**UNITED      STATES SECURITIES AND EXCHANGE      COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

| þ | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 FOR THE QUARTERLY PERIOD ENDED September 30,                2007 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  ̈ | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 FOR TRANSITION PERIOD FROM                ______________TO_________________ |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**CASCADE      FINANCIAL CORPORATION**

| Washington                                                                         |   | 91-1661954                                       |
|------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| (State                or other jurisdiction of incorporation or organization)      |   | (IRS                Employer Identification No.) |
|                                                                               |   |                                             |
| 2828                Colby Avenue                                                   |   |                                             |
| Everett,                Washington                                                 |   | 98201                                            |
| (Address                of principal executive offices)                            |   | (Zip                Code)                        |
|                                                                               |   |                                             |
| (425)                339-5500                                                      |
| (Registrant's                telephone number, including area                code) |

| Class                                        | Outstanding                as of October 31, 2007 |
|----------------------------------------------|---------------------------------------------------|
| Common                Stock ($.01 par value) | 12,023,685                                        |

----

**CASCADE      FINANCIAL CORPORATION**

**FORM      10-Q**

**For      the Quarter Ended**
**September 30, 2007**

**INDEX**

|                                                     | **PAGE**                                                                                                            |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
| **PART                I — Financial Information:** |                                                                                                                |
| Item                1                                    | —                Financial Statements:                                                                        |   |
|                                                     | —                Condensed Consolidated Balance Sheets                                                        | 3 |
|                                                     | —                Condensed Consolidated Statements of Income                                                  | 4 |
|                                                     | —                Consolidated Statements of Comprehensive Income                                              | 5 |
|                                                     | —                Condensed Consolidated Statements of Cash Flows                                              | 6 |
|                                                     | —                Notes to Condensed Consolidated Financial Statements                                         | 8 |
|                                                     |                                                                                                                |   |
| Item                2                                    | —                Management’s Discussion and Analysis of Financial Condition and                Results |   |
|                                                     | of                Operations                                                                                        | 13 |
|                                                     |                                                                                                                |   |
| Item                3                                    | —                Quantitative and Qualitative Disclosures about Market Risk                                   | 26 |
|                                                     |                                                                                                                |   |
| Item                4                                    | —                Controls and Procedures                                                                      | 27 |
|                                                     |                                                                                                                |   |
| **PART                II — Other Information:**    |                                                                                                                |
| Item                1                                    |  —                Legal Proceedings                                                                      | 27 |
| Item                1A                                   |  —                Risk Factors                                                                           | 28 |
| Item                2                                    |  —                Unregistered Sales of Equity Securities and Use of                Proceeds             | 28 |
| Item                3                                    |  —                Defaults Upon Senior Securities                                                        | 28 |
| Item                4                                    |  —                Submission of Matters to a Vote of Security Holders                                    | 28 |
| Item                5                                    |  —                Other Information                                                                      | 28 |
| Item                6                                    |  —                Exhibits                                                                               | 28 |
|                                                     | Signatures                                                                                                          | 29 |

----

**PART      I –– FINANCIAL INFORMATION**

**Item      1 – Financial Statements**

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED BALANCE SHEETS**

| *(Dollars                in thousands)*                                    |       | **September                30,** | ** ** | ** ** | **December                31,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|------------|---------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                         | ** ** | ** ** | **2006**                        |       |
| **ASSETS**                                                                 |       |                             |       |       |                            |       |
| Cash                on hand and in banks                                   |       | $                                | 14,246     |       |                            | $          | 23,707 |   |
| Interest-earning                deposits in other institutions             |       |                             | 7,380      |       |                            |       | 19,172 |   |
| Securities                held-for-trading, fair value                     |       |                             | 17,009     |       |                            |       | - |   |
| Securities                available-for-sale, fair value                   |       |                             | 112,671    |       |                            |       | 130,656 |   |
| Federal                Home Loan Bank (FHLB) Stock                         |       |                             | 11,920     |       |                            |       | 11,920 |   |
| Securities                held-to-maturity, amortized cost                 |       |                             | 83,689     |       |                            |       | 96,846 |   |
| Loans,                net                                                  |       |                             | 1,060,469  |       |                            |       | 996,015 |   |
| Goodwill                                                                   |       |                             | 24,585     |       |                            |       | 25,195 |   |
| Core                deposit intangible, net                                |       |                             | 669        |       |                            |       | 775 |   |
| Premises                and equipment, net                                 |       |                             | 14,219     |       |                            |       | 12,003 |   |
| Cash                surrender value of bank-owned life insurance           |       |                             | 18,483     |       |                            |       | 17,974 |   |
| Deferred                tax asset                                          |       |                             | 2,461      |       |                            |       | 555 |   |
| Accrued                interest receivable and other assets                |       |                             | 12,448     |       |                            |       | 10,436 |   |
| **TOTAL                ASSETS**                                            |       | $                                | 1,380,249  |       |                            | $          | 1,345,254 |   |
|                                                                       |       |                             |       |       |                            |       |   |   |
| **LIABILITIES                AND STOCKHOLDERS’ EQUITY**              |       |                             |       |       |                            |       |   |   |
| Liabilities:                                                               |       |                             |       |       |                            |       |   |   |
| Deposits                                                                   |       | $                                | 906,725    |       |                            | $          | 855,449 |   |
| FHLB                advances                                               |       |                             | 197,000    |       |                            |       | 243,000 |   |
| Securities                sold under agreements to repurchase              |       |                             | 120,618    |       |                            |       | 95,710 |   |
| Junior                subordinated debentures payable                      |       |                             | 15,465     |       |                            |       | 25,775 |   |
| Junior                subordinated debentures payable, at fair value       |       |                             | 11,541     |       |                            |       | - |   |
| Advance                payments by borrowers for taxes and insurance       |       |                             | 738        |       |                            |       | 703 |   |
| Dividends                payable                                           |       |                             | 1,082      |       |                            |       | 967 |   |
| Accrued                interest payable, expenses and other liabilities    |       |                             | 8,199      |       |                            |       | 8,451 |   |
| **TOTAL                LIABILITIES**                                       |       |                             | 1,261,368  |       |                            |       | 1,230,055 |   |
|                                                                       |       |                             |       |       |                            |       |   |   |
| Stockholders’                Equity:                                 |       |                             |       |       |                            |       |   |   |
| Preferred                stock, $.01 par value, Authorized 500,000 shares; |       |                             |       |       |                            |       |   |   |
| no                shares issued or outstanding                             |       |                             | -          |       |                            |       | - |   |
| Common                stock, $.01 par value, Authorized 25,000,000 shares; |       |                             |       |       |                            |       |   |   |
| issued                and outstanding 12,023,685 shares at September       |       |                             |       |       |                            |       |   |   |
| 30,                2007, and 12,093,699 shares at December 31, 2006        |       |                             | 120        |       |                            |       | 121 |   |
| Additional                paid-in capital                                  |       |                             | 40,277     |       |                            |       | 39,430 |   |
| Retained                earnings, substantially restricted                 |       |                             | 79,010     |       |                            |       | 77,952 |   |
| Accumulated                other comprehensive (loss), net of tax          |       |                             | (526       | )          |                            |       | (2,304 | ) |
| **TOTAL                STOCKHOLDERS’ EQUITY**                        |       |                             | 118,881    |       |                            |       | 115,199 |   |
| **TOTAL                LIABILITIES AND STOCKHOLDERS’ EQUITY**        |       | $                                | 1,380,249  |       |                            | $          | 1,345,254 |   |

*See      notes to condensed consolidated financial statements*

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED STATEMENTS OF INCOME**

| *(Dollars                in thousands except*                                                                   |   | **Three                months ended** |       |       | **Nine                months ended** |       |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|------------|--------------------------------------|------------|
| *share                and per share amounts)*                                                                   |   | **September                30,**      |       |       | **September                30,**     |       |
|                                                                                                            |   | **2007**                              | ** ** | ** ** | **2006**                             | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |
| **Interest                income:**                                                                             |   |                                  |       |       |                                 |       |   |   |   |   |   |   |
| Loans                                                                                                           |   | $                                     | 20,345     |       |                                 | $          | 18,532 |   |   | $ | 60,456 |   |   | $ | 51,735 |   |
| Securities                held-for-trading                                                                      |   |                                  | 386        |       |                                 |       | - |   |   |   | 1,738 |   |   |   | - |   |
| Securities                available-for-sale                                                                    |   |                                  | 1,408      |       |                                 |       | 1,675 |   |   |   | 3,396 |   |   |   | 5,099 |   |
| FHLB                dividends                                                                                   |   |                                  | 18         |       |                                 |       | - |   |   |   | 48 |   |   |   | - |   |
| Securities                held-to-maturity                                                                      |   |                                  | 1,054      |       |                                 |       | 1,151 |   |   |   | 3,089 |   |   |   | 3,418 |   |
| Interest-earning                deposits                                                                        |   |                                  | 167        |       |                                 |       | 38 |   |   |   | 1,072 |   |   |   | 179 |   |
| Total                interest income                                                                            |   |                                  | 23,378     |       |                                 |       | 21,396 |   |   |   | 69,799 |   |   |   | 60,431 |   |
| **Interest                expense:**                                                                            |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                        |   |                                  | 8,821      |       |                                 |       | 7,683 |   |   |   | 26,395 |   |   |   | 20,465 |   |
| FHLB                advances and securities sold under agreements   to                repurchase |   |                                  | 3,217      |       |                                 |       | 3,238 |   |   |   | 9,736 |   |   |   | 9,447 |   |
| Junior                subordinated debentures                                                                   |   |                                  | 530        |       |                                 |       | 519 |   |   |   | 1,590 |   |   |   | 1,355 |   |
| Total                interest expense                                                                           |   |                                  | 12,568     |       |                                 |       | 11,440 |   |   |   | 37,721 |   |   |   | 31,267 |   |
| Net                interest income                                                                              |   |                                  | 10,810     |       |                                 |       | 9,956 |   |   |   | 32,078 |   |   |   | 29,164 |   |
| Provision                for loan losses                                                                        |   |                                  | 350        |       |                                 |       | 300 |   |   |   | 850 |   |   |   | 850 |   |
| Net                interest income after provision for loan losses                                              |   |                                  | 10,460     |       |                                 |       | 9,656 |   |   |   | 31,228 |   |   |   | 28,314 |   |
| **Other                income:**                                                                                |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Gain                on sale of loans                                                                            |   |                                  | 46         |       |                                 |       | 97 |   |   |   | 167 |   |   |   | 177 |   |
| Net                gain on fair value of financial instruments                                                  |   |                                  | 281        |       |                                 |       | - |   |   |   | 934 |   |   |   | - |   |
| Net                gain (loss) on sale of securities held-for-trading                                           |   |                                  | 22         |       |                                 |       | - |   |   |   | (459 | ) |   |   | - |   |
| Net                gain on sale of securities available-for-sale                                                |   |                                  | 6          |       |                                 |       | - |   |   |   | 28 |   |   |   | - |   |
| Net                gain on FHLB advances                                                                        |   |                                  | -          |       |                                 |       | - |   |   |   | 569 |   |   |   | - |   |
| Net                loss on sale of REO                                                                          |   |                                  | -          |       |                                 |       | - |   |   |   | - |   |   |   | (27 | ) |
| Checking                fees                                                                                    |   |                                  | 1,005      |       |                                 |       | 911 |   |   |   | 2,839 |   |   |   | 2,529 |   |
| Service                fees                                                                                     |   |                                  | 265        |       |                                 |       | 281 |   |   |   | 794 |   |   |   | 898 |   |
| Bank-owned                life insurance                                                                        |   |                                  | 203        |       |                                 |       | 195 |   |   |   | 598 |   |   |   | 572 |   |
| Other                                                                                                           |   |                                  | 114        |       |                                 |       | 132 |   |   |   | 357 |   |   |   | 365 |   |
| Total                other income                                                                               |   |                                  | 1,942      |       |                                 |       | 1,616 |   |   |   | 5,827 |   |   |   | 4,514 |   |
| **Other                expenses:**                                                                              |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Compensation                and employee benefits                                                               |   |                                  | 3,551      |       |                                 |       | 3,348 |   |   |   | 10,246 |   |   |   | 9,737 |   |
| Occupancy                                                                                                       |   |                                  | 903        |       |                                 |       | 866 |   |   |   | 2,603 |   |   |   | 2,607 |   |
| Marketing                                                                                                       |   |                                  | 316        |       |                                 |       | 263 |   |   |   | 909 |   |   |   | 789 |   |
| Data                processing                                                                                  |   |                                  | 104        |       |                                 |       | 99 |   |   |   | 326 |   |   |   | 305 |   |
| Other                                                                                                           |   |                                  | 1,850      |       |                                 |       | 1,773 |   |   |   | 5,611 |   |   |   | 4,822 |   |
| Total                other expenses                                                                             |   |                                  | 6,724      |       |                                 |       | 6,349 |   |   |   | 19,695 |   |   |   | 18,260 |   |
| Income                before provision for federal income taxes                                                 |   |                                  | 5,678      |       |                                 |       | 4,923 |   |   |   | 17,360 |   |   |   | 14,568 |   |
| Provision                for federal income taxes                                                               |   |                                  | 1,892      |       |                                 |       | 1,609 |   |   |   | 5,826 |   |   |   | 4,755 |   |
| **Net                income**                                                                                   |   | $                                     | 3,786      |       |                                 | $          | 3,314 |   |   | $ | 11,534 |   |   | $ | 9,813 |   |
|                                                                                                            |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |

*See      notes to condensed consolidated financial statements*

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**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED STATEMENTS OF INCOME**

|                                                                  |   | **Three                months ended** | ** ** | ** ** | **Nine                months ended** |       |       |
|-----------------------------------------------------------------------|--------|---------------------------------------|------------|------------|--------------------------------------|------------|------------|
|                                                                  |   | **September                30,**      | ** ** | ** ** | **September                30,**     |       |       |
|                                                                  |   | **2007**                              | ** ** | ** ** | **2006**                             | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |   |
| Net                income per common share, basic                     |   | $                                     | 0.32       |       |                                 | $          | 0.27       |   |   | $ | 0.96 |   |   | $ | 0.81 |   |
| Weighted                average number of shares outstanding, basic   |   |                                  | 12,009,440 |       |                                 |       | 12,078,088 |   |   |   | 12,055,024 |   |   |   | 12,051,238 |   |
| Net                income per share, diluted                          |   | $                                     | 0.31       |       |                                 | $          | 0.27       |   |   | $ | 0.94 |   |   | $ | 0.79 |   |
| Weighted                average number of shares outstanding, diluted |   |                                  | 12,233,781 |       |                                 |       | 12,366,497 |   |   |   | 12,307,001 |   |   |   | 12,358,862 |   |
| Dividends                declared per share                           |   | $                                     | 0.09       |       |                                 | $          | 0.08       |   |   | $ | 0.25 |   |   | $ | 0.23 |   |

*See      notes to condensed consolidated financial statements*

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONSOLIDATED      STATEMENTS OF COMPREHENSIVE INCOME**

|                                                                     |   | **Three                months ended** | ** ** | ** ** | **Nine                months Ended** |       |
|--------------------------------------------------------------------------|--------|---------------------------------------|------------|------------|--------------------------------------|------------|
| *(Dollars                in thousands)*                                  |   | **September                30,**      | ** ** | ** ** | **September                30,**     |       |
|                                                                     |   | **2007**                              | ** ** | ** ** | **2006**                             | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |
| **Net                Income**                                            |   | $                                     | 3,786      |       |                                 | $          | 3,314 |   |   | $ | 11,534 |   |   | $ | 9,813 |   |
| Increase                in unrealized gain (loss) on securities          |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| available-for-sale,                net of tax expense (benefit)          |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| of                $351 and $859 for the three months                     |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| ended                September 30, 2007, and 2006, respectively,         |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| and                $947 and $(166) for the nine months ended             |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| September                30, 2007, and 2006, respectively.               |   |                                  | 651        |       |                                 |       | 1,596 |   |   |   | 1,759 |   |   |   | (308 | ) |
| Less                reclassification adjustment for (loss) on securities |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| included                in net income, net of tax (benefit) of           |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| $2                and $0 for the three months ended                      |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| September                30, 2007, and 2006, respectively, and           |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| $10                and $0 for the nine months ended                      |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| September                30, 2007, and 2006, respectively.               |   |                                  | 4          |       |                                 |       | - |   |   |   | 19 |   |   |   | - |   |
|                                                           |   |                                  |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Comprehensive                Income**                        |   | $                                     | 4,441      |       |                                 | $          | 4,910 |   |   | $ | 13,312 |   |   | $ | 9,505 |   |

*See      notes to condensed consolidated financial statements*

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS**

|                                                                                                   |   | **Nine                Months Ended****September                30, **** ** |       |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|------------|
| *(Dollars                in thousands)*                                                                |   | **2007**                                                                             | ** ** | ** ** | **2006** |   |
|                                                                                                   |   |                                                                                 |       |   |   |   |
| **Cash                flows from operating activities:**                                               |   |                                                                                 |       |   |   |   |
| Net                income                                                                              |   | $                                                                                    | 11,534     |   |   | $ | 9,813 |   |
| Adjustments                to reconcile net income to net cash provided by                             |   |                                                                                 |       |   |   |   |   |   |
| (used                in) operating activities:                                                         |   |                                                                                 |       |   |   |   |   |   |
| Depreciation                and amortization of premises and equipment                                 |   |                                                                                 | 1,362      |   |   |   | 1,468 |   |
| Provision                for losses on loans                                                           |   |                                                                                 | 850        |   |   |   | 850 |   |
| Increase                in cash surrender value of bank-owned life insurance                           |   |                                                                                 | (509       | ) |   |   | (492 | ) |
| Amortization                of retained servicing rights                                               |   |                                                                                 | 32         |   |   |   | 7 |   |
| Amortization                of core deposit intangible                                                 |   |                                                                                 | 106        |   |   |   | 106 |   |
| Deferred                federal income taxes                                                           |   |                                                                                 | (1,141     | ) |   |   | (39 | ) |
| Deferred                loan fees, net of amortization                                                 |   |                                                                                 | 262        |   |   |   | (4 | ) |
| Stock-based                compensation                                                                |   |                                                                                 | 168        |   |   |   | 212 |   |
| Excess                tax benefit from stock-based payments                                            |   |                                                                                 | (265       | ) |   |   | - |   |
| Net                change in fair value of financial instruments                                       |   |                                                                                 | (460       | ) |   |   | - |   |
| Net                (increase) in accrued interest receivable and other assets                          |   |                                                                                 | (1,381     | ) |   |   | (932 | ) |
| Net                increase in accrued interest payable, expenses and other                liabilities |   |                                                                                 | (29        | ) |   |   | (185 | ) |
| Net                cash provided by operating activities                                               |   |                                                                                 | 10,529     |   |   |   | 10,804 |   |
|                                                                                                   |   |                                                                                 |       |   |   |   |   |   |
| Cash                flows from investing activities:                                                   |   |                                                                                 |       |   |   |   |   |   |
| Loans                originated, net of principal repayments                                           |   |                                                                                 | (62,855    | ) |   |   | (110,922 | ) |
| Net                purchases of securities held-for-trading                                            |   |                                                                                 | 48,761     |   |   |   | - |   |
| Net                purchases of securities available-for-sale                                          |   |                                                                                 | (61,198    | ) |   |   | (5,716 | ) |
| Proceeds                from sales/calls of securities available-for-sale                              |   |                                                                                 | 22,132     |   |   |   | - |   |
| Principal                repayments on securities available-for-sale                                   |   |                                                                                 | 5,343      |   |   |   | 12,091 |   |
| Net                purchases of securities held-to-maturity                                            |   |                                                                                 | (5,000     | ) |   |   | (3,744 | ) |
| Principal                repayments on securities held-to-maturity                                     |   |                                                                                 | 2,173      |   |   |   | 1,549 |   |
| Purchases                of premises and equipment                                                     |   |                                                                                 | (3,595     | ) |   |   | (1,407 | ) |
| Proceeds                from sales/retirements of premises and equipment                               |   |                                                                                 | 14         |   |   |   | 191 |   |
| Net                decrease in loan participations sold                                                |   |                                                                                 | (2,573     | ) |   |   | (289 | ) |
| Net                cash used in investing activities                                                   |   |                                                                                 | (56,798    | ) |   |   | (108,247 | ) |
|                                                                                                   |   |                                                                                 |       |   |   |   |   |   |
| Subtotal,                carried forward                                                               |   | $                                                                                    | (46,269    | ) |   | $ | (97,443 | ) |

*See        notes to condensed consolidated financial statements*

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS**

|                                                                                                                   |       | **Nine                Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                             | ** ** | **September                30,**     |       |
| *(Dollars                in thousands)*                                                                                |       | **2007**                             | ** ** | ** ** | **2006** |   |
|                                                                                                                   |       |                                 |       |   |   |   |
| Subtotal,                brought forward                                                                               |       | $                                    | (46,269    | ) |   | $ | (97,443 | ) |
|                                                                                                                   |       |                                 |       |   |   |   |   |   |
| **Cash                flows from financing activities:**                                                               |       |                                 |       |   |   |   |   |   |
| Proceeds                from issuance of common stock                                                                  |       |                                 | 572        |   |   |   | 754 |   |
| Dividends                paid                                                                                          |       |                                 | (2,896     | ) |   |   | (2,638 | ) |
| Repurchase                of common stock                                                                              |       |                                 | (2,830     | ) |   |   | (528 | ) |
| Excess                tax benefits from stock-based payments                                                           |       |                                 | 265        |   |   |   | - |   |
| Net                increase in deposits                                                                                |       |                                 | 50,962     |   |   |   | 44,338 |   |
| Net                decrease in FHLB advances                                                                           |       |                                 | (46,000    | ) |   |   | (3,000 | ) |
| Net                increase in securities sold under agreements to repurchase                                          |       |                                 | 24,908     |   |   |   | 44,642 |   |
| Proceeds                from Trust Preferred Securities issued                                                         |       |                                 | -          |   |   |   | 10,310 |   |
| Net                increase in advance payments by borrowers for taxes and                insurance                    |       |                                 | 35         |   |   |   | 268 |   |
| Net                cash provided by financing activities                                                               |       |                                 | 25,016     |   |   |   | 94,146 |   |
| Net                increase (decrease) in cash and cash equivalents                                                    |       |                                 | (21,253    | ) |   |   | (3,297 | ) |
|                                                                                                                   |       |                                 |       |   |   |   |   |   |
| Cash                and cash equivalents at beginning of period                                                        |       |                                 | 42,879     |   |   |   | 31,109 |   |
| Cash                and cash equivalents at end of period                                                              |       | $                                    | 21,626     |   |   | $ | 27,812 |   |
|                                                                                                                   |       |                                 |       |   |   |   |   |   |
| Supplemental                disclosures of cash flow information—cash paid during the period                for: |       |                                 |       |   |   |   |   |   |
| Interest                                                                                                               |       | $                                    | 37,683     |   |   | $ | 29,842 |   |
| Federal                income taxes                                                                                    |       |                                 | 5,600      |   |   |   | 5,200 |   |
|                                                                                                                   |       |                                 |       |   |   |   |   |   |
| Supplemental                schedule of noncash investing activities:                                                  |       |                                 |       |   |   |   |   |   |
| Mark-to-market                on securities available-for-sale                                                         |       |                                 | (598       | ) |   |   | 474 |   |
| Retirement                of common stock in retained earnings                                                         |       |                                 | 171        |   |   |   | 142 |   |
| Dividends                declared                                                                                      |       |                                 | 3,013      |   |   |   | (2,739 | ) |
| Cumulative                adjustment to equity on adoption of SFAS No. 159                                             |       |                                 | (3,389     | ) |   |   | - |   |

*See      notes to condensed consolidated financial statements*

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**NOTES      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September      30, 2007**

**(unaudited)**

| 1. | Presentation                of Financial Information |
|----|------------------------------------------------------|

| 2. | Commitments                and Contingencies |
|----|----------------------------------------------|

| 3. | Recently                Issued Accounting Standards |
|----|-----------------------------------------------------|

*Adoption      of SFAS No. 159 and No. 157:*
*The      Fair Value Option for Financial Assets and Financial Liabilities*
*Fair Value Measurements*

*Accounting for      Uncertainty in Income Taxes, *
*Accounting for Income Taxes,*

----

| 4. | Trust                Preferred Securities (Junior Subordinated                Debentures) |
|----|-------------------------------------------------------------------------------------------|

| 5. | Stockholders’                Equity |
|----|-------------------------------------------|

|   | a) | Earnings                Per Share |
|--------|----|-----------------------------------|

|                                                         |       | **Three                Months Ended**                                       | ** ** | ** ** | **Nine                Months Ended** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **September                30,**                                            | ** ** | ** ** | **September                30,**     | ** ** |
| ** **                                                   | ** ** | **2007**                                                                    | ** ** | ** ** | **2006**                             | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |
|                                                         |       | *(Dollars                in thousands, except share and per share amounts)* |       |
| **Numerator:**                                               |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |
| Net                income                                    |       | $                                                                           | 3,786      |       |                                 | $          | 3,314 |   |   | $ | 11,534 |   |   | $ | 9,813 |   |
|                                                         |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Denominator:**                                             |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Denominator                for basic net income per share-   |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Weighted                average shares                       |       |                                                                        | 12,009,440 |       |                                 |       | 12,078,088 |   |   |   | 12,055,024 |   |   |   | 12,051,238 |   |
| Effect                of dilutive securities:                |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Stock                options                                 |       |                                                                        | 224,341    |       |                                 |       | 288,409 |   |   |   | 251,977 |   |   |   | 307,624 |   |
| Denominator                for diluted net income per share- |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Weighted                average shares and assumed           |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| conversion                of dilutive stock options          |       |                                                                        | 12,233,781 |       |                                 |       | 12,366,497 |   |   |   | 12,307,001 |   |   |   | 12,358,862 |   |
|                                                         |       |                                                                        |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Basic                net income per share                    |       | $                                                                           | 0.32       |       |                                 | $          | 0.27 |   |   | $ | 0.96 |   |   | $ | 0.81 |   |
| Diluted                net income per share                  |       | $                                                                           | 0.31       |       |                                 | $          | 0.27 |   |   | $ | 0.94 |   |   | $ | 0.79 |   |

----

|   | b) | Dividends |
|--------|----|-----------|

|   | c) | Stock-based                Compensation |
|--------|----|-----------------------------------------|

*Share-Based      Payment,*

*Accounting for Stock Issued to Employees,*

|                                             |   | **Options** | ** ** | ** ** | **Weighted-****Average****Exercise****Price                per Share** | ** ** | ** ** | **Weighted-****Average****Remaining****Contractual****Term****(in                years)** | ** ** | ** ** | **Aggregate****Intrinsic****Value** |   |
|--------------------------------------------------|--------|-------------|------------|------------|------------------------------------------------------------------------|------------|------------|-------------------------------------------------------------------------------------------|------------|------------|-------------------------------------|--------|
| Outstanding                on December 31, 2006  |   |        | 703,606    |       |                                                                   | $          | 9.26       |                                                                                      |       |       | 5.76                                |   |   | $ | 5,511,642 |   |
| Granted                                          |   |        | 1,000      |       |                                                                   |       | 17.17      |                                                                                      |       |       |                                |   |   |   |   |   |
| Exercised                                        |   |        | (29,553    | )          |                                                                   |       | 6.72       |                                                                                      |       |       |                                |   |   |   |   |   |
| Forfeited/Canceled                               |   |        | (5,389     | )          |                                                                   |       | 11.87      |                                                                                      |       |       |                                |   |   |   |   |   |
| Outstanding                on March 31, 2007     |   |        | 669,664    |       |                                                                   | $          | 9.36       |                                                                                      |       |       | 5.63                                |   |   | $ | 5,388,055 |   |
| Granted                                          |   |        | 1,000      |       |                                                                   |       | 15.90      |                                                                                      |       |       |                                |   |   |   |   |   |
| Exercised                                        |   |        | (32,213    | )          |                                                                   |       | 5.20       |                                                                                      |       |       |                                |   |   |   |   |   |
| Forfeited/Canceled                               |   |        | -          |       |                                                                   |       | -          |                                                                                      |       |       |                                |   |   |   |   |   |
| Outstanding                on June 30, 2007      |   |        | 638,451    |       |                                                                   | $          | 9.58       |                                                                                      |       |       | 5.46                                |   |   | $ | 3,998,101 |   |
| Granted                                          |   |        | 2,000      |       |                                                                   | $          | 15.88      |                                                                                      |       |       |                                |   |   |   |   |   |
| Exercised                                        |   |        | (40,529    | )          |                                                                   |       | 5.18       |                                                                                      |       |       |                                |   |   |   |   |   |
| Forfeited/Canceled                               |   |        | (312       | )          |                                                                   |       | 15.00      |                                                                                      |       |       |                                |   |   |   |   |   |
| Outstanding                on September 30, 2007 |   |        | 599,610    |       |                                                                   | $          | 9.90       |                                                                                      |       |       | 5.40                                |   |   | $ | 3,307,730 |   |
|                                             |   |        |       |       |                                                                   |       |       |                                                                                      |       |       |                                |   |   |   |   |   |
| Exercisable                on September 30, 2007 |   |        | 385,793    |       |                                                                   | $          | 7.78       |                                                                                      |       |       | 4.33                                |   |   | $ | 2,937,145 |   |

----

| Expected                price volatility               |   |   | 24   | %      |
|--------------------------------------------------------|--------|--------|------|--------|
| Risk-free                interest rate                 |   |   | 4.23 | %      |
| Dividend                yield on underlying stock      |   |   | 2.25 | %      |
| Weighted-average                expected life in years |   |   | 5.4  |   |

| 6. | Fair                Value Accounting |
|----|--------------------------------------|

*The Fair Value Option for      Financial*
*Assets and Financial Liabilities*
*Fair Value Measurements*

----

| **Fair                Value of Financial Assets and Liabilities**      |   |
|-------------------------------------------------------------------------------------------------|--------|
|                *(Dollars                in thousands)*                                |   |  **Fair                  Market Value                  at****September 30, 2007** | ** ** | ** ** | **Change                    in Fair****Market                    Value for the****T****hree                    Months ended****September                    30, 2007** |   |
| **Assets**                                                                                      |   |   |   |   |   |   |
| Securities                held-for-trading                                                      |   | $ | 17,009 |   |   | $ | 25 |   |
|                                                                                            |   | $ | 17,009 |   |   | $ | 25 |   |
| **Liabilities**                                                                                 |   |   |   |   |   |   |   |   |
| Junior                subordinated debentures payable                                           |   | $ | 11,541 |   |   | $ | 256 |   |
|                                                                                            |   | $ | 11,541 |   |   | $ | 256 |   |
|                                                                                            |   |   |   |   |   |   |   |   |
| Total                adjustment gain to net income before provision for taxes                   |   |   |   |   |   | $ | 281 |   |

|   | · | Securities                are priced using current market pricing provided through a third                party                investment services provider, and under the provisions of SFAS No.                157,                were considered a Level 1 input                method. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Junior                subordinated debentures are priced using discounted cash flows to                the next                available redemption date on the date of valuation based on recent                issuances or quotations from brokers for comparable bank holding                companies                and are considered a Level 2 input                method. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

*The      following discussion is intended to assist in understanding the financial      condition and results of the Corporation. The information contained in this      section should be read with the unaudited condensed consolidated financial      statements and accompanying notes included in this Quarterly Report, and the      December 31, 2006 audited consolidated financial statements and accompanying      notes included in our recent Annual Report on Form 10-K.*

*This      section contains forward-looking statements, within the meaning of Section      27A      of the Securities Act of 1933, as amended, and Section 21E of the Securities      Exchange Act of 1934, as amended, and subject to the safe harbor created by      the      Private Securities Litigation Reform Act of 1995, that are subject to risks      and      uncertainties that could cause actual results to differ materially from those      projected. Those factors include, but are not limited to: the impact of national      and regional economic trends on small business loan demand in the Puget Sound      area; loan delinquency rates; the Bank’s ability to continue to attract quality      commercial business; interest rate movements; changes in the demographic make-up      of the Bank’s market area; fluctuation in demand for the Bank’s products and      services; the Corporation’s ability to attract and retain qualified people, the      risks inherent in significant construction and commercial real estate lending,      the ability to attract low-cost deposits and commercial loans, expectations      for      the net interest margin, maintaining asset quality, management’s ability to      minimize interest rate exposure and the impact of interest rate movements,      general economic conditions and ability of the Corporation and the Bank to      successfully adjust to any changes in these conditions and other factors. These      factors should be considered in evaluating the forward-looking statements and      undue reliance should not be placed on such statements. The Corporation shall      not be responsible to update any such forward-looking statements. For a      discussion of factors that could cause actual results to differ, and for certain      mandated SEC Guide 3 information that has not materially changed since the      audited statements, please see the Corporation’s Annual Report on Form 10-K for      the year ended December 31, 2006, including but not limited to the “Risk      Factors” section.*

**Adoption      of SFAS No. 159 – Fair Value Option and SFAS No. 157 – Fair Value      Measurements**

| 1. | The                Company applied fair value accounting to the notional value of a                $10                million interest rate swap that was hedging a long term CD. The swap                was                previously accounted for using the short cut method of measuring                hedge                effectiveness under SFAS No. 133. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | The                swap was terminated effective April 13, 2007, at a loss of $308,000,                including a $255,000 mark-to-market loss in the first quarter of                2007 and                a $53,000 loss on the termination of the swap in the second quarter                of                2007. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | Cascade                elected to apply the fair value accounting option to $45 million                of FHLB                advances with an average coupon of                5.83%. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | These                advances were replaced in April 2007 resulting in a gain of $623,000.                The                new advances had an average rate of 4.66%. This transaction reduced                interest rate expense by 117 basis points and reduced the Bank’s interest                rate risk exposure. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | The                Company elected the fair value option for certain securities held                as                available-for-sale and held-to-maturity. These securities, totaling                approximately $70 million, were designated as held-for-trading and                sold in                April 2007 at a loss of $482,000. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | There                are three groups of investment securities that were designated for                fair                value accounting. The first group consisted of $26 million of intermediate                term agency callable notes in the available-for-sale (AFS) portfolio                that                carried premiums due to adjustments mandated by SFAS No. 133,                *Accounting for Derivative Instruments and Hedging Activities*. The                second group of securities was $28 million of low coupon, agency                notes                with remaining maturities of two to three years that were in the                AFS                portfolio. The final group of securities was $16 million of step-up                bonds,                which were held in the held-to-maturity (HTM) portfolio. These long-term                securities have low current coupons that increase in defined intervals                over time. The coupons on these securities were among the lowest                and the                final maturities the longest in the                portfolio. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | The                Company applied fair value accounting to Cascade Capital Trust I.                Upon                adoption of SFAS No. 159 and No. 157, the Corporation established                a fair                value for Cascade Capital Trust I of approximately 117 or $11.17                million                for our $10 million in trust preferred securities (junior subordinated                debentures). This resulted in charging off the unamortized issuance                costs                to retained earnings of $654,000 as required under SFAS No. 159.                The $1.17                million fair value premium is the result of the 11% coupon and the                5.5%                call premium. This fair value premium should be effectively written                down                to the $550,000 premium to call the security on March 1, 2010, which                is                embedded in its fair value. The fair value option was not selected                for                variable rate junior subordinated debentures totaling $15                million. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 1. | Terminated                the interest rate swap hedging our CD                issuance. |
|--------|----|------------------------------------------------------------------------------------------|

|   | 2. | Applied                fair value accounting to $45 million of FHLB advances and repaid                those $45                million in FHLB advances. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Sold                the $70 million of investment securities that had been designated                as                held-for-trading. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Replaced                the securities sold in #3 with $64.5 million of securities that we                also                designated as held-for-trading. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Selected      Financial Data**

|                                                                |       | **At                or for the three months ended September 30,** | ** ** | ** ** | **At                or for the nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------|------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                                          | ** ** | ** ** | **2006**                                                         | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |
| Return                on average assets                             |       |                                                              | 1.12       | %          |                                                             |       | 1.02 | % |   |   | 1.13 | % |   |   | 1.04 | % |
| Return                on average stockholders’ equity         |       |                                                              | 12.75      |       |                                                             |       | 12.05 |   |   |   | 13.27 |   |   |   | 12.23 |   |
| Average                stockholders’ equity to average assets |       |                                                              | 8.77       |       |                                                             |       | 8.45 |   |   |   | 8.55 |   |   |   | 8.52 |   |
| Other                expenses to average assets                     |       |                                                              | 2.00       |       |                                                             |       | 1.97 |   |   |   | 1.93 |   |   |   | 1.93 |   |
| Efficiency                ratio                                     |       |                                                              | 52.73      |       |                                                             |       | 54.87 |   |   |   | 51.96 |   |   |   | 54.22 |   |
| Average                interest-bearing assets to                   |       |                                                              |       |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| average                interest-bearing liabilities                 |       |                                                              | 112.91     |       |                                                             |       | 111.77 |   |   |   | 112.21 |   |   |   | 111.79 |   |

----

**CHANGES      IN FINANCIAL CONDITION**

| *(Dollars                in thousands)*                            |   | **September                30, 2007** |    |
|--------------------------------------------------------------------|--------|---------------------------------------|---------|
|    **Securities                held-for-trading**   |   | **Carrying****Value**                 |    |   | **Gross****Unrealized****Gains****Less                Than****1                Year** |   |   | **Gross****Unrealized****Gains****More                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****Less                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****More                Than****1                Year** |   |   | **Fair****Value** |   |
|    Agency                notes                      |   | $                                     | 17,009  |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | 17,009 |   |
|                                                               |   | $                                     | 17,009  |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | 17,009 |   |
|                                                               |   |                                  |    |
|    **Securities                available-for-sale** |   | **Amortized****Cost**                 |    |   | **Gross****Unrealized****Gains****Less                Than****1                Year** |   |   | **Gross****Unrealized****Gains****More                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****Less                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****More                Than****1                Year** |   |   | **Fair****Value** |   |
|    MBS                                              |   | $                                     | 26,674  |   |   | $ | 2 |   |   | $ | 5 |   |   | $ | (29 | ) |   | $ | (734 | ) |   | $ | 25,918 |   |
|    Agency                notes                      |   |                                  | 86,835  |   |   |   | 101 |   |   |   | - |   |   |   | (1 | ) |   |   | (182 | ) |   |   | 86,753 |   |
|                                                               |   | $                                     | 113,509 |   |   | $ | 103 |   |   | $ | 5 |   |   | $ | (30 | ) |   | $ | (916 | ) |   | $ | 112,671 |   |
|                                                               |   |                                  |    |
|    **Securities                held-to-maturity**   |   | **Amortized****Cost**                 |    |   | **Gross****Unrealized****Gains****Less                Than****1                Year** |   |   | **Gross****Unrealized****Gains****More                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****Less                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****More                Than****1                Year** |   |   |   **Fair****Value** |   |
|    MBS                                              |   | $                                     | 23,043  |   |   | $ | 4 |   |   | $ | 1 |   |   | $ | (40 | ) |   | $ | (759 | ) |   | $ | 22,249 |   |
|    Agency                notes                      |   |                                  | 59,871  |   |   |   | 1 |   |   |   | - |   |   |   | (151 | ) |   |   | (979 | ) |   |   | 58,742 |   |
|    Corporate/other                                  |   |                                  | 775     |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 775 |   |
|                                                               |   | $                                     | 83,689  |   |   | $ | 5 |   |   | $ | 1 |   |   | $ | (191 | ) |   | $ | (1,738 | ) |   | $ | 81,766 |   |

----

|                                                                                                |   | **DECEMBER                31, 2006** |    |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
| *(Dollars                in thousands)*  **Securities                available-for-sale** |   | **Amortized****Cost**                |    |   | **Gross****Unrealized****Gains****Less                Than****1                Year** |   |   | **Gross****Unrealized****Gains****More                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****Less                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****More                Than****1                Year** |   |   | **Fair****Value** |   |
|    MBS                                                                               |   | $                                    | 38,427  |   |   | $ | 48 |   |   | $ | 3 |   |   | $ | (18 | ) |   | $ | (713 | ) |   | $ | 37,747 |   |
|    Agency                notes                                                       |   |                                 | 95,772  |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (2,863 | ) |   |   | 92,909 |   |
|                                                                                                |   | $                                    | 134,199 |   |   | $ | 48 |   |   | $ | 3 |   |   | $ | (18 | ) |   | $ | (3,576 | ) |   | $ | 130,656 |   |
|                                                                                                |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Securities                held-to-maturity**                                                      |   | **Amortized****Cost**                |    |   | **Gross****Unrealized****Gains****Less                Than****1                Year** |   |   | **Gross****Unrealized****Gains****More                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****Less                Than****1                Year** |   |   | **Gross****Unrealized****(Losses)****More                Than****1                Year** |   |   | **Fair****Value** |   |
|    MBS                                                                               |   | $                                    | 25,218  |   |   | $ | 7 |   |   | $ | 1 |   |   | $ | (14 | ) |   | $ | (873 | ) |   | $ | 24,339 |   |
|    Agency                notes                                                       |   |                                 | 70,853  |   |   |   | - |   |   |   | - |   |   |   | (25 | ) |   |   | (2,406 | ) |   |   | 68,422 |   |
|    Corporate/other                                                                   |   |                                 | 775     |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 775 |   |
|                                                                                                |   | $                                    | 96,846  |   |   | $ | 7 |   |   | $ | 1 |   |   | $ | (39 | ) |   | $ | (3,279 | ) |   | $ | 93,536 |   |

**Loan      Portfolio**

----

| **Types                of Loans**          |   | **September                30, 2007** | ** ** | ** ** | **%                of Portfolio** | ** ** | ** ** | **December                31, 2006** | ** ** | ** ** | **%                of Portfolio** |   |
|--------------------------------------------|--------|---------------------------------------|------------|------------|----------------------------------------|------------|------------|--------------------------------------|------------|------------|----------------------------------------|--------|
| *(Dollars                in thousands)*    |   |                                  |       |       |                                   |       |       |                                 |       |       |                                   |   |
| Business                                   |   | $                                     | 464,314    |       |                                   |       | 43.2       | %                                    |       | $          | 442,391                                |   |   |   | 43.8 | % |
| Real                estate construction(1) |   |                                  | 356,064    |       |                                   |       | 33.1       |                                 |       |       | 289,993                                |   |   |   | 28.7 |   |
| Commercial                real estate      |   |                                  | 119,890    |       |                                   |       | 11.1       |                                 |       |       | 119,298                                |   |   |   | 11.8 |   |
| Retail(2)                                  |   |                                  | 123,648    |       |                                   |       | 11.5       |                                 |       |       | 124,036                                |   |   |   | 12.3 |   |
| Multifamily                real estate     |   |                                  | 11,506     |       |                                   |       | 1.1        |                                 |       |       | 34,719                                 |   |   |   | 3.4 |   |
| Total                loans                 |   | $                                     | 1,075,422  |       |                                   |       | 100.0      | %                                    |       | $          | 1,010,437                              |   |   |   | 100.0 | % |
| Deferred                loan fees          |   |                                  | (3,695     | )          |                                   |       |       |                                 |       |       | (3,434                                 | )      |   |   |   |   |
| Allowance                for loan losses   |   |                                  | (11,258    | )          |                                   |       |       |                                 |       |       | (10,988                                | )      |   |   |   |   |
| **Loans,                net**              |   | $                                     | 1,060,469  |       |                                   |       |       |                                 |       | $          | 996,015                                |   |   |   |   |   |

*    (1)        Real        estate construction loans are net of loans in process.*

*    (2)        Loans        held-for-sale are included in retail loans, and at less than 1% of total        loans,        are not considered material.*

**Deposits,      Other Borrowings, and Shareholder Equity**

| * (Dollars                in thousands)* |       | **September                30,** | ** ** | ** ** | **%                of** | ** ** | ** ** | **December                31,** | ** ** | ** ** | **%                of** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|------------|-------------------------|------------|------------|---------------------------------|------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2007**                         | ** ** | ** ** | **Deposits**            | ** ** | ** ** | **2006**                        | ** ** | ** ** | **Deposits**            |       |
| Checking                accounts              |       | $                                | 142,191    |       |                    |       | 15.7       | %                               |       | $          | 139,507                 |       |   |   | 16.3 | % |
| Savings                & MMDA             |       |                             | 330,031    |       |                    |       | 36.4       |                            |       |       | 290,444                 |       |   |   | 34.0 |   |
| CDs                                           |       |                             | 434,503    |       |                    |       | 47.9       |                            |       |       | 425,498                 |       |   |   | 49.7 |   |
|                                          |       | $                                | 906,725    |       |                    |       | 100.0      | %                               |       | $          | 855,449                 |       |   |   | 100.0 | % |

----

**Asset      Quality**

----

|                                                                                                                         |   | **September                30, 2007** | ** ** | ** ** | **December                31, 2006** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|------------|--------------------------------------|--------|
| Non-performing                loans to total assets                                                                          |   |                                  | 0.05       | %          |                                 |   | 0.06 | % |
| Non-performing                loans to total loans outstanding                                                               |   |                                  | 0.06       |       |                                 |   | 0.08 |   |
| Non-performing                assets to total assets                                                                         |   |                                  | 0.05       |       |                                 |   | 0.06 |   |
| Total                allowance for loan losses to non-performing loans(1)                                                    |   |                                  | 1,823      |       |                                 |   | 1,291 |   |
| Total                allowance for loan losses to total loans(1)                                                             |   |                                  | 1.06       |       |                                 |   | 1.09 |   |
| Net                charge-offs to total loans                                                                                |   |                                  | 0.03       |       |                                 |   | 0.02 |   |
|                                                                                                                         |   |
| *(1)                Total allowance for loan losses includes off-balance sheet loan                commitments of $136,000.* |   |

**RESULTS      OF OPERATIONS**

**General**

**Net      Interest Income**

----

|                                                |   | **At                or for the**      |       |       | **At                or for the**     |       |
|-----------------------------------------------------|--------|---------------------------------------|------------|------------|--------------------------------------|------------|
| ** **                                          |   | **three                months ended** |       |       | **nine                months ended** |       |
| ** **                                          |   | **September                30,**      |       |       | **September                30,**     |       |
| *(Dollars                in millions)*              |   | **2007**                              | ** ** | ** ** | **2006**                             | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |
|                                                |   |                                  |       |       |                                 |       |   |   |   |   |   |   |
| Average                interest-earning assets      |   | $                                     | 1,272,810  |       |                                 | $          | 1,220,900 |   |   | $ | 1,286,453 |   |   | $ | 1,190,362 |   |
| Average                interest-bearing liabilities |   |                                  | 1,127,235  |       |                                 |       | 1,092,375 |   |   |   | 1,146,488 |   |   |   | 1,064,794 |   |
| Yield                on interest-earning assets     |   |                                  | 7.29       | %          |                                 |       | 6.95 | % |   |   | 7.25 | % |   |   | 6.79 | % |
| Cost                of interest-bearing liabilities |   |                                  | 4.42       |       |                                 |       | 4.15 |   |   |   | 4.40 |   |   |   | 3.93 |   |
|   Net                interest spread      |   |                                  | 2.87       |       |                                 |       | 2.80 |   |   |   | 2.85 |   |   |   | 2.86 |   |
|   Net                interest margin      |   |                                  | 3.37       |       |                                 |       | 3.24 |   |   |   | 3.33 |   |   |   | 3.28 |   |

**Provision      for Loan Losses**

**Other      Income**

----

**Other      Expense**

**Segment      Results**

**For      the three months ended September 30, 2007**

| *(Dollars                in thousands)*                                                       |   | **BUSINESS** | ** ** | ** ** | **CON-                STRUCTION** | ** ** | ** ** | **INCOME                PROPERTY** | ** ** | ** ** | **RETAIL** | ** ** | ** ** | **ADMIN-                ISTRATION** | ** ** | ** ** | **TOTAL** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------|------------|------------|-----------------------------------|------------|------------|------------------------------------|------------|------------|------------|------------|------------|-------------------------------------|------------|------------|-----------|--------|
| **Condensed                Income Statement**                                                 |   |         |       |       |                              |       |       |                               |       |       |       |       |       |                                |       |       |      |   |
|   Net                interest income after provision                for loan losses |   | $            | 2,943      |       |                              | $          | 5,479      |                               |       | $          | 804        |       |       | $                                   | 524        |       |      | $      | 710 |   |   | $ | 10,460 |   |
|   Other                income                                                       |   |         | 32         |       |                              |       | 30         |                               |       |       | 10         |       |       |                                | 1,242      |       |      |   | 628 |   |   |   | 1,942 |   |
|   Other                expense                                                      |   |         | 359        |       |                              |       | 151        |                               |       |       | 52         |       |       |                                | 578        |       |      |   | 5,584 |   |   |   | 6,724 |   |
|   Contribution                before overhead                                       |   |         | 2,616      |       |                              |       | 5,358      |                               |       |       | 762        |       |       |                                | 1,188      |       |      |   | (4,246 | ) |   |   | 5,678 |   |
|   Support                transfer                                                   |   |         | 1,859      |       |                              |       | 1,374      |                               |       |       | 526        |       |       |                                | 487        |       |      |   | (4,246 | ) |   |   | - |   |
|   Income                before provision for income                tax              |   |         | 757        |       |                              |       | 3,984      |                               |       |       | 236        |       |       |                                | 701        |       |      |   | - |   |   |   | 5,678 |   |
|   Provision                for federal income taxes                                 |   |         | 252        |       |                              |       | 1,327      |                               |       |       | 78         |       |       |                                | 235        |       |      |   | - |   |   |   | 1,892 |   |
|   **Net                income**                                                     |   | $            | 505        |       |                              | $          | 2,657      |                               |       | $          | 158        |       |       | $                                   | 466        |       |      | $      | - |   |   | $ | 3,786 |   |

----

**For      the three months ended September 30, 2006**

| *(Dollars                in thousands)*                                                       |   | **BUSINESS** | ** ** | ** ** | **CON-                STRUCTION** | ** ** | ** ** | **INCOME                PROPERTY** | ** ** | ** ** | **RETAIL** | ** ** | ** ** | **ADMIN-                ISTRATION** | ** ** | ** ** | **TOTAL** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------|------------|------------|-----------------------------------|------------|------------|------------------------------------|------------|------------|------------|------------|------------|-------------------------------------|------------|------------|-----------|--------|
| **Condensed                Income Statement**                                                 |   |         |       |       |                              |       |       |                               |       |       |       |       |       |                                |       |       |      |   |
|   Net                interest income after provision                for loan losses |   | $            | 3,853      |       |                              | $          | 3,870      |                               |       | $          | 1,124      |       |       | $                                   | 340        |       |      | $      | 469 |   |   | $ | 9,656 |   |
|   Other                income                                                       |   |         | 88         |       |                              |       | 9          |                               |       |       | -          |       |       |                                | 1,193      |       |      |   | 326 |   |   |   | 1,616 |   |
|   Other                expense                                                      |   |         | 387        |       |                              |       | 82         |                               |       |       | 82         |       |       |                                | 581        |       |      |   | 5,217 |   |   |   | 6,349 |   |
|   Contribution                before overhead                                       |   |         | 3,554      |       |                              |       | 3,797      |                               |       |       | 1,042      |       |       |                                | 952        |       |      |   | (4,422 | ) |   |   | 4,923 |   |
|   Support                transfer                                                   |   |         | 1,865      |       |                              |       | 1,148      |                               |       |       | 835        |       |       |                                | 574        |       |      |   | (4,422 | ) |   |   | - |   |
|   Income                before provision for federal                income tax      |   |         | 1,689      |       |                              |       | 2,649      |                               |       |       | 207        |       |       |                                | 378        |       |      |   | - |   |   |   | 4,923 |   |
|   Provision                for federal income taxes                                 |   |         | 552        |       |                              |       | 866        |                               |       |       | 68         |       |       |                                | 123        |       |      |   | - |   |   |   | 1,609 |   |
| **  Net                income**                                                     |   | $            | 1,137      |       |                              | $          | 1,783      |                               |       | $          | 139        |       |       | $                                   | 255        |       |      | $      | - |   |   | $ | 3,314 |   |

**For      the nine months ended September 30, 2007**

| *(Dollars                in thousands)*                                                       |   | **BUSINESS** | ** ** | ** ** | **CON-                STRUCTION** | ** ** | ** ** | **INCOME                PROPERTY** | ** ** | ** ** | **RETAIL** | ** ** | ** ** | **ADMIN-                ISTRATION** | ** ** | ** ** | **TOTAL** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------|------------|------------|-----------------------------------|------------|------------|------------------------------------|------------|------------|------------|------------|------------|-------------------------------------|------------|------------|-----------|--------|
| **Condensed                Income Statement**                                                 |   |         |       |       |                              |       |       |                               |       |       |       |       |       |                                |       |       |      |   |
|   Net                interest income after provision                for loan losses |   | $            | 9,281      |       |                              | $          | 15,976     |                               |       | $          | 2,609      |       |       | $                                   | 1,398      |       |      | $      | 1,964 |   |   | $ | 31,228 |   |
|   Other                income                                                       |   |         | 107        |       |                              |       | 81         |                               |       |       | 10         |       |       |                                | 3,495      |       |      |   | 2,134 |   |   |   | 5,827 |   |
|   Other                expense                                                      |   |         | 1,109      |       |                              |       | 356        |                               |       |       | 121        |       |       |                                | 1,760      |       |      |   | 16,349 |   |   |   | 19,695 |   |
|   Contribution                before overhead                                       |   |         | 8,279      |       |                              |       | 15,701     |                               |       |       | 2,498      |       |       |                                | 3,133      |       |      |   | (12,251 | ) |   |   | 17,360 |   |
|   Support                transfer                                                   |   |         | 5,351      |       |                              |       | 3,816      |                               |       |       | 1,636      |       |       |                                | 1,448      |       |      |   | (12,251 | ) |   |   | - |   |
|   Income                before provision for federal                income tax      |   |         | 2,928      |       |                              |       | 11,885     |                               |       |       | 862        |       |       |                                | 1,685      |       |      |   | - |   |   |   | 17,360 |   |
|   Provision                for federal income taxes                                 |   |         | 984        |       |                              |       | 3,987      |                               |       |       | 289        |       |       |                                | 566        |       |      |   | - |   |   |   | 5,826 |   |
| **  Net                income**                                                     |   | $            | 1,944      |       |                              | $          | 7,898      |                               |       | $          | 573        |       |       | $                                   | 1,119      |       |      | $      | - |   |   | $ | 11,534 |   |

**For      the nine months ended September 30, 2006**

| *(Dollars                in thousands)*                                                       |   | **BUSINESS** | ** ** | ** ** | **CON-                STRUCTION** | ** ** | ** ** | **INCOME                PROPERTY** | ** ** | ** ** | **RETAIL** | ** ** | ** ** | **ADMIN-                ISTRATION** | ** ** | ** ** | **TOTAL** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------|------------|------------|-----------------------------------|------------|------------|------------------------------------|------------|------------|------------|------------|------------|-------------------------------------|------------|------------|-----------|--------|
| **Condensed                Income Statement**                                                 |   |         |       |       |                              |       |       |                               |       |       |       |       |       |                                |       |       |      |   |
|   Net                interest income after provision                for loan losses |   | $            | 11,235     |       |                              | $          | 10,230     |                               |       | $          | 3,437      |       |       | $                                   | 1,330      |       |      | $      | 2,082 |   |   | $ | 28,314 |   |
|   Other                income                                                       |   |         | 253        |       |                              |       | 49         |                               |       |       | -          |       |       |                                | 3,272      |       |      |   | 940 |   |   |   | 4,514 |   |
|   Other                expense                                                      |   |         | 1,017      |       |                              |       | 271        |                               |       |       | 271        |       |       |                                | 1,687      |       |      |   | 15,014 |   |   |   | 18,260 |   |
|   Contribution                before overhead                                       |   |         | 10,471     |       |                              |       | 10,008     |                               |       |       | 3,166      |       |       |                                | 2,915      |       |      |   | (11,992 | ) |   |   | 14,568 |   |
|   Support                transfer                                                   |   |         | 5,115      |       |                              |       | 2,822      |                               |       |       | 2,403      |       |       |                                | 1,652      |       |      |   | (11,992 | ) |   |   | - |   |
|   Income                before provision for federal                income tax      |   |         | 5,356      |       |                              |       | 7,186      |                               |       |       | 763        |       |       |                                | 1,263      |       |      |   | - |   |   |   | 14,568 |   |
|   Provision                for federal income taxes                                 |   |         | 1,748      |       |                              |       | 2,345      |                               |       |       | 248        |       |       |                                | 414        |       |      |   | - |   |   |   | 4,755 |   |
|   **Net                income**                                                     |   | $            | 3,608      |       |                              | $          | 4,841      |                               |       | $          | 515        |       |       | $                                   | 849        |       |      | $      | - |   |   | $ | 9,813 |   |

**Liquidity      and Sources of Funds**

----

**Capital      Resources**

----

**Capital      Requirements**

*(Dollars      in thousands)*

|                                                              |   | **Adequately                Capitalized** |       |       | **Well                Capitalized** |       |
|-------------------------------------------------------------------|--------|-------------------------------------------|------------|------------|-------------------------------------|------------|
| **Core                capital**                                   |   | **Amount**                                | ** ** | ** ** | **Percentage**                      | ** ** | ** ** | **Amount** | ** ** | ** ** | **Percentage** |   |
| Cascade’s                Tier 1 (Core) capital              |   | $                                         | 119,137    |       |                                |       | 9.06 | % |   | $ | 119,137 |   |   |   | 9.06 | % |
| Minimum                requirement                                |   |                                      | 52,602     |       |                                |       | 4.00 |   |   |   | 78,903 |   |   |   | 6.00 |   |
| Excess                                                            |   | $                                         | 66,535     |       |                                |       | 5.06 | % |   | $ | 40,234 |   |   |   | 3.06 | % |
|                                                              |   |                                      |       |       |                                |       |
| **Risk-based                capital**                             |   | **Amount**                                | ** ** | ** ** | **Percentage**                      | ** ** | ** ** | **Amount** | ** ** | ** ** | **Percentage** |   |
| Cascade’s                Risk-based capital                 |   | $                                         | 130,531    |       |                                |       | 10.58 | % |   | $ | 130,531 |   |   |   | 10.58 | % |
| Minimum                requirement(1)                             |   |                                      | 98,715     |       |                                |       | 8.00 |   |   |   | 123,394 |   |   |   | 10.00 |   |
| Excess                                                            |   | $                                         | 31,816     |       |                                |       | 2.58 | % |   | $ | 7,137 |   |   |   | .58 | % |
| *(1)Based                on                risk-weighted assets.* |   |                                      |       |       |                                |       |   |   |   |   |   |   |   |   |   |   |

----

**Item      3 – Quantitative and Qualitative Disclosures about Market      Risk**

**ASSET/LIABILITY      MANAGEMENT**

----

|  **Type** |   | **Percentage****of                Portfolio** |   |
|----------------|--------|-----------------------------------------------|--------|
| Variable       |   |                                          | 39     | % |
| Adjustable     |   |                                          | 34     | % |
| Fixed          |   |                                          | 27     | % |

**Item      4 - Controls and Procedures**

**EVALUATION      OF DISCLOSURE CONTROLS AND PROCEDURES**

**CHANGES      IN INTERNAL CONTROLS**

**PART      II –– OTHER      INFORMATION**

**Item      1.  Legal Proceedings**

----

**Item      1A.  Risk Factors**

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

| Issuer                Purchases of Equity Securities                                                                                                                                                                                         |                              |                         |                                        |       |                 |                                 |       |                                                     |                  |       |                                                                        |                                                    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|------------------------------|---------------------------------------------|------------|----------------------|--------------------------------------|------------|----------------------------------------------------------|-----------------------|------------|-----------------------------------------------------------------------------|---------------------------------------------------------|
|                                                                                                                                                                                                                                         |                              | **2007                PLAN** |                                        |       |                 |                                 |       |                                                     |                  |
|                                                                                                                                                                                                                                         |                              |                         |                                        |       |                 |                                 |       | **Total                Number of Shares Purchased** | ** **            | ** ** | **Maximum****Number                of**** Shares                that** |                                                    |
| **Period**                                                                                                                                                                                                                                   |                              | **Total****Number**          | ** **                                  | ** ** | **Average****Price** | ** **                           | ** ** | **as                Part of****Publicly**                | ** **            | ** ** | **May                Yet be Purchased**                                     | ** **                                              |
| **Beginning**                                                                                                                                                                                                                                | **Ending**                        | ** **                   | **of Shares                Purchased** | ** ** | ** **           | **Paid                per****Share** | ** ** | ** **                                               | **Announced****Plan** | ** ** | ** **                                                                  | **Under                the****Plan                (2)** |   |
| July                1, 2007                                                                                                                                                                                                                  | July                31, 2007      |                         |                                        | 21,375     |                 |                                 | $          | 15.98                                                    |                  |       |                                                                        | 21,375                                                  |   |   |   | 328,707 |   |
| August                1, 2007                                                                                                                                                                                                                | August                31, 2007    |                         |                                        | 6,000      |                 |                                 |       | 15.08                                                    |                  |       |                                                                        | 6,000                                                   |   |   |   | 322,707 |   |
| September                1, 2007                                                                                                                                                                                                             | September                30, 2007 |                         |                                        | 4,880      | (1)                  |                                 |       | 16.14                                                    |                  |       |                                                                        | -                                                       |   |   |   | 322,707 |   |
|                                                                                                                                                                                                                                         | **Total**                         |                         |                                        | 32,255     |                 |                                 | $          | 15.73                                                    |                  |       |                                                                        | 27,375                                                  |   |   |   | 322,707 |   |
|                                                                                                                                                                                                                                         |                              |                         |                                        |       |                 |                                 |       |                                                     |                  |       |                                                                        |                                                    |   |   |   |   |   |
| *1) During                the period presented there were 4,880 shares purchased, which were                acquired at current market values as consideration for the exercise                of                fully vested options.* |                              |
|                                                                                                                                                                                                                                         |                              |
| *2) In                May 2007, the Corporation announced a new stock repurchase plan to                purchase up to 375,000 shares of the Corporation’s stock. The Plan                will expire on May 31, 2008.*      |                              |

**Item      3.  Defaults upon Senior Securities**

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

**Item      5.  Other information**

**Item      6.  Exhibits**

|   | 31.1 | Certifications                of the Chief Executive Officer pursuant to Section 302 of the                Sarbanes-Oxley Act |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------|

|   | 31.2 | Certifications                of the Chief Financial Officer pursuant to Section 302 of the                Sarbanes-Oxley Act |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------|
|   | 32  | Certification              pursuant to Section 906 of the Sarbanes-Oxley              Act |
|--------|----------|------------------------------------------------------------------------------------------------|

| (b) | Reports                on Form 8-K |
|-----|------------------------------------|

----

| (b) | Reports                on Form 8-K (continued) |
|-----|------------------------------------------------|

**SIGNATURES**

|                                                  |  **CASCADE              FINANCIAL CORPORATION**                                                                                                                                                                                                                                                                                          |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                                                                                                                                                                                                                                                          |
|  November              8, 2007    | /s/              Lars H.              Johnson                                                 |
|                                                  | By:  Lars              H.              Johnson,                                                                                                                                                                                                                                                                                     |
|                                                  |     Executive              Vice              President                                                                                                                                                                                                                                                                    |
|                                                  |     (Chief              Financial Officer)                                                                                                                                                                                                                                                                                |

----