Code
                of Conduct and Ethics
            +15
            Letter
                on unaudited interim financial information
            None18
            Letter
                re change in accounting principles
            None19
            Reports
                furnished to security holders
            None20
            Other
                documents to security holders or incorporated by reference
            None22
            Published
                report on matters submitted for shareholder vote
            None23
            Consents
            None24
            Power
                of Attorney
            None31.1
            Rule
                13a–14(a) Certification of Chief Executive Officer
            31.131.2
            Rule
                13a–14(a) Certification of Chief Financial Officer
            31.232
            Section
                1350 Certification
            32*
            Filed
                as an exhibit to the Company's Form SB–2 registration statement filed on
                September 20, 2007 (File No.333–146196) pursuant
                to
                Section 5 of the Securities Act of 1933.**
            Filed
                as an exhibit to Pre-effective Amendment No. 1 to the Company's Form
                SB–2
                registration statement filed on November 2, 2007 (File No.333–146196) pursuant
                to
                Section 5 of the Securities Act of 1933.+
            Company
                is in formation and will not be chartered until the closing of its
                stock
                offering.  It will adopt a Code of Conduct and Ethics at its
                organization.





20





**SIGNATURES**








In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.














SOUND
      FINANICAL, INC.











December
      21,
      2007                                                                                     By:       /s/  Laura
      Lee Stewart


Laura
      Lee. Stewart


President
      and Chief Executive
      Officer











December
      21,
      2007                                                                                     By:       /s/  Matthew
      P. Deines


Matthew
      P. Deines


Executive
      Vice President
      and


Chief
      Financial Officer




















21