UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(Mark
One)




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




For the quarterly period
ended March
31, 2008




OR




[  ]           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 registrant as specified in its charter)




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




2005
5thAvenue,
Second Floor, Seattle, Washington 98121


(Address
of principal executive offices)




(206)
448-0884


(Registrant’s
telephone number)






None


(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 and 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes
[X]                      No
[   ]




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




Large accelerated
filer                                 
Accelerated filer




Non-accelerated
filer                                   Smaller
reporting company X


(Do not check if smaller
reporting company)




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




Yes
[   ]                           No
[X]




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






As
of May 8, 2008, there were issued and outstanding 2,948,063 shares of the
registrant’s common stock.










SOUND
FINANCIAL, INC.




Index




Page
      NumberPART
      I       FINANCIAL
      INFORMATIONItem
      1.
              Financial
      StatementsConsolidated
      Balance Sheets as of March 31, 2008 and
                December
      31, 2007
              1Consolidated
      Statements of Income For the Three-Month
                Periods
      Ended March 31, 2008 and 2007
              3Consolidated
      Statements of Comprehensive Income For
                the
      Three-Month Periods Ended March 31, 2008 and 2007
              4Consolidated
      Statements of Cash Flows For the Three-
                Month
      Periods Ended March 31, 2008 and 2007
              5Notes
      to Consolidated Financial Statements
              6Item
      2.
              Management's
      Discussion and Analysis of
                Financial
      Condition and Results of Operations
              11Item
      3.
              Quantitative
      and Qualitative Disclosures About
                Market
      Risk
              18Item
      4T.
              Controls
      and Procedures
              18PART
      II
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              19Item
      1A
              Risk
      Factors
              19Item
      2.
              Unregistered
      Sales of Equity Securities and Use
                of
      Proceeds
              19Item
      3.
              Defaults
      Upon Senior Securities
              19Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              19Item
      5.
              Other
      Information
              20Item
      6.
              Exhibits
              20SIGNATURESEXHIBITS













PART
I   FINANCIAL INFORMATION




Item
1     Financial
Statements




SOUND
FINANCIAL, INC. AND SUBSIDIARY


Consolidated
Balance Sheets




ASSETS





MARCH
      31,
            
            
            DECEMBER
      31,2008
              (Unaudited)
            
            
            2007CASH
      AND CASH EQUIVALENTS
            
            $
            8,159,027
            
            
            $
            6,104,963SECURITIES
      AVAILABLE-FOR-SALE,
      at fair value
            
            
            4,964,311
            
            
            
            71,245FEDERAL
      HOME LOAN BANK(FHLB)
      STOCK, at cost
            
            
            1,319,500
            
            
            
            1,319,500LOANS
            
            
            228,933,524
            
            
            
            220,233,447Less
      allowance for loan losses
            
            
            (876,827
            )
            
            
            (827,688
            )Loans,
      net
            
            
            228,056,697
            
            
            
            219,405,759LOANS
      HELD FOR SALE
            
            
            3,216,253
            
            
            
            822,129ACCRUED
      INTEREST RECEIVABLE
            
            
            1,058,315
            
            
            
            1,051,476PREMISES
      AND EQUIPMENT, net
            
            
            1,444,523
            
            
            
            1,404,853CASH
      SURRENDER VALUE OFBANK
      OWNED LIFE INSURANCE
            
            
            4,073,424
            
            
            
            4,035,412MORTGAGE
      SERVICING RIGHTS
            
            
            885,522
            
            
            
            864,946OTHER
      REAL ESTATE OWNED
            
            
            970,092
            
            
            
            817,108OTHER
      ASSETS
            
            
            413,194
            
            
            
            1,068,008Total
      assets
            
            $
            254,560,858
            
            
            $
            236,965,399








See
notes to consolidated financial statements.


1





SOUND
FINANCIAL, INC. AND SUBSIDIARY


Consolidated
Balance Sheets




LIABILITIES
AND STOCKHOLDERS' EQUITY





MARCH
      31,
            
            
            DECEMBER
      31,2008
              (Unaudited)
            
            
            2007DEPOSITSInterest-bearing
            
            $
            180,681,067
            
            
            $
            189,501,253Noninterest-bearing
      demand
            
            
            18,861,638
            
            
            
            13,289,946Total
      deposits
            
            
            199,542,705
            
            
            
            202,791,199FHLB
      ADVANCES
            
            
            25,719,355
            
            
            
            15,869,355ACCRUED
      INTEREST PAYABLE
            
            
            245,641
            
            
            
            210,518ACCOUNTS
      PAYABLE ANDOTHER
      LIABILITIES
            
            
            1,953,320
            
            
            
            1,951,786ADVANCE
      PAYMENTS FROMBORROWERS
      FOR TAXESAND
      INSURANCE
            
            
            447,992
            
            
            
            254,213Total
      liabilities
            
            
            227,909,013
            
            
            
            221,077,071STOCKHOLDERS’
      EQUITYRetained
      earnings
            
            
            15,902,592
            
            
            
            15,885,167Preferred
      stock, $0.01 par value, 1,000,000 shares
              authorized,
      no shares issued and outstanding as of
              March
      31, 2008 and December 31, 2007
            
            
            ---
            
            
            
            ---Common
      stock, $0.01 par value, 24,000,000 shares
              authorized,
      2,948,063 shares issued and 2,832,503
              outstanding
      as of March 31, 2008, no shares
              issued
      and outstanding as of December 31, 2007
            
            
            29,481
            
            
            
            ---Additional
      Paid-in Capital
            
            
            11,936,034Unearned
      shares - Employee Stock Ownership Plan (“ESOP”)
            
            
            (1,155,600
            )
            
            
            ---Accumulated
      other comprehensive(loss)
      income, net
            
            
            (60,662
            )
            
            
            3,161Total
      stockholders’ equity
            
            
            26,651,845
            
            
            
            15,888,328Total
      liabilities and stockholders’ equity
            
            $
            254,560,858
            
            
            $
            236,965,399





See
notes to consolidated financial statements.


2


SOUND
FINANCIAL, INC. AND SUBSIDIARY


Consolidated
Statements of Income


(Unaudited)





THREE
      MONTHS ENDEDMARCH
      31,2008
            
            
            2007INTEREST
      INCOMELoans,
      including fees
            
            $
            3,772,432
            
            
            $
            3,515,018Interest
      and dividends oninvestments,
      and cashequivalents
            
            
            56,512
            
            
            
            6,977Total
      interest income
            
            
            3,828,944
            
            
            
            3,521,995INTEREST
      EXPENSEDeposits
            
            
            1,708,104
            
            
            
            1,455,004FHLB
      advances
            
            
            221,823
            
            
            
            346,851Total
      interest expense
            
            
            1,929,927
            
            
            
            1,801,855NET
      INTEREST INCOME
            
            
            1,899,017
            
            
            
            1,720,140PROVISION
      FOR LOAN LOSSES
            
            
            160,000
            
            
            
            ---NET
      INTEREST INCOMEAFTER
      PROVISIONFOR
      LOAN LOSSES
            
            
            1,739,017
            
            
            
            1,720,140NONINTEREST
      INCOMEService
      charges and fee income
            
            
            491,320
            
            
            
            414,773Earnings
      on cash surrender valueof
      bank owned life insurance
            
            
            38,012
            
            
            
            40,108Mortgage
      servicing income
            
            
            103,100
            
            
            
            83,465Gain
      on sale of investment
            
            
            153,633
            
            
            
            ---Loss
      on sale of assets
            
            
            (28,775
            )
            
            
            (6,818
            )(Loss)
      gain on sale of loans
            
            
            (26,276
            )
            
            
            1,319Total
      noninterest income
            
            
            731,014
            
            
            
            532,847NONINTEREST
      EXPENSESalaries
      and benefits
            
            
            1,116,612
            
            
            
            982,030Operations
            
            
            688,937
            
            
            
            447,940Charitable
      contributions
            
            
            213,551
            
            
            
            21,028Occupancy
            
            
            226,991
            
            
            
            195,935Data
      processing
            
            
            226,015
            
            
            
            227,862Total
      noninterest expense
            
            
            2,472,106
            
            
            
            1,874,795(LOSS)
      INCOME BEFORE (BENEFIT)
              PROVISION FOR INCOME TAXES
            
            
            (2,075
            )
            
            
            378,192(BENEFIT)
      PROVISION FOR INCOME TAXES
            
            
            (19,500
            )
            
            
            118,830NET
      INCOME
            
            $
            17,425
            
            
            $
            259,362BASIC
      EARNINGS PER SHARE
            
            $
            0.01
            
            
            
            N/ADILUTED
      EARNINGS PER SHARE
            
            $
            0.01
            
            
            
            N/A





See
notes to consolidated financial statements


3


SOUND
FINANCIAL, INC. AND SUBSIDIARY


Consolidated
Statements of Comprehensive Income


(Unaudited)











Three
      Months Ended
              March
      31,2008
            
            
            2007Net
      Income
            
            $
            17,425
            
            
            $
            259,362Increase
      in unrealized (loss) gain on
              securities
      available-for-sale, net of tax
              (benefit)
      expense of ($31,251) and $1,075
              for
      the three months ended March 31, 2008,
              and
      2007, respectively.
            
            
            (63,823
            )
            
            
            2,086Comprehensive
      (Loss) Income
            
            $
            (46,398
            )
            
            $
            261,448


































See notes to consolidated
financial statements.





4


SOUND
FINANCIAL, INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)





THREE
      MONTHS ENDEDMARCH
      31,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
            
            $
            17,425
            
            
            $
            259,362Adjustments
      to reconcile net income to net cashfrom
      operating activities(Accretion) amortization of net discount/premium
              on
      investments
            
            
            (4,315
            )
            
            
            3,544Provision for loan losses
            
            
            160,000
            
            
            
            ---Depreciation and amortization
            
            
            93,828
            
            
            
            87,878Amortization of mortgage servicing rights
            
            
            (108,878
            )
            
            
            (69,969
            )Additions to mortgage servicing rights
            
            
            88,302
            
            
            
            64,138Earnings on cash surrender value ofbank
      owned life insurance
            
            
            (38,012
            )
            
            
            (40,108
            )Proceeds from sales of mortgage loans
            
            
            8,344,592
            
            
            
            5,311,485Originations of mortgage loans held for sale
            
            
            (10,868,942
            )
            
            
            (5,332,800
            )Loss (gain) on sale of loans
            
            
            26,276
            
            
            
            (1,319
            )Loss on sale of assets
            
            
            28,775
            
            
            
            6,818(Decrease) increase in operating assets and liabilitiesChange
      in accrued interest receivable
            
            
            (6,839
            )
            
            
            23,667Change
      in other assets
            
            
            687,390
            
            
            
            262,322Change
      in accrued interest payable
            
            
            35,123
            
            
            
            56,638Change
      in accounts payable and other liabilities
            
            
            1,534
            
            
            
            1,700,777Net
      cash from operating activities
            
            
            (1,543,741
            )
            
            
            2,332,433CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from maturities ofavailable-for-sale
      investments
            
            
            10,625
            
            
            
            42,991Purchase
      of available-for sale investments
            
            
            (4,991,291
            )
            
            
            ---Purchase
      of bank owned life insurance
            
            
            ---
            
            
            
            (600,000
            )Proceeds
      from sale of assets
            
            
            195,419
            
            
            
            ---Net
      increase in loans
            
            
            (8,979,972
            )
            
            
            (1,562,736
            )Net
      increase in OREO
            
            
            (108,678
            )Purchases
      of premises and equipment
            
            
            (133,498
            )
            
            
            (50,749
            )Net
      cash from investing activities
            
            
            (14,007,395
            )
            
            
            (2,170,494
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      decrease in deposits
            
            
            (3,248,494
            )
            
            
            (5,811,923
            )Proceeds
      from FHLB advances
            
            
            10,000,000
            
            
            
            5,040,000Repayment
      of FHLB advances
            
            
            (150,000
            )
            
            
            (150,000
            )Net
      proceeds from stock issuance
            
            
            10,809,915
            
            
            
            ---Net
      change in advances from borrowers fortaxes
      and insurance
            
            
            193,779
            
            
            
            190,427Net
      cash from financing activities
            
            
            17,605,200
            
            
            
            (731,496
            )INCREASE
      (DECREASE) IN CASHAND
      CASH EQUIVALENTS
            
            
            2,054,064
            
            
            
            (569,557
            )CASH
      AND CASH EQUIVALENTS, beginning of period
            
            
            6,104,963
            
            
            
            5,649,306CASH
      AND CASH EQUIVALENTS, end of period
            
            $
            8,159,027
            
            
            $
            5,079,749SUPPLEMENTAL
      CASH FLOW INFORMATIONCash
      paid for income taxes
            
            $
            ---
            
            
            $
            570,000Interest
      paid on deposits and FHLB advances
            
            $
            1,894,804
            
            
            $
            1,839,645Net
      transfer to other real estate owned
            
            $
            272,984
            
            
            
            ---


See notes to consolidated
financial statements.


5





SOUND
FINANCIAL, INC. AND SUBSIDIARY


Notes to
Consolidated Financial Statements






1.           BASIS
OF PRESENTATION




The
accompanying financial information is unaudited and has been prepared from the
consolidated financial statements of Sound Financial, Inc. (“Sound Financial” or
the “Company”) and its subsidiary, Sound Community Bank (“Bank”). These
consolidated financial statements have been prepared in accordance with the
instructions for Form 10-Q and Article 8 of regulation S-X and do not include
all disclosures required by generally accepted accounting principles for a
complete presentation of the Company's financial condition andresults 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-month periods ended March 31, 2008
and 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, 2007, included in the
Company's Annual Report on Form 10-K.




The Bank
sponsors a leveraged Employee Stock Ownership Plan ("ESOP").  The ESOP is
accounted for in accordance with the American Institute of Certified Public
Accountants Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership
Plan.  Accordingly, the debt of the ESOP is recorded as other
borrowed funds of the Bank, and the shares pledged as collateral are reported as
unearned shares issued to the employee stock ownership trust on the consolidated
balance sheet.  The debt of the ESOP is with the Company and is thereby
eliminated in the consolidated financial statements.  As shares are
released from collateral, compensation expense is recorded equal to the average
market price of the shares for the period, and the shares become available for
earnings per share calculations.




2.           RECENT
ACCOUNTING DEVELOPMENTS




In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133 (“SFAS 161”).  This Statement requires
enhanced disclosures about an entity’s derivative and hedging activities and is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.  The Company does not use
derivative instruments.  The adoption of this Statement is not
expected to have a material impact on the Company’s financial condition or
results of operations.




In
September 2006, the Emerging Issues Task Force (“EITF”) reached a final
consensus on Issue No. 06-4,Accounting
for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements.
EITF 06-4 requires employers to recognize a liability for future benefits
provided through endorsement split-dollar life insurance arrangements that
extend into postretirement periods in accordance with SFAS No. 106,Employers’
Accounting for Postretirement Benefits Other Than Pensions or APB Opinion
No. 12, “Omnibus Opinion – 1967.EITF 06-4
is effective for fiscal years beginning after December 15, 2007. Entities
should recognize the effects of applying EITF 06-4 through either
(a) a change in accounting principle through a cumulative-effect adjustment
to retained earnings or to other components of equity or net assets in the
statement of financial position as of the beginning of the year of adoption or
(b) a change in accounting principle through retrospective application to
all prior periods.The adoption of this Statement did not have a material
impact on the Company’s financial condition or results of
operations.




In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities—Including
an amendment of FASB Statement No. 115 (“SFAS
159”).  SFAS 159 permits the choice of measuring financial
instruments and certain other items at fair value.  SFAS 159 was
effective as of January 1, 2008. We have elected not to apply the provisions of
SFAS 159 to our eligible financial assets and financial liabilities on the
date of adoption. Accordingly, the initial application of SFAS 159 had no
effect on our financial statements.






6






In
December 2007, the FASB issued Statement No. 141(R), Business
Combinations (“SFAS 141(R)”).  SFAS 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree and recognizes and measures the
goodwill acquired in the business




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51 (“SFAS 160”).  SFAS 160 establishes accounting
and reporting standards that require that the ownership interests in
subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity; the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face of the
consolidated statement of income; and changes in a parent’s ownership interest
while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently.




SFAS 160
also requires that any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value when a subsidiary is
deconsolidated. SFAS 160 also sets forth the disclosure requirements to
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited.
SFAS 160 must be applied prospectively as of the beginning of the fiscal
year in which SFAS 160 is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure requirements are
applied retrospectively for all periods presented.  We do not have a
noncontrolling interest in one or more subsidiaries. Accordingly, we do not
anticipate that the initial application of SFAS 160 will have a material
impact on our financial statements.




3.           FAIR
VALUE OF FINANCIAL INSTRUMENTS




Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair
Value Measurements for all financial assets and liabilities measured and
reported on a fair value basis. At adoption, there was no effect on the
Company's financial position or results of operations.




Fair
Value Hierarchy


As
defined in SFAS No.157, fair value is the price that would be received to sell
an asset or paid to transfer a liability (i.e., exit price) in an orderly
transaction between market participants at the measurement date. In determining
fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. Observable inputs
reflect market-derived or market-based information obtained from independent
sources, while unobservable inputs reflect the Company's estimate about market
data. Based on the observability of the inputs used in the valuation techniques,
the Company classifies its financial assets and liabilities measured and
disclosed at fair value in accordance with the three-level hierarchy established
under SFAS No. 157. This hierarchy ranks the quality and reliability of the
information used to determine fair values.




Level 1:
Valuations are based on quoted prices in active markets for identical assets or
liabilities. Since valuations are based on quoted prices that are readily and
regularly available in an active market, valuation of these products does not
entail a significant degree of judgment.




Level 2:
Valuations are based on quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active and model-based valuations for which all significant assumptions are
observable or can be corroborated by observable market data.






7








Level 3:
Valuations are based on unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or
liabilities. Values are determined using pricing models and discounted cash flow
models and include management judgment and estimation which may be
significant.




In
determining the appropriate levels, the Company performs a detailed analysis of
the assets and liabilities that are subject to SFAS No. 157. In certain cases,
the inputs used to measure fair value of an asset or liability may fall into
different levels of the fair value hierarchy. The level within which the fair
value measurement is categorized is based on the lowest level input that is
significant to the fair value measurement in its entirety. Therefore, an item
may be classified in Level 3 even though there may be some significant inputs
that are readily observable.




Valuation
Methodologies


A
description of the valuation methodologies used for certain financial assets and
financial liabilities measured at fair value is as follows:




Securities
Available for Sale: Securities available for sale are recorded at fair value
based on quoted market prices, if available. If quoted market prices are not
available, management utilizes third-party pricing services or broker quotations
from dealers in the specific instruments. Level 1 securities include those
traded on an active exchange, as well as U.S. government and its agencies
securities. Level 2 securities include mortgage-backed securities and certain
asset-backed securities. Level 3 securities include collateralized mortgage
obligations (CMOs).




Loans
Held for Sale: Residential mortgage loans held for sale are recorded at the
lower of cost or fair value. The fair value of fixed-rate residential loans is
based on whole loan forward prices obtained from government sponsored
enterprises. These loans are classified as Level 2.




4.  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 three months ended
March 31, 2008 and 2007, we engaged in no off-balance sheet transactions likely
to have a material effect on our financial condition, our results of operations
or our cash flows.




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 materialadverse
effect on the business or financial condition of the
Company.




5.                      LEGAL
PROCEEDINGS




In
November 2007, Visa Inc. (“Visa”) announced that it had reached a settlement
with American Express and Discover Card related to antitrust lawsuits. The
Company and other Visa member banks are obligated to fund the settlement and
share in losses resulting from this litigation. The Company is not a party to
the Visa litigation and its liability arises solely from the Bank’s membership
interest in Visa, Inc.




Previously,
Visa announced that it completed restructuring transactions in preparation for
an initial public offering of its Class A stock planned for early 2008,
and, as part of those transactions, Sound Financial’s membership interest was
exchanged for Class B stock of Visa. In March 2008, Visa completed its initial
public offering. Using the proceeds from this offering, Visa established a $3.0
billion escrow account to cover settlements, resolution of pending litigation
and related claims (“covered litigation”).






8






As a
result of Visa’s initial public offering, we received $153,633 proceeds from a
mandatory partial redemption of our restricted Class B common stock, which is
recorded in gain on sale of investment. As of March 31, 2008, The Company
owns 5,699 shares of Class B common stock. These shares are restricted and may
not be transferred until the later of (1) three years from the date of the
initial public offering or (2) the period of time necessary to resolve the
covered litigation. A conversion ratio of 0.71429 was established for the
conversion rate of Class B shares into Class A shares. If the funds in the
escrow account are insufficient to settle all the covered litigation, Visa may
sell additional Class A shares, use the proceeds to settle litigation, and
further reduce the conversion ratio. If funds remain in the escrow account after
all litigation is settled, the Class B conversion ratio will be increased to
reflect that surplus.

















9


6.           LOANS




The
composition of the loan portfolio, excluding loans held for sale, was as
follows:




March
      31,
              2008
            
            
            December
      31,
              2007Real
      estate loansOne-
      to four-family
            
            $
            83,193,618
            
            
            $
            83,965,522Home
      equity
            
            
            47,632,275
            
            
            
            45,373,749Commercial
            
            
            29,961,897
            
            
            
            25,013,481Construction
      or development
            
            
            8,556,888
            
            
            
            8,621,743169,344,678
            
            
            
            162,974,495Consumer
      loansManufactured
      homes
            
            
            22,876,630
            
            
            
            22,495,034Automobile
            
            
            13,659,647
            
            
            
            15,077,564Other
            
            
            8,711,481
            
            
            
            8,818,01245,247,758
            
            
            
            46,390,610Commercial
      business loans
            
            
            14,277,005
            
            
            
            10,802,911228,869,441
            
            
            
            220,168,016Deferred
      loan origination costs
            
            
            64,083
            
            
            
            65,431Allowance
      for loan losses
            
            
            (876,827
            )
            
            
            (827,688
            )Total
      loans, net
            
            $
            228,056,697
            
            
            $
            219,405,759










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




Three
      Months Ended
              March
      31,2008
            
            
            2007Balance
      at beginning of period
            
            $
            827,688
            
            
            $
            822,393Provision
      for loan losses
            
            
            160,000
            
            
            
            ---Recoveries
            
            
            42,988
            
            
            
            92,117Charge-offs
            
            
            (153,849
            )
            
            
            (151,749
            )Balance
      at end of period
            
            $
            876,827
            
            
            $
            762,761










10






7.           FHLB
ADVANCES:




Sound Community Bank
utilizes a loan agreement with the 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 March 31, 2008, the
amount available to borrow under this agreement is approximately 25% of total
assets, conditional upon meeting certain collateral and stock ownership
requirements.  The Bank had outstanding borrowings under this
arrangement of $25,719,355 and $15,869,355 at March 31, 2008, and December 31,
2007, respectively.




8.           EARNINGS
PER SHARE:




Basic earnings/loss per
share is net income divided by the weighted average number of common shares
outstanding during the periods which was 2,594,032 shares for the quarter ended
March 31, 2008 and 0 for the quarter ended March 31, 2007.  ESOP
shares are considered outstanding for this calculation, unless
unearned.  There are currently no potentially dilutive common shares
issuable under stock options or other programs.






Item
2        Management’s
Discussion and Analysis of Financial Condition and


Resultsof
Operations




Forward-Looking
Statements




This
report contains statements that are not historical or current fact and
constitute forward-looking statements.  In some cases, you can
identify these statements by words such as "may", "might", "will", "should",
"expect", "plan", "intend", "anticipate", "believe", "estimate", "predict",
"potential", or "continue", the negative of these terms and other comparable
terminology.  Such forward-looking statements, which are based on
various underlying assumptions and expectations and are subject to risks,
uncertainties and other unknown factors, may include projections of our future
financial performance based on our growth strategies and anticipated trends in
our business.  These statements are only predictions based on our
current expectations and projections about future events, and there are or may
be important factors that could cause our actual results to be materially
different from the historical results or from any future results expressed or
implied by such forward-looking statements.  Unless required by law,
we undertake no obligation to publicly update or revise any forward-looking
statement to reflect circumstances or events after the date of this press
release.




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.







11







General




Sound
Financial, Inc. (“Company” or “Sound Financial”) was incorporated on January 8,
2008, to hold all of the stock of the Sound Community Bank (the “Bank”), which
converted from a state-charted credit union to a federally chartered savings
bank in 2003. Prior to that conversion, its name was Credit Union of the
Pacific.




In
connection with its organization, Sound Financial sold 1,297,148 shares of
common stock to investors at $10.00 per share in a subscription offering, which
closed on January 8, 2008.  Those shares constitute 44% of the
outstanding shares of common stock of Sound Financial.  In connection
with the closing of the offering, Sound Financial also issued 29,480 shares of
common stock to Sound Community Foundation, a charitable foundation created by
the Bank in connection with the mutual holding company reorganization and
subscription offering.  The remaining 1,621,435 shares of common stock
of Sound Financial outstanding were issued in accordance with federal law to
Sound Community MHC, a federal mutual holding company (“MHC”).




Sound
Financial raised $12,971,480 in its public offering and after paying $1,005,965
in offering expenses, it contributed $8,000,000 to the Bank, lent $1,155,600 to
fund its employee stock ownership plan’s purchase of shares in the offering,
contributed $200,000 to Sound Community Foundation and retained the remaining
$2,809,915 for working capital.




The
Bank’s 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, 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.




The
OTS issued a supervisory directive to the Bank in November2005,
because its capital was below levels in its business plan, its level of
commercial real estate and business loans was above levels in its business plan,
its earnings were below levels to maintain adequate capital; it did not conduct
an independent loan review; and its commercial loan monitoring required
improvement.Under
that directive, as amended, the Bank’s total investment in commercial loans was
limited to 15% of assets, of which at least initially 12% and later 10% had to
be secured by commercial real estate.  The Bank also was required to
reach earnings and capital levels in their business plan and enhance their loan
review and classification process,
including obtaining an independent loan review.  The
directive affected our operations by limiting our total investment in commercial
loans; however, it 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 $8.3 million and $5.3 million in
fixed-rate one- to four-family residential mortgage loans during the three
months ended March 31, 2008 and 2007, respectively.  During these same
periods, we sold $10.9 million and $5.3 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 on
Federal Home Loan Bank advances to augment






12






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 have adopted a plan of reorganization and stock issuance,
primarily to increase our capital to grow our loan portfolio and to continue to
build our franchise.




The 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 the Bank include
primarily deposits, borrowings, payments on loans and income provided from
operations.




The
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.  The 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.




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, other real
estate owned and determining our net deferred tax assets is described in our
Annual Report on Form 10-K.




Comparison
of Financial Condition at March 31, 2008 and December 31, 2007




General.  Total
assets increased by $17.6
million, or 7.4%,
to $254.6
million at March 31, 2008 from $237.0
million at December 31, 2007.  The increase was primarily the result
of an
$11.1 million, or 5.0%,
increase in our loan portfolio, including loans held for sale, from $221.1
million at December 31, 2007 to $232.1
million at March 31, 2008. The increase also was the result of a $7.0 million
increase in cash, cash equivalents and securities during the
quarter.  This increase in total assets was funded primarilyby the $10.8 million capital infusion from our stock offering and $9.9
million in new Federal Home Loan Bank advances obtained during the
quarter.




Loans.  Our
loan portfolio,
including loans held for sale, increased $11.1 million, or 4.8%,
to $232.1million atMarch
31,2008,
from $221.1 million at December 31, 2007.  This
increase in our loan portfolio consisted primarily of a $4.9 million (19.8%)
increase in commercial real estate loans, a $2.3 million (4.9%) increase in home
equity loans, a $3.5 million (32.2%) increase in commercial business loans,
which was offset by a $1.1 million (2.5%) decrease in consumer
loans.  The $8.4 million, or 23.5%, increase
in commercial real estate and business loans during the quarter is consistent
with our strategy to diversify our loan portfolio and increase our amount of
higher-yielding commercial loans.  The overall slowdown in the
national housing market and the pressures of the sub-prime market failures have
not had a significant impact on the housing and employment markets in the Puget
Sound area, which have experienced only a slight decline since early 2007.The
volume of residential
loan originations
increased during the first quarter of 2008, as compared to the level during the
last quarter of 2007.As
a result,loans
held for sale increased
$2.4
million,
or291.2%,
from $822,000at December 31,2007to $3.2
millionatMarch
31,2008.






13






Allowance
for Loan Losses.  Our allowance for loan losses at March 31,
2008, was $877,000,
or 0.38%,
of netloansreceivable, compared to $828,000, or 0.38%, of netloansreceivable at December 31, 2007.  The increase
in the allowance for loan losses was due tonet charge-offs of non-performing loans of
$111,000, which was offset by a $160,000
provision for loan losses during the quarter ended March 31,
2008.  This
provision was made as a result of a slowdown in the local residential housing
market and increases in our commercial and home equity loan
portfolios.Non-performing loans decreased to $356,000 at
March 31, 2008,from $418,000 at December 31, 2007, primarily as a result of our enhanced
collection efforts, which included contacting borrowers with past due loans
earlier in the delinquency cycle.  Non-performing loans to total loans
decreased to 0.15% at March 31, 2008,
from 0.19% at December 31, 2007.  Other real estate owned
increased by $153,000, or 18.7%, during the quarter ended March 31, 2008, as a
result of our acquisition of one single family residence, valued at $273,000, in
foreclosure proceedings, which was offset by the sale of one property for
$195,000, at a net loss of $33,000.




Cash
and Securities.  Cash and cash equivalents increased by $2.1
million, or 34.4%, to $8.2 million at March 31, 2008, as a result of the funds
received in our stock offering.  Our securities portfolio consists of
mortgage-backed securities, all of which are designated as
available-for-sale.  The securities portfolio increased $4.9 million
to $5.0 million at March 31, 2008 from $71,000 at December 31,
2007.  This significant increase reflects our purchase of non-agency
mortgage-backed securities, which were purchased at a discount to face value
with the funds received in our stock offering.  All of these
investments were purchased at a discount, which we believe will enhance our net
interest margin due to higher yields than if we had purchased them at
par.




Deposits.  Total
deposits decreased by $3.2 million, or 1.6%, to $199.5 million at March 31,
2008, from $202.8 million at December 31, 2007.  Time deposits
increased $2.6 million, while demand deposits and interest-bearing checking
accounts decreased $7.8 million and savings and money market accounts decreased
$779,000.  Total deposits decreased from year-end primarily as a
result of the timing of our stock offering, which closed January 8,
2008.  As of December 31, 2007, total deposits held for the
prospective purchase of stock totaled $10.8 million.  These funds were
classified in checking accounts as of December 31, 2007 and were subsequently
used to purchase stock on that closing date.  The increase in time
deposits reflects an emphasis of our branch staff to bring additional deposits
to the Bank from our existing customers.




Borrowings.  Federal
Home Loan Bank advances increased $9.9 million, or 62.1%, to $25.7
million at March 31, 2008 from $15.9 million at December 31,
2007.  These additional advances were all long-term
advances.  We continue to rely on Federal Home Loan Bank advances to
fund interest earning asset growth when deposit growth is insufficient to fund
such growth.  This reliance on borrowings, rather than deposits,
generally increases our overall cost of funds.




Equity.  Total
equity increased $10.7 million,
or 67.6%, to $26.7
million at March 31, 2008, from $15.9 million at December 31, 2007, primarily as
a result of the $10.8 million capital infusion from our stock offering and
$17,000
in quarterly earnings, which were offset by a decrease in Accumulated other
comprehensive income of $64,000.




Comparison
of Results of Operation for the Three Months Ended March 31, 2008 and
2007




General.  Net
income decreased $242,000
to $17,000
for the three months ended March 31, 2008 compared to $259,000 for the three
months ended March 31, 2007.  The
primary reasons for this decreasein
the 2008 period was
the $160,000 provision for loan losses and the $597,000 increase in
non-interest expense, which were offset by a $179,000 increase in net interest
income and a $198,000 increase in non-interest income from levels in the 2007
period.






14






Interest
Income.  Interest income increased by $307,000, or 8.8%, to
$3.8 million for the three months ended March 31, 2008 from $3.5 million for the
three months ended March 31, 2007.  The increase in interest income
for the period reflects the increased amount of loans and securities outstanding
during the 2008 period.




The
weighted average yield on loans decreased from 6.76% for the three months ended
March 31, 2007, to 6.72% for the three months ended March 31,
2008.  The decrease was primarily the result of the decrease in the
prime interest rate and the 1 year Treasury bill rate, which we use to set and
adjust our loan rates.  We anticipate our weighted average yield on
loans will improve as we continue to emphasize higher yielding commercial real
estate and business loans.




Interest
Expense.  Interest expense increased $128,000, or 7.1%, to $1.9
million for the three months ended March 31, 2008, from $1.8 million for the
three months ended March 31, 2007.  The increase in interest expense
for the 2008 period reflects the increased level of time deposits and the higher
interest rates paid on those funds as a result of the rising interest rate
environment.  Our weighted average cost of interest-bearing
liabilities was 3.60% for the three months ended March 31, 2008, compared to
3.54% for the same period in 2007.




Interest
paid on deposits increased $253,000, or 17.4%, to $1.7 million for the three
months ended March 31, 2008, as compared to $1.5 million for the three months
ended March 31, 2007.  The increase for the period resulted primarily
from an increase in the average balance and weighted average cost of time
deposits.  Our
average balance of time deposits was $107.0 million during the three
months ended March 31, 2008, compared to $85.6 million during the three months
ended March 31, 2007.  We
also experienced a 35 basis point increase in the average
rate paid on deposits during thethree-months ended March 31, 2008
compared to the same period in 2007.  Thisincrease in average rates were offset partially by decreases in the
average balance of outstanding savings and money market accounts of $10.3
million during
the three month period and a reduction in the cost of funds on these products
resulting from a lower overall interest rate environment.




Interest
expense on Federal Home Loan Bank advances decreased $125,000, or 36.0%, to
$222,000 for the three months ended March 31, 2008 from $347,000 for the three
months ended March 31, 2007.  The decrease resulted from a decrease in
the average balance of outstanding Federal Home Loan Bank advances of $8.2
million, to $20.5 million for the three months ended March 31, 2008, from $28.7
million for the three months ended March 31, 2007.  In addition, the
cost of Federal Home Loan Bank advances decreased 48 basis points from the 2007
period to the 2008 period.




Net
Interest Income.  Net interest income increased $179,000, or
10.4%, to $1.9 million for the three months ended March 31, 2008, from $1.7
million for the three months ended March 31, 2007.  The
increase in net interest income for the three-month
period primarily resulted from higher yields earned on our increasing commercial
loan portfolio.Our net interest margin was 3.34% for the
three months ended March 31, 2008, compared to 3.28% for the three months ended
March 31, 2007.




Provision
for Loan Losses.We
establish provisions for loan losses, which are charged to earnings, at a level
required to reflect probable incurred credit losses in the loan
portfolio.  In evaluating the level of the allowance for loan losses,
management considers historical loss experience, the types of loans and the
amount of loans in the loan portfolio, adverse situations that may affect
borrowers’ ability to repay, estimated value of any underlying collateral, peer
group data, prevailing economic conditions, and current
factors.  Large groups of smaller balance homogeneous loans, such as
residential real estate, small commercial real estate, home equity and consumer
loans, are evaluated in the aggregate using historical loss factors adjusted for
current economic conditions and other relevant data.  Larger
non-homogeneous loans, such as commercial loans for which management has
concerns about the borrowers’ ability to repay, are evaluated individually, and
specific loss allocations are provided for these loans when
necessary.






15






A
provision of $160,000
was made during the three months ended March 31, 2008, and no provision was made
during the three months ended March 31, 2007.  This was primarily
attributable to small
increases in delinquencies and non-performing loans, a decline in the local
residential housing market,increases
in our commercial loan portfolioandan increase in our overall loan portfolio.  At March 31,
2008, the annualized ratio of net charge-offs to average loans decreased 14
basis points to 0.20% from 0.34% at March 31, 2007.  The ratio of
non-performing loans to total loans decreased from 0.28% at March 31, 2007 to
0.15% at March 31, 2008.




Noninterest
Income.  Noninterest income increased $198,000, or 37.2%, to
$731,000 for the three months ended March 31, 2008, from $533,000 for the three
months ended March 31, 2007.  The
primary reason for this increase during the 2008 period was the$153,000
gain on the sale on investments, resulting from the mandatory redemption of a
portion of our Class B Visa, Inc. shares as part of Visa's recent initial public
offering.  The Bank obtained its Visa shares, by being a long-time
Visa member, prior to the sale of its credit card portfolio in
2006.  We continue to own 5,699 shares of Visa Class B shares that are
convertible into Class A shares.  Each Class B share currently is
convertible into 0.71429 Class A shares, which are traded on the New York Stock
Exchange.  The amount of Class A shares the Bank could realize upon
conversion of its Class B shares may change depending upon whether additional
amounts of money need to be reserved by Visa to settle outstanding
litigation.  The Class B shares carry a three-year lock-up provision
and may not be converted or redeemed during that period. If those shares could
be converted today, they would have a market value of approximately
$254,000.




The
increase in noninterest income during the 2008 period also reflects the loss on
the sale of loans and foreclosed property totaling $55,000 for the three months
ended March 31, 2008 compared to a loss of $5,500 for the three months ended
March 31, 2007, and an aggregate $94,000, or 17.5%, increase in income from
service charges and fees, the cash surrender value of bank owned life insurance
and mortgage servicing incomethe2008period,
compared to the 2007 period.




Noninterest
Expense.  Noninterest expense increased $597,000, or 31.9%, to
$2.5 million for the three months ended March 31, 2008, compared to $1.9 million
for the three months ended March 31, 2007.  The increase in the 2008
period was primarily the result of our $200,000 charitable contribution to Sound
Community Foundation (a non-stock Washington corporation we founded in
connection with our stock offering) and higher operating expenses including an
increase in salaries and benefits of $135,000 and higher legal costs and
printing fees resulting from our becoming a public
company.




Income
Tax Expense (Benefit).  In the first three months of 2008, we
incurred an income tax benefit of $20,000 on our pre-tax income as compared to
expense of $119,000 for the first three months of
2007.




Off-Balance
Sheet Arrangements




In the normal course of
operations, the 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 three months ended March 31, 2008, and the
year ended December 31, 2007, we engaged in no off-balance sheet transactions
likely to have a material effect on our financial condition, our results of
operations or our cash flows.









16







A summary
of our off-balance sheet commitments to extend credit at March 31, 2008, is as
follows:




Off-balance
      sheet loan commitments:Commitments
      to make loans
            
            $
            3,210,000Unfunded
      Letters of Credit
            
            
            2,998,000Undisbursed
      portion of loans closed
            
            
            2,745,000Unused
      lines of credit
            
            
            32,568,000Total
      loan commitments
            
            $
            41,521,000





Capital




The Bank
is subject to minimum capital requirements imposed by the OTS.  Based
on its capital levels at March 31, 2008, the Bank exceeded these requirements as
of that date and continues to exceed them as of the date of this
filing.  Consistent with our goals to operate a sound and profitable
organization, our policy is for the Bank to maintain a “well-capitalized” status
under the capital categories of the OTS.  Based on capital levels at
March 31, 2008, the Bank was considered to be
well-capitalized.  Management monitors the capital levels of the Bank
to provide for current and future business opportunities and to meet regulatory
guidelines for “well-capitalized” institutions.  The following table
shows the capital ratios of the Bank at March 31, 2008.




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)
            $25,024
            13.62%
            $14,702
            8.00%
            $18,378
            10.00%Core
      Capital
              (to risk-weighted assets)
            $24,147
            13.14%
            $7,351
            6.00%
            $11,027
            6.00%Core Capital
              (to total
      adjusted  assets)
            $24,147
            9.48%
            $10,188
            4.00%
            $12,735
            5.00%





Sound
Financial raised $13.0 million in its public offering, which resulted in net
proceeds of $10.8 million, which increased the capital levels of the Sound
Financial and the Bank.  We believe that we have sufficient capital to
carry out our proposed business plan at least through 2008 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 the 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     Quantitative
and Qualitative Disclosures About Market Risk




Not
required; the Company is a smaller reporting company.




Item
4T   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 ofMarch
31,2008,
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 ofMarch
31,2008,
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 endedMarch
31,2008,
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
1A     Risk
Factors




Not
required; the Company is a smaller reporting 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




The
Registration Statement on Form SB-2(No.
333-146196),
for which the use of proceeds information is being disclosed, was declared
effective by the Securities and Exchange Commission onNovember
13, 2007.The
offering commenced onNovember
21,
2007and
was completed onJanuary
8,
2008.The
Registration Statement covered the issuance of shares ofSound
Financial, Inc.common
stock, par value $.01 per share,
for $10.00 per share.The
managing underwriter for the offering was Keefe, Bruyette and Woods, Inc.The
Companysold
1,297,148 shares of common stock to investors at $10.00 per share in a
subscription offering, which closed on January 8, 2008.  Those shares
constitute 44% of the outstanding shares of common stock of Sound
Financial.  In connection with the closing of the offering, Sound
Financial also issued 29,480 shares of common stock to Sound Community
Foundation, a charitable foundation created by Sound Community Bank in
connection with the mutual holding company reorganization and subscription
offering.  The remaining 1,621,435 shares of common stock of Sound
Financial outstanding were issued in accordance with federal law to Sound
Community MHC, a federal mutual holding company (“MHC”).Sound
Financial raised $12,971,480 in its public
offering and after paying $1,005,965in
offering expenses (including$147,340.27in
commissions and expenses of the managing underwriter), it
contributed $8,000,000 to the Bankin
exchange for Bank stock,
lent $1,155,600 to fund its employee stock ownership plan’s purchase of shares
in the offering,
contributed $200,000 to its charitable foundation, which was expensed in the
current period’s earnings,and
retained the remaining $2,809,915for
working capital.




(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.







19








Item
5.       Other Information





Nothing
to report.





Item
6        Exhibits





Exhibit
    Number
            Document
            Reference to
              Prior Filing
              or Exhibit
      Number
              Attached
    Hereto2
            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
            Director
      Fee Arrangements for 2008
            *11
            Statement
      re computation of per share earnings
            None15
            Letterreunaudited interim financial
      information
            None18
            Letter re change in accounting
      principles
            None19
            Reports furnished to security
      holders
            None22
            Published reportregardingmatters submittedto vote of security
      holders
            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 onNovember 2, 2007(File No.333–146196) pursuant
      to Section 5 of the Securities Act of
  1933.


20








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.








SOUND FINANCIAL,
      INC.May
      15, 2008
              By:
              /s/ Laura
      Lee StewartLaura
      Lee StewartPresident
      and Chief Executive Officer


May
      15, 2008
              By:
              /s/ Matthew
      P. DeinesMatthew
      P. DeinesExecutive
      Vice President and
                Chief
      Financial officer












21


Exhibit
Index






31.1
            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