SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C.  20549

                                 FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the Fiscal Year Ended September 30, 2001                OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                      Commission File Number: 0-23333

                           TIMBERLAND BANCORP, INC.
------------------------------------------------------------------------------
               (Exact name of registrant as specified in its charter)

         Washington                                             91-1863696
----------------------------------------------               -----------------
(State or other jurisdiction of incorporation                (I.R.S. Employer
or organization)                                               I.D. Number)

624 Simpson Avenue, Hoquiam, Washington                            98550
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(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code:            (360) 533-4747

Securities registered pursuant to Section 12(b)
of the Act:                                                         None
                                                             -----------------

Securities registered pursuant to Section 12(g)        Common Stock, par value
of the Act:                                                 $.01 per share
                                                       -----------------------
                                                              (Title of Class)

     Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.  YES   X      NO
                   -----       -----
     Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained herein, and no disclosure will be contained, to
the best of the Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.   X
                              -----
     As of December 5, 2001, there were outstanding 4,006,103 shares of the
registrant's Common Stock, which are listed on the Nasdaq National Market
System under the symbol "TSBK."  Based on the average of the bid and asked
prices for the Common Stock on December 5, 2001, the aggregate value of the
Common Stock outstanding held by nonaffiliates of the registrant was
$58,889,714 (4,006,103 shares at $14.70 per share).  For purposes of this
calculation, Common Stock held by officers and directors of the registrant and
Timberland  Bank, Employee Stock Ownership Plan and Trust are considered
nonaffiliates.

                     DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions of Definitive Proxy Statement for the 2002 Annual Meeting
          of Stockholders (Part III).

<PAGE>


<PAGE>
                             TIMBERLAND BANCORP, INC.
                        2001 ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS

                                                                      Page
                                                                      ----
PART I.............................................................    1
    Item 1. Business...............................................    1
       General.....................................................    1
       Market Area.................................................    1
       Lending Activities..........................................    2
       Investment Activities.......................................   17
       Deposit Activities and Other Sources of Funds...............   18
       Regulation of the Bank......................................   21
       Regulation of the Company...................................   26
       Taxation....................................................   28
       Competition.................................................   30
       Subsidiary Activities.......................................   30
       Personnel...................................................   30
    Item 2. Properties.............................................   30
    Item 3. Legal Proceedings......................................   32
    Item 4. Submission of Matters to a Vote of Security Holders....   32
PART II............................................................   32
    Item 5. Market for the Registrant's Common Equity and
             Related Stockholder Matters...........................   32
    Item 6. Selected Financial Data................................   33
    Item 7. Management's Discussion and Analysis of Financial
             Condition and Results of Operations...................   35
       General.....................................................   35
       Operating Strategy..........................................   35
       Market Risk and Asset and Liability Management..............   36
       Comparison of Financial Condition at September 30, 2001
        and 2000...................................................   37
       Comparison of Financial Condition at September 30, 2000
        and 1999...................................................   38
       Comparison of Operating Results for Years Ended September
        30, 2001 and 2000..........................................   39
       Comparison of Operating Results for Years Ended September
        30, 2000 and 1999..........................................   40
       Nonperforming Assets........................................   41
       Average Balances, Interest and Average Yields/Cost..........   41
       Rate/Volume Analysis........................................   43
       Liquidity and Capital Resources.............................   43
       Effect of Inflation and Changing Prices.....................   44
    Item 7A. Quantitative and Qualitative Disclosures About
              Market Risk..........................................   44
    Item 8. Financial Statements and Supplementary Data............   45
    Item 9. Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure................   80
PART III...........................................................   80
    Item 10. Directors and Executive Officers of the Registrant....   80
    Item 11. Executive Compensation................................   80
    Item 12. Security Ownership of Certain Beneficial Owners
              and Management.......................................   80
    Item 13. Certain Relationships and Related Transactions........   81
PART IV............................................................   81
    Item 14. Exhibits, Financial Statement Schedules, and
              Reports on Form 8-K..................................   81

<PAGE>



                                     PART I

ITEM 1.  BUSINESS
-----------------

GENERAL

     Timberland Bancorp, Inc. ("Company"), a Washington corporation, was
organized on September 8, 1997 for the purpose of becoming the holding company
for Timberland Savings Bank, SSB ("Bank") upon the Bank's conversion from a
Washington-chartered mutual to a Washington-chartered stock savings bank
("Conversion").  The Conversion was completed on January 12, 1998 through the
sale and issuance of 6,612,500 shares of common stock by the Company.  At
September 30, 2001, the Company had total assets of $386.3 million, total
deposits of $242.4 million and total shareholders' equity of $71.8 million.
The Company's business activities generally are limited to passive investment
activities and oversight of its investment in the Bank.  Accordingly, the
information set forth in this report, including consolidated financial
statements and related data, relates primarily to the Bank and its subsidiary.

     The Bank was established in 1915 as "Southwest Washington Savings and
Loan Association."  In 1935, the Bank converted from a state-chartered mutual
savings and loan association to a federally chartered mutual savings and loan
association, and in 1972, changed its name to "Timberland Federal Savings and
Loan Association."  In 1990, the Bank converted to a federally chartered
mutual savings bank under the name "Timberland Savings Bank, FSB."  In 1991,
the Bank converted to a Washington-chartered mutual savings bank and changed
its name to "Timberland Savings Bank, SSB."  On December 29, 2000, the Bank
changed its name to "Timberland Bank."  The Bank's deposits are insured by the
FDIC up to applicable legal limits under the Savings Association Insurance
Fund ("SAIF").  The Bank has been a member of the Federal Home Loan Bank
("FHLB") System since 1937.  The Bank is regulated by the Washington
Department of Financial Institutions, Division of Banks ("Division") and the
FDIC.

     The Bank is a community oriented bank which has traditionally offered a
variety of savings products to its retail customers while concentrating its
lending activities on real estate mortgage loans.  Lending activities have
been focused primarily on the origination of loans secured by one- to- four
family residential dwellings, including an emphasis on construction and land
development loans, as well as the origination of multi-family and commercial
real estate loans.  The Bank actively originates adjustable rate residential
mortgage loans that do not qualify for sale in the secondary market under
Federal Home Loan Mortgage Corporation ("FHLMC") guidelines.  The Bank also
originates commercial business loans and in 1998 established a business
banking division to increase the origination of these loans.

MARKET AREA

     The Bank considers Grays Harbor, Thurston, Pierce, King and Kitsap
Counties as its primary market areas.  The Bank conducts operations from its
main office in Hoquiam (Grays Harbor County), three branch offices in Grays
Harbor County (Aberdeen, Montesano and Ocean Shores), a branch office in King
County (Auburn, opened in 1994), four branch offices in Pierce County
(Edgewood, opened in 1980, Puyallup, opened in 1996,  Spanaway, opened in
1999, and Tacoma, opened in 2001), three branch offices in Thurston County
(Lacey, opened in 1997,  Yelm, opened in 1999, and Tumwater opened in 2001),
and a branch office in Kitsap County (Poulsbo opened in 1999).   See "Item 2.
Properties."

     Hoquiam, population approximately 9,000, is located in Grays Harbor
County which is situated along Washington State's central Pacific coast.
Hoquiam is located approximately 110 miles southwest of Seattle and 145 miles
northwest of Portland, Oregon.

     The Bank considers its primary market area to include three submarkets:
primarily rural Grays Harbor County with its historical dependence on the
timber and fishing industries; Ocean Shores with its dependence on tourism and
vacation home residents; and Pierce, King, Thurston and Kitsap Counties with
their dependence on state government in Olympia, the state capital, and the
aerospace and computer industries in the Seattle-Tacoma metropolitan area.
Each of these markets present operating risks to the Bank.  The Bank's recent
expansion into Thurston, King and Kitsap

                                       1

<PAGE>



Counties and four branch offices in Pierce County represents the Bank's
strategy to diversify its primary market area to become less reliant on the
economy of Grays Harbor County.

LENDING ACTIVITIES

     GENERAL.  Historically, the principal lending activity of the Bank has
consisted of the origination of loans secured by first mortgages on
owner-occupied, one- to- four family residences and loans for the construction
of one- to- four family residences.  In recent years, the Bank has increased
its origination of loans secured by multi-family properties, construction and
land development loans, land loans and commercial real estate loans.  The
Bank's net loans receivable, including loans held for sale, totaled
approximately $323.8 million at September 30, 2001, representing approximately
83.8% of consolidated total assets, and at that date construction and land
development loans, land loans and loans secured by commercial and multi-family
properties were $215.0 million, or 58.1%, of total loans.

     The Bank's internal loan policy limits the maximum amount of loans to one
borrower to 25% of its capital.  At September 30, 2001, the maximum amount
which the Bank could have lent to any one borrower and the borrower's related
entities was approximately $15.6 million under its policy.  At September 30,
2001, the Bank had no loans with an aggregate outstanding balance in excess of
this amount.  At that date, the Bank had 53 borrowers or related borrowers
with total loans outstanding in excess of $1.0 million.  The largest amount
outstanding to any one borrower and the borrower's related entities was
approximately $7.6 million, which includes $306,000 of undisbursed loans in
process balance.

     LOAN PORTFOLIO ANALYSIS.  The following table sets forth the composition
of the Bank's loan portfolio by type of loan as of the dates indicated.

<TABLE>





                                                        At September 30,
                      --------------------------------------------------------------------------------------
                           2001              2000             1999              1998              1997
                      ---------------   ---------------  ---------------  ----------------  ----------------
                      Amount  Percent   Amount  Percent  Amount  Percent   Amount  Percent   Amount  Percent
                      ------  -------   ------  -------  ------  -------   ------  -------   ------  -------
                                                      (Dollars in thousands)


                 <c>       <c>     <c>      <c>      <c>      <c>      <c>       <c>     <c>       <c>
Mortgage Loans:
 One- to- four
  family(1)(2).....$130,082  35.14%  $136,825   38.85%  $115,133  38.42%  $100,921  43.48%  $100,127  48.76%
 Multi-family......  29,412   7.95     33,604    9.54     15,945   5.32     12,432   5.36     12,178   5.93
 Commercial........  65,731  17.76     58,632   16.65     52,049  17.37     32,906  14.18     29,410  14.32
 Construction and
  land development. 106,244  28.71     89,903   25.52     90,621  30.24     64,172  27.65     45,031  21.93
 Land(2)...........  13,632   3.68     12,561    3.56      9,059   3.02      7,749   3.34      6,937   3.38
                    -------- -----   --------  ------   -------- ------   -------- ------   -------- ------
   Total mortgage
    loans.......... 345,101  93.24    331,525   94.12    282,807  94.37    218,180  94.01    193,683  94.32

Consumer Loans:
 Home equity and second
  mortgage.........  11,039   2.98      9,816    2.79      7,978   2.66      8,740   3.77      8,142   3.97
 Other.............   6,825   1.85      6,081    1.72      4,279   1.43      4,066   1.74      2,824   1.37
                   -------- ------   --------  ------   -------- ------   -------- ------   -------- ------
                     17,864   4.83     15,897    4.51     12,257   4.09     12,806   5.51     10,966   5.34
Commercial business
  loans............   7,150   1.93      4,808    1.37      4,611   1.54      1,105   0.48        694   0.34
                   -------- ------   --------  ------   -------- ------   -------- ------   -------- ------
   Total loans..... 370,115 100.00%   352,230  100.00%   299,675 100.00%   232,091 100.00%   205,343 100.00%
                   -------- ======   --------  ======   -------- ======   -------- ======   -------- ======
Less:
 Undisbursed portion
  of loans in
  process.......... (39,803)          (32,831)           (37,781)          (28,886)          (14,820)
 Unearned income...  (3,494)           (3,578)            (3,170)           (2,256)           (1,761)
 Allowance for loan
  losses...........  (3,050)           (2,640)            (2,056)           (1,728)           (1,716)
 Market value
  adjustment of loans
  held-for-sale....      --              (175)              (583)               --               (19)
                   --------          --------           --------          --------          --------
Total loans receivable,
 net...............$323,768          $313,006           $256,085          $199,221          $187,027
                   ========          ========           ========          ========          ========

--------------
(1) Includes loans held-for-sale.
(2) Includes real estate contracts totaling $1.3 million at September 30, 2001.  See " -- Lending
    Activities -- Real Estate Contracts."

</TABLE>
                                                   2

<PAGE>



     RESIDENTIAL ONE- TO- FOUR FAMILY LENDING.  At September 30, 2001,
$130.1million, or 35.1%, of the Bank's loan portfolio consisted of loans
secured by one- to- four family residences.

     The Bank originates both fixed-rate loans and adjustable-rate loans.
Generally, 15- and 30-year fixed-rate loans are originated to meet the
requirements for sale in the secondary market to the FHLMC, however, from time
to time, a portion of these fixed-rate loans originated by the Bank may be
retained in the Bank's loan portfolio to meet the Bank's asset/liability
management objectives.  The Bank uses an automated underwriting program, which
preliminarily qualifies a loan as conforming to FHLMC underwriting standards
when the loan is originated.  At September 30, 2001, $42.1  million, or 32.3%,
of the Bank's one- to- four family loan portfolio consisted of fixed rate
one-to-four family mortgage loans.

     The Bank also offers adjustable rate mortgage ("ARM") loans at rates and
terms competitive with market conditions.  All of the Bank's ARM loans are
retained in its loan portfolio and not with a view toward sale in the
secondary market.

     The Bank offers several ARM products which adjust annually after an
initial period ranging from one to five years subject to a limitation on the
annual increase of 2% and an overall limitation of 6%.  These ARM products
have utilized the weekly average yield on one year U.S. Treasury securities
adjusted to a constant maturity of one year plus a margin of 3.00% to 4.00%.
ARM loans held in the Bank's portfolio do not permit negative amortization of
principal and carry no prepayment restrictions.  Borrower demand for ARM loans
versus fixed-rate mortgage loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan.
The relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.  At September 30, 2001, $88.0 million, or 67.7%, of
the Bank's one- to- four family loan portfolio consisted of ARM loans.

     The material portion of the Bank's ARM loans are "non-conforming" because
they do not satisfy acreage limits, or various other requirements imposed by
the FHLMC.  Some of these loans are also originated to meet the needs of
borrowers who cannot otherwise satisfy the FHLMC credit requirements because
of personal and financial reasons (i.e., divorce, bankruptcy, length of time
employed, etc.), and other aspects, which do not conform to the FHLMC's
guidelines.  Many of these borrowers have higher debt to income ratios, or the
loans are secured by unique properties in rural markets for which there are no
comparable sales of comparable properties to support value according to
secondary market requirements.  These loans are known as non-conforming loans
and the Bank may require additional collateral or lower loan-to-value ratios
prior to the origination of the loan.  The Bank believes that these loans
satisfy a need in its local market area.  As a result, subject to market
conditions, the Bank intends to continue to originate such loans.

     The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates.  There are, however,
unquantifiable credit risks resulting from the potential of increased interest
to be paid by the customer due to increases in interest rates.  It is possible
that, during periods of rising interest rates, the risk of default on ARM
loans may increase as a result of repricing and the increased costs to the
borrower.  Furthermore, because the ARM loans originated by the Bank generally
provide, as a marketing incentive, for initial rates of interest below the
rates which would apply were the adjustment index used for pricing initially,
these loans are subject to increased risks of default or delinquency.  The
Bank attempts to reduce the potential for delinquencies and defaults on ARM
loans by qualifying the borrower based on the borrower's ability to repay the
ARM loan assuming that the maximum interest rate that could be charged at the
first adjustment period remains constant during the loan term.  Another
consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base due to changes in the interest rates, the extent
of this interest sensitivity is limited by the periodic and lifetime interest
rate adjustment limits.  Because of these considerations, the Bank has no
assurance that yields on ARM loans will be sufficient to offset increases in
the Bank's cost of funds.

     While fixed-rate, single-family residential mortgage loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding
for substantially shorter periods.  This is because borrowers often prepay
their loans in full upon sale of the property pledged as security or upon
refinancing the original loan.  In addition, substantially all mortgage loans
in the Bank's loan portfolio contain due-on-sale clauses providing that the
Bank may declare the unpaid

                                       3

<PAGE>



amount due and payable upon the sale of the property securing the loan.
Typically, the Bank enforces these due-on-sale clauses to the extent permitted
by law and as business judgment dictates.  Thus, average loan maturity is a
function of, among other factors, the level of purchase and sale activity in
the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.

     The Bank requires fire and extended coverage casualty insurance (and
loans originated since 1994, if appropriate, generally requires flood
insurance) be maintained on all of its real estate secured loans.

     The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or the purchase price.  However, the Bank
usually obtains private mortgage insurance ("PMI") on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property.  The maximum loan-to-value ratio on mortgage loans secured by
non-owner-occupied properties is generally 75% (70% for loans originated for
sale in the secondary market to the FHLMC).

     CONSTRUCTION AND LAND DEVELOPMENT LENDING.  Prompted by unfavorable
economic conditions in its primary market area in 1980, the Bank sought to
establish a market niche and, as a result, began originating construction
loans.  In recent periods, construction lending activities have been primarily
in the Pierce County, King County, Thurston County, and Kitsap County markets.
Competition from other financial institutions has increased in recent periods
and the Bank expects that its margins on construction loans may be reduced in
the future.

     The Bank currently originates three types of residential construction
loans: (i) speculative construction loans, (ii) custom construction loans and
(iii) owner/builder loans.  The Bank initiated its construction lending with
the origination of speculative construction loans.  As a result, the Bank
began to establish contacts with the building community and increased the
origination of custom construction and land development loans in rural market
areas.  The Bank believes that its in-house computer system has enabled it to
establish processing and disbursement procedures to meet the needs of these
borrowers.  To a lesser extent, the Bank also originates construction loans
for the development of multi-family and commercial properties.   Subject to
market conditions, the Bank intends to continue to emphasize its residential
construction lending activities.

     At September 30, 2001, the composition of the Bank's construction and
land development loan portfolio was as follows:

                                            Outstanding       Percent of
                                              Balance            Total
                                              -------            -----
                                           (In thousands)

Speculative construction...................   $28,860            27.16%
Custom and owner/builder construction......    32,302            30.40
Multi-family...............................    17,965            16.91
Land development...........................    14,497            13.65
Commercial real estate.....................    12,620            11.88
                                             --------           ------
  Total....................................  $106,244           100.00%
                                             ========           ======

     Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Bank or another lender for the finished
home.  The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified.  The Bank lends
to approximately 75 builders located in the Bank's primary market area, each
of which generally have three to six speculative loans outstanding from the
Bank during a 12 month period.  Rather than originating lines of credit to
home builders to construct several homes at once, the Bank originates and
underwrites a separate loan for each home.  Speculative construction loans are
originated for a term of 12 months, with fixed interest rates ranging from
9.0% to 10.0%, and with a loan-to-value ratio of no more than


                                    4

<PAGE>



80% of the appraised estimated value of the completed property.  During this
12 month period, the borrower is required to make monthly payments of accrued
interest on the outstanding loan balance.  At September 30, 2001 speculative
construction loans totaled $28.9 million, or 27.2%, of the total construction
loan portfolio.  At September 30, 2001, the Bank had 16 borrowers each with
aggregate outstanding speculative loan balances of more than $500,000. The
largest aggregate outstanding balance to one borrower amounted to $3.4
million, and the largest outstanding balance for a single speculative loan was
$480,000.  At September 30, 2001, two speculative construction loans totaling
$321,000 were not performing according to terms.  See "-- Lending Activities -
- Nonperforming Assets and Delinquencies."

     Unlike speculative construction loans, custom construction loans are made
to home builders who, at the time of construction, have a signed contract with
a home buyer who has a commitment for permanent financing for the finished
home with the Bank or another lender.  Custom construction loans are generally
originated for a term of 12 months, with fixed interest rates ranging from
9.0% to 10.0% and with loan-to-value ratios of 80% of the appraised estimated
value of the completed property or sales price, whichever is less.  During
this 12 month period, the borrower is required to make monthly payments of
accrued interest on the outstanding loan balance.

     Owner/builder construction loans are originated to the home owner rather
than the home builder as a single loan that automatically converts to a
permanent loan at the completion of construction.  The construction phase of a
owner/builder construction loan generally lasts six to nine months with fixed
interest rates ranging from 9.0% to 9.5%, and with loan-to-value ratios of 80%
(or up to 95% with PMI) of the appraised estimated value of the completed
property or cost, whichever is less.  During this 12 month period, the
borrower is required to make monthly payments of accrued interest on the
outstanding loan balance.  At the completion of construction, the loan
converts automatically to either a fixed-rate mortgage loan, which conforms to
secondary market standards, or an ARM loan for retention in the Bank's
portfolio.  At September 30, 2001, custom and owner/builder construction loans
totaled $32.3 million, or 30.4%, of the total construction loan portfolio.  At
September 30, 2001, the largest outstanding custom construction loan had an
outstanding balance of $600,000 and was performing according to its terms.

     The Bank originates loans to local real estate developers with whom it
has established relationships for the purpose of developing residential
subdivisions (i.e., installing roads, sewers, water and other utilities)
(generally with ten to 50 lots).  At September 30, 2001, subdivision
development loans totaled $14.5 million, or 13.7% of construction and land
development loans receivable.  Land development loans are secured by a lien on
the property and made for a period of two to five years with generally fixed
interest rates, and are made with loan-to-value ratios generally not exceeding
75%.  Monthly interest payments are required during the term of the loan.
Land development loans are structured so that the Bank is repaid in full upon
the sale by the borrower of approximately 80% of the subdivision lots.
Substantially all of the Bank's land development loans are secured by property
located in its primary market area.  In addition, in the case of a corporate
borrower, the Bank also generally obtains personal guarantees from corporate
principals and reviews  their personal financial statements.  At September 30,
2001, the largest land development loan had an outstanding loan balance of
$2.2 million and was performing according to its terms.

     Land development loans secured by land under development involve greater
risks than one- to- four family residential mortgage loans because such loans
are advanced upon the predicted future value of the developed property.  If
the estimate of such future value proves to be inaccurate, in the event of
default and foreclosure the Bank may be confronted with a property the value
of which is insufficient to assure full repayment.  The Bank attempts to
minimize this risk by generally limiting the maximum loan-to-value ratio on
land loans to 75% of the estimated developed value of the secured property.

     The Bank also provides construction financing for  multi-family and
commercial properties.  At September 30, 2001, such construction loans
amounted to $30.6 million.  These loans are secured by motels, apartment
buildings, condominiums, office buildings and retail rental space located in
the Bank's primary market area and typically range in amount from $300,000 to
$2.0 million.  At September 30, 2001, the largest outstanding commercial real
estate construction loan had a balance of $3.3 million (including $3.0 million
of undisbursed loans in process balance), and was performing according to
terms.  At September 30, 2001, the largest outstanding multi-family
construction loan had a balance of $3.9 million (including $2.8 million of
undisbursed loans in process balance), and was performing according to terms.
Periodically, the Bank purchases (without recourse to the seller other than
for fraud) from other lenders

                                       5

<PAGE>



participation interests in multi-family and commercial construction loans
secured by properties located in the Bank's primary market area.  The Bank
underwrites such participation interests according to its own standards.  At
September 30, 2001, the largest construction participation interest had an
outstanding balance of $2.0 million, which represented a 50% interest in a
construction loan secured by a multi-family property located in Kitsap County,
Washington.  At September 30, 2001, this loan was performing according to its
terms.

     All construction loans must be approved by the Bank's Loan Committee or
the Bank's Board of Directors.  See "-- Lending Activities -- Loan
Solicitation and Processing."  Prior to preliminary approval of any
construction loan application, an independent fee appraiser inspects the site
and the Bank reviews the existing or proposed improvements, identifies the
market for the proposed project and analyzes the pro forma data and
assumptions on the project.  In the case of a speculative or custom
construction loan, the Bank reviews the experience and expertise of the
builder.  After preliminary approval has been given, the application is
processed, which includes obtaining credit reports, financial statements and
tax returns on the borrowers and guarantors, an independent appraisal of the
project, and any other expert reports necessary to evaluate the proposed
project.  In the event of cost overruns, the Bank requires that the borrower
increase the funds available for construction by depositing its own funds into
a loans in process account.

     Loan disbursements during the construction period are made to the builder
based on a line item budget.  Periodic on-site inspections are made by
qualified Bank employees to document the reasonableness of the draw request.
For most builders, the Bank disburses loan funds by providing vouchers to
suppliers, which when used by the builder to purchase supplies are submitted
by the supplier to the Bank for payment.

     The Bank regularly monitors the construction loan disbursements using an
internal computer program.  Property inspections are performed by Bank
personnel for properties located within the Bank's primary market area and by
independent inspectors for properties outside the primary market area.  The
Bank believes that its internal monitoring system helps reduce many of the
risks inherent in its construction lending.

     The Bank originates construction loan applications through customer
referrals, contacts in the business community and real estate brokers seeking
financing for their clients.

     Construction lending affords the Bank the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its single-
family permanent mortgage lending.  Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost of
the project.  The nature of these loans is such that they are generally more
difficult to evaluate and monitor.  If the estimate of construction cost
proves to be inaccurate, the Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project.  If the
estimate of value upon completion proves to be inaccurate, the Bank may be
confronted with a project whose value is insufficient to assure full
repayment.  Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been
identified carry more risk because the payoff for the loan depends on the
builder's ability to sell the property prior to the time that the construction
loan is due.  The Bank has sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices.  In
addition, because the Bank's construction lending is primarily secured by
properties in its primary market area, changes in the local and state
economies and real estate markets could adversely affect the Bank's
construction loan portfolio.

     REAL ESTATE CONTRACTS.  The Bank purchases real estate contracts and
deeds of trust from individuals who have privately sold their homes or
property.  These contracts are generally secured by one- to- four family
properties, building lots and undeveloped land and range in principal amount
from $10,000 to $200,000, but typically are in amounts between $20,000 and
$40,000.  Properties securing real estate contracts purchased by the Bank are
generally located within its primary market area.  Prior to purchasing the
real estate contract, the Bank reviews the contract and analyzes and assesses
the collateral for the loan, the down payment made by the borrower and the
credit history on the loan.  As of September 30, 2001, the Bank had
outstanding $1.3 million of real estate contracts.

                                       6

<PAGE>



     MULTI-FAMILY LENDING.  At September 30, 2001, the Bank had $29.4 million,
or 8.0% of the Bank's total loan portfolio, secured by multi-family dwelling
units (more than four units) located primarily in the Bank's primary market
area.  At September 30, 2001, approximately 44.5% of the Bank's multi-family
loans represent participation interests in loans, secured by properties
located in the Bank's primary market area, purchased from other lenders.  Such
participation interests are purchased without recourse to the seller other
than for fraud.  The Bank underwrites such participation interests according
to its own standards.

     Multi-family loans are generally originated with variable rates of
interest ranging from 3.00% to 3.50% over the one-year constant maturity U.S.
Treasury Bill Index or a matched term FHLB advance, with principal and
interest payments fully amortizing over terms of up to 30 years.  Multi-family
loans generally range in principal balance from $300,000 to $6.5 million.  At
September 30, 2001, the largest multi-family loan had an outstanding principal
balance of $6.1 million and was secured by an apartment building located in
the Bank's primary market area.  At September 30, 2001, this loan was
performing according to its terms.

     The maximum loan-to-value ratio for multi-family loans is generally 75%.
The Bank requires its multi-family loan borrowers to submit financial
statements and rent rolls on the subject property annually.  The Bank also
inspects the subject property annually.  The Bank generally imposes a minimum
debt coverage ratio of approximately 1.10 for loans secured by multi-family
properties.

     Multi-family mortgage lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending.  However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans.  Because payments on loans secured by multi-family properties
are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in
the real estate market or the economy.  The Bank seeks to minimize these risks
by strictly scrutinizing the financial condition of the borrower, the quality
of the collateral and the management of the property securing the loan.  If
the borrower is a corporation, the Bank also generally obtains personal
guarantees from corporate principals based on a review of personal financial
statements.

     COMMERCIAL REAL ESTATE LENDING.  Commercial real estate loans totaled
$65.7 million, or 17.8% of total loans receivable at September 30, 2001, and
consisted of 193 loans.  The Bank originates commercial real estate loans
generally at variable interest rates and secured by properties, such as
restaurants, motels, office buildings and retail/wholesale facilities, located
in its primary market area.  The principal balance of a commercial real estate
loan generally ranges between $100,000 and $3.0 million.  At September 30,
2001, the largest commercial real estate loan had an outstanding principal
balance of $3.7 million, which represented a 50% interest in a commercial
property located in Bellingham, Washington.  At September 30, 2001, three
commercial real estate loans totaling $2.1 million were not performing
according to terms.  See "-- Lending Activities -- Nonperforming Assets and
Delinquencies."

     The Bank requires appraisals of all properties securing commercial real
estate loans.  Appraisals are performed by an independent appraiser designated
by the Bank, all of which are reviewed by management.  The Bank considers the
quality and location of the real estate, the credit of the borrower, the cash
flow of the project and the quality of management involved with the property.
The Bank generally imposes a minimum debt coverage ratio of approximately
1.10x for originated loans secured by income producing commercial properties.
Loan-to-value ratios on commercial real estate loans are generally limited to
75%.  The Bank generally obtains loan guarantees from financially capable
parties based on a review of personal financial statements.

     Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending.  However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans.  Because payments on loans secured by commercial properties
often depend upon the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real
estate market or the economy.  The Bank seeks to minimize these risks by
generally limiting the

                                       7

<PAGE>



maximum loan-to-value ratio to 75% and strictly scrutinizing the financial
condition of the borrower, the quality of the collateral and the management of
the property securing the loan.

     LAND LENDING.  The Bank occasionally originates loans for the acquisition
of land upon which the purchaser can then build or make improvements necessary
to build or to sell as improved lots.  At September 30, 2001, land loans
totaled $13.6 million, or 3.7% of the Bank's total loan portfolio.  Land loans
originated by the Bank are generally fixed-rate loans and have maturities of
five to ten years.  Land loans generally range in principal amount from
$40,000 to $100,000.  The largest land loan had an outstanding balance of
$730,000 at September 30, 2001 and was performing according to its terms.  At
September 30, 2001, six land loans totaling $611,000 were not performing
according to terms.  See "-- Lending Activities   Nonperforming Assets and
Delinquencies."

     Loans secured by undeveloped land or improved lots involve greater risks
than one- to- four family residential mortgage loans because such loans are
more difficult to evaluate.  If the estimate of value proves to be inaccurate,
in the event of default and foreclosure the Bank may be confronted with a
property the value of which is insufficient to assure full repayment.  The
Bank attempts to minimize this risk by generally limiting the maximum loan-to-
value ratio on land loans to 75%.

     CONSUMER LENDING.  Consumer lending has traditionally been a small part
of the Bank's business.  Consumer loans generally have shorter terms to
maturity and higher interest rates than mortgage loans.  Consumer loans
include home equity lines of credit, Title I home improvement loans, second
mortgage loans, savings account loans, automobile loans, boat loans,
motorcycle loans, recreational vehicle loans and unsecured loans.  Consumer
loans are made with both fixed and variable interest rates and with varying
terms.  At September 30, 2001, consumer loans amounted to $17.9  million, or
4.8% of the total loan portfolio.

     At September 30, 2001, the largest component of the consumer loan
portfolio consisted of second mortgage loans and home equity lines of credit,
which totaled $11.0 million, or 3.0%, of the total loan portfolio.  Home
equity lines of credit and second mortgage loans are made for purposes such as
the improvement of residential properties, debt consolidation and education
expenses, among others.  The majority of these loans are made to existing
customers and are secured by a first or second mortgage on residential
property.  The Bank occasionally solicits these loans.  The loan-to-value
ratio is typically 80% or less, when taking into account both the first and
second mortgage loans.  Second mortgage loans typically carry fixed interest
rates with a fixed payment over a term between five and 20 years.  Home equity
lines of credit are generally for a one year term and the interest rate is
tied to the 26 week Treasury Bill plus 4.0%.

     In July 1997, the Bank began issuing VISA credit cards to its existing
customers.  At September 30, 2001, credit card loans amounted to $2.0 million.
The Bank does not engage in direct mailings of pre-approved credit cards.

     Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles.  In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation.  The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment.  In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy.  Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount that can be recovered on such loans.  The Bank
believes that these risks are not as prevalent in the case of the Bank's
consumer loan portfolio because a large percentage of the portfolio consists
of second mortgage loans and home equity lines of credit that are underwritten
in a manner such that they result in credit risk that is substantially similar
to one- to- four family residential mortgage loans.  Nevertheless, second
mortgage loans and home equity lines of credit have greater credit risk than
one- to- four family residential mortgage loans because they are secured by
mortgages subordinated to the existing first mortgage on the property, which
may or may not be held by the Bank.  At September 30, 2001, there were $26,000
of consumer loans delinquent in excess of 90 days.

                                       8

<PAGE>



     COMMERCIAL BUSINESS LENDING.  Commercial business loans totaled $7.2
million, or 1.9% of total loans receivable at September 30, 2001, and
consisted of 69 loans.  In July 1998, the Bank established a business banking
division staffed by three experienced commercial bankers to increase the
Bank's origination of commercial business loans.  Commercial business loans
are generally secured by business equipment or other property and are made at
variable rates of interest equal to a negotiated margin above the prime rate.
The Bank also generally obtains personal guarantees from financially capable
parties based on a review of personal financial statements.

     Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending.  Real estate
lending is generally considered to be collateral based lending with loan
amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default.  Although commercial business
loans are often collateralized by equipment, inventory, accounts receivable or
other business assets, the liquidation of collateral in the event of a
borrower default is often an insufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete
or of limited use, among other things.  Accordingly, the repayment of a
commercial business loan depends primarily on the creditworthiness of the
borrower (and any guarantors), while liquidation of collateral is a secondary
and often insufficient source of repayment.

     LOAN MATURITY.  The following table sets forth certain information at
September 30, 2001 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments.  Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less.

                                         After     After
                             One Year   3 Years   5 Years
                   Within    Through    Through   Through    After
                  One Year   3 Years    5 Years   10 Years  10 Years   Total
                  --------   --------   -------   --------  --------   -----
                                            (In thousands)

Mortgage loans:
 One- to- four
  family.........$   481    $   809     $ 1,551   $ 5,598  $121,643  $130,082
 Multi-family....  3,393         27       3,488    16,303     6,201    29,412
 Commercial......    586      5,164       2,778    27,994    29,209    65,731
 Construction and
  land development
  (1)............ 48,961     13,337         922     5,174    37,850   106,244
 Land............  1,003      3,051       8,606       819       153    13,632
Consumer loans:
 Home equity and
  second
  mortgage.......  4,080        737       1,291     2,082     2,849    11,039
 Other...........  1,653      1,361       1,863       571     1,377     6,825
 Commercial business
  loans..........  3,312        750       1,601     1,487        --     7,150
                  ------     ------      ------    ------   -------  --------
  Total.......... 63,469     25,236      22,100    60,028   199,282   370,115

Less:
 Undisbursed portion
  of loans in
  process........                                                     (39,803)
 Unearned
  income.........                                                      (3,494)
 Allowance for loan
  losses.........                                                      (3,050)
                                                                     --------
 Loans receivable,
  net............                                                    $323,768
                                                                     ========
----------------
(1)  Includes construction/permanent that convert to a permanent mortgage
     loan once construction is completed.

                                       9

<PAGE>



     The following table sets forth the dollar amount of all loans due after
September 30, 2001, which have fixed interest rates and have floating or
adjustable interest rates.

                                  Fixed        Floating or
                                  Rates      Adjustable Rates      Total
                                  -----      ----------------      -----
                                             (In thousands)

Mortgage loans:
One- to- four family........... $ 42,061         $ 88,021         $130,082
 Multi-family..................    6,599           22,813           29,412
 Commercial....................   17,052           48,679           65,731
 Construction and land
  development..................   91,322           14,922          106,244
 Land..........................   13,632               --           13,632
Consumer loans:
 Home equity and second
  mortgage.....................    6,627            4,412           11,039
 Other.........................    6,666              159            6,825
Commercial business loans......    2,859            4,291            7,150
                                --------         --------         --------
   Total....................... $186,818         $183,297         $370,115
                                ========         ========         ========

     Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets.  The average life of loans is substantially less
than their contractual terms because of prepayments.  In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid.  The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates.

     LOAN SOLICITATION AND PROCESSING.  Loan originations are obtained from a
variety of sources, including walk-in customers, and referrals from builders
and realtors.  Upon receipt of a loan application from a prospective borrower,
a credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing.  An
appraisal of the real estate offered as collateral generally is undertaken by
an appraiser retained by the Bank and certified by the State of Washington.

     Mortgage loan applications are initiated by loan officers and are
required to be approved by the Bank's Loan Committee, which consists of the
Bank's President, Executive Vice President and two other senior management
officers.  Certain consumer loans up to and including $25,000 may be approved
by individual loan officers and the Bank's consumer lending department manager
may approve loans up to and including $50,000.  All other loans up to and
including $300,000 may be approved by any two members of the Bank's Loan
Committee.  Commercial business loans up to and including $250,000 may also be
approved by the Bank's Business Banking Division manager.  Loans in excess of
$300,000, as well as loans of any size granted to a single borrower whose
aggregate lending relationship exceeds $300,000, must be approved by the
Bank's Board of Directors.

     LOAN ORIGINATIONS, PURCHASES AND SALES.  During the years ended September
30, 2001 and 2000, the Bank's total gross loan originations were $156.0
million and $136.2 million, respectively.  Periodically, the Bank purchases
participation interests in construction and land development loans and
multi-family loans, secured by properties located in the Bank's primary market
area, from other lenders.  Such purchases are underwritten to the Bank's
underwriting guidelines and are without recourse to the seller other than for
fraud.  See "-- Lending Activities -- Construction and Land Development
Lending" and "-- Lending Activities -- Multi-Family Lending."

     Consistent with its asset/liability management strategy, the Bank's
policy has been to retain in its portfolio all of the ARM loans and generally
originates fixed rate loans with a view toward sale in the secondary market to
the FHLMC; however, from time to time, a portion of fixed-rate loans may be
retained in the Bank's portfolio to meet its asset-liability objectives.
Loans sold in the secondary market are generally sold on a servicing retained
basis.  At September 30, 2001, the Bank's loan servicing portfolio totaled
$90.3 million.

                                       10

<PAGE>



     The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.

                                         Year Ended September 30,
                                    ----------------------------------
                                    2001           2000           1999
                                    ----           ----           ----
                                        (Dollars in thousands)
Loans originated:
 Mortgage loans:
  One- to- four family......... $  47,534        $ 34,240      $ 41,084
  Multi-family.................     1,014           7,124         6,952
  Commercial...................     9,400           8,855        15,722
  Construction and land
   development.................    80,131          69,638        63,162
  Land.........................     5,749           6,279         4,605
  Consumer.....................     7,831           8,601         6,845
  Commercial business loans....     4,390           1,497         6,069
                                 --------        --------      --------
   Total loans originated......   156,049         136,234       144,439

Loans purchased:
 Mortgage loans:
  One- to- four family.........      188               60           269
  Multi-family.................       --            6,163            --
  Commercial...................        -            2,745         9,170
  Construction.................    1,063               --         7,226
  Land.........................       51               --            34
                                --------         --------      --------
   Total loans purchased.......    1,302            8,968        16,699
                                --------         --------      --------
    Total loans originated
     and purchased.............  157,351          145,202       161,138

Loans sold or converted to
securities:
  Total whole loans sold.......  (27,597)         (11,800)      (13,572)
  Participation loans..........   (3,868)              --        (6,249)
  Loans converted to
   securities..................  (11,926)              --            --
                                --------         --------      --------
   Total loans sold or
    converted to securities....  (43,391)         (11,800)      (19,821)

Mortgage loan principal
 repayments....................  (96,075)         (80,847)      (73,733)
Decrease (increase) in
 other items, net..............   (7,123)           4,366       (10,720)
                                --------         --------      --------
Net increase in loans
 receivable, net............... $ 10,762         $ 56,921      $ 56,864
                                ========         ========      ========

     LOAN ORIGINATION FEES.  The Bank, in some instances, receives loan
origination fees.  Loan fees are a percentage of the principal amount of the
loan which are charged to the borrower for funding the loan.  The amount of
fees charged by the Bank is generally 1.0% to 2.0%.  Current accounting
standards require fees received and certain loan origination costs for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan.  Net deferred fees or costs associated with
loans that are prepaid are recognized as income at the time of prepayment.
Deferred origination loan fees totaled $3.5 million at September 30, 2001.

     NONPERFORMING ASSETS AND DELINQUENCIES.  The Bank assesses late fees or
penalty charges on delinquent loans of approximately 5% of the monthly loan
payment amount.  Substantially all fixed-rate and ARM loan payments are due on
the first day of the month; however, the borrower is given a 15 day grace
period to make the loan payment.  When a mortgage loan borrower fails to make
a required payment when due, the Bank institutes collection procedures. A
notice is mailed to the borrower 16 days after the date the payment is due,
giving the borrower 15 days to respond and correct the delinquency.  Attempts
to contact the borrower by telephone generally begin upon the 30th day of
delinquency.  If a satisfactory response is not obtained, continuous follow-up
contacts are attempted until the loan has been brought current.  Before the
90th day of delinquency, attempts to interview the borrower, preferably in
person, are made to establish (i) the cause of the delinquency, (ii) whether
the cause is temporary, (iii) the attitude of the borrower toward the debt,
and (iv) a mutually satisfactory arrangement for curing the default.

                                       11

<PAGE>



     If the borrower is chronically delinquent and all reasonable means of
obtaining payment on time have been exhausted, foreclosure is initiated
according to the terms of the security instrument and applicable law.
Interest income on loans is reduced by the full amount of accrued and
uncollected interest.

     When a consumer loan borrower or commercial business borrower fails to
make a required payment on a  loan by the payment due date, the Bank
institutes similar collection procedures as for its mortgage loan borrowers.

     The Bank's Board of Directors is informed monthly as to the status of all
loans that are delinquent by more than 30 days, the status on all loans
currently in foreclosure, and the status of all foreclosed and repossessed
property owned by the Bank.

     The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.

                                            At September 30,
                             --------------------------------------------
                             2001      2000      1999      1998      1997
                             ----      ----      ----      ----      ----
                                        (Dollars in thousands)
Loans accounted for on a
 nonaccrual basis:
 Mortgage loans:
  One- to- four family..   $  863     $1,203   $  941     $  996    $ 776
  Commercial............    2,091        551    1,675      2,919    2,886
  Construction and land
   development..........      491      1,267      390         --    3,891
  Land..................      610        233      253        397       --
 Consumer loans.........       26        273      330         17        2
 Commercial business
  loans.................       10         85       --         81
                            -----      -----    -----      -----    -----
   Total................    4,091      3,612    3,589      4,410    7,555

Accruing loans which are
  contractually past due
  90 days or more:
 Mortgage loans:
  Construction and land
  development...........       --         --      449        396      109
                            -----      -----    -----      -----    -----
   Total................       --         --      449        396      109
                            -----      -----    -----      -----    -----

Total of nonaccrual and
 90 days past due loans.    4,091      3,612    4,038      4,806    7,664

Real estate owned and
 other repossessed
 assets.................    1,006      1,966      867      1,724      434
                            -----      -----    -----      -----    -----
   Total nonperforming
    assets..............    5,097      5,578    4,905      6,530    8,098

Restructured loans......       --         --      509        236       70

Nonaccrual and 90 days
 or more past due loans as
 a percentage of loans
 receivable, net........     1.25%      1.14%    1.56%      2.39%    4.06%
Nonaccrual and 90 days
 or more past due loans as
 a percentage of total
 assets.................     1.06%      0.98%    1.31%      1.81%    3.62%

Nonperforming assets as a
 percentage of total
 assets.................     1.32%      1.52%    1.60%      2.46%     3.83%

Loans receivable,
 net(1)................. $326,818   $315,646 $258,141   $200,949  $188,743
                         ========   ======== ========   ======== =========
Total assets             $386,305   $368,080 $307,116   $265,709  $211,553
                         ========   ======== ========   ======== =========

-------------
(1) Includes loans held-for-sale and is before the allowance for loan
    losses.

                                       12

<PAGE>



     Additional interest income which would have been recorded for the year
ended September 30, 2001 had nonaccruing loans been current in accordance with
their original terms amounted to approximately $319,000.  No interest income
was recorded on nonaccrual loans for the year ended September 30, 2001.

     The following is a discussion of the Bank's major problem assets at
September 30, 2001:

     Motel, Pierce County Washington.  The Bank had a $1.8 million non-
performing commercial mortgage loan on a 142-unit motel in Tacoma, Washington,
at September 30, 2001.  After the loan became delinquent, the Bank initiated
foreclosure proceedings and held a trustee sale on November 30, 2001.  The
motel was purchased at the trustee sale by a bank-approved third party for an
amount in excess of the outstanding principal balance.

    REAL ESTATE OWNED.  Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold.  When property is acquired it is recorded at the lower of
its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or fair market value.  Subsequent to foreclosure, the
property is carried at the lower of the foreclosed amount or fair value, less
estimated selling costs.  At September 30, 2001, the Bank had $1.0 million in
real estate owned consisting primarily of six one- to- four family properties,
and several land parcels.

     RESTRUCTURED LOANS.  Under generally accepted accounting principles
("GAAP"), the Bank is required to account for certain loan modifications or
restructuring as a "troubled debt restructuring."  In general, the
modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that
the Bank would not otherwise consider.  Debt restructuring or loan
modifications for a borrower does not necessarily always constitute troubled
debt restructuring, however, and troubled debt restructuring do not
necessarily result in non-accrual loans.  The Bank had no restructured loans
at September 30, 2001.

     ASSET CLASSIFICATION.  Applicable regulations require that each insured
institution review and classify its assets on a regular basis.  In addition,
in connection with examinations of insured institutions, regulatory examiners
have authority to identify problem assets and, if appropriate, require them to
be classified.  There are three classifications for problem assets:
substandard, doubtful and loss.  Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss.  An asset classified as loss is
considered uncollectible and of such little value that continuance as an asset
of the institution is not warranted.  When an insured institution classifies
problem assets as either substandard or doubtful, it is required to establish
general allowances for loan losses in an amount deemed prudent by management.
These allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities and the risks
associated with particular problem assets.  When an insured institution
classifies problem assets as loss, it charges off the balance of the asset
against the allowance for loan losses.  Assets which do not currently expose
the insured institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are required to be
designated as special mention.  The Bank's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the FDIC and the Division which can order the
establishment of additional loss allowances.

                                       13

<PAGE>


     The aggregate amounts of the Bank's classified assets (as determined by
the Bank), and of the Bank's  allowances for loan losses at the dates
indicated, were as follows:

                                        At September 30,
                                  --------------------------------
                                  2001          2000          1999
                                  ----          ----          ----
                                          (In thousands)

Loss..........................  $   --        $   --         $  --
Doubtful......................       5           206            89
Substandard(1)................   9,528         7,016         4,108
Special mention(1)............   5,820         1,764         1,059

Allowance for loan losses.....   3,050         2,640         2,056

--------------
(1)  For further information concerning the increase in classified assets,
     see "-- Lending Activities -- Nonperforming Assets and Delinquencies."

     The Bank's classified assets increased by $6.4 million at September 30,
2001, primarily as a result of a $4.1 million increase in loans classified as
special mention and a $2.5 million increase in loans classified as
substandard.

     The increase in special mention loans is primarily the result of three
loan relationships.  The largest of these is a loan of $2.5 million that had
an original balance of $3.5 million and is secured by a mobile home park in
Portland, Oregon.  This loan is classified as special mention due to the
slower than anticipated absorption of unit spaces.  The project was designed
to allow individual unit sites to be sold and the borrower is in the process
of selling sites.  The loan is current and paying in accordance with the
required loan terms.  The second relationship involves a loan of $1.1 million
secured by an apartment complex in Tacoma, Washington.  The Bank's borrower
sold the property to a third party who failed to maintain the property in a
satisfactory manner.  The original borrower has now regained possession of the
property and made the required repairs.  The loan is current and paying in
accordance with the required loan terms.  The third relationship involves a
line of credit and three construction loans totaling $619,000 to a builder in
Pierce County.  Subsequent to September 30, 2001, one of these loans has paid
off.  The balance on the remaining three loans totaled $478,000 at December 1,
2001 and continue to be classified as special mention due to a defined
weakness in the borrower's financial position.

     The increase in substandard loans is primarily the result of two
commercial real estate loans and a land loan being classified during the year.
A 142-unit motel in Tacoma, Washington secures the larger commercial real
estate loan of $1.8 million.  The Bank initiated foreclosure proceedings and
held a trustee sale on November 30, 2001.  The motel was purchased at the
trustee sale by a third party for an amount in excess of the outstanding
principal balance.  A riverfront restaurant facility in Hoquiam, Washington
secures the second commercial real estate loan and had an outstanding balance
of $273,000 at September 30, 2001.  A trustee sale is scheduled for December
14, 2001.  While no assurances can be provided, no material loss is
anticipated on the disposition of this property.  A parcel of land in Pierce
County, Washington secures the land loan, which had a balance of $391,000 at
September 30, 2001.  The Bank has a first mortgage loan on this property.  The
holder of a large second mortgage on the property is currently foreclosing.
While no assurances can be provided, no material loss is anticipated on the
disposition of this property.

     ALLOWANCE FOR LOAN LOSSES.  The allowance for loan losses is maintained
to cover losses inherent in the loan portfolio.  The Bank has established a
systematic methodology for the determination of provisions for loan losses
that takes into consideration the need for an overall general valuation
allowance.  The Bank's methodology for assessing the adequacy of its allowance
for loan losses is based on its historic loss experience for various loan
segments; adjusted for changes in economic conditions, delinquency rates, and
other factors.  Using these loss estimate factors, management develops a range
of probable loss for each loan category.  Certain individual loans for which
full collectibility may not assured are evaluated individually with loss
exposure based on estimated discounted cash flows or collateral values.  The
total estimated range of loss based on these two components of the analysis is
compared to the loan loss allowance balance.  Based on this review, management
will adjust the allowance as necessary to maintain directional consistency
with trends in the loan portfolio.

                                       14

<PAGE>



     In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan.  The Bank increases its allowance for loan losses
by charging provisions for loan losses against the Bank's income.

     Management reviews the adequacy of the allowance at least quarterly based
on management's assessment of current economic conditions, past loss and
collection experience, and risk characteristics of the loan portfolio.  A
provision for losses is charged against income monthly to maintain the
allowances.

     At September 30, 2001, the Bank had an allowance for loan losses of $3.1
million.  Management believes that the amount maintained in the allowance is
adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.

     While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to increase significantly its allowance for loan losses.  In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loans deteriorate as a result of the factors discussed
above.  Any material increase in the allowance for loan losses may adversely
affect the Bank's financial condition and results of operations.

     The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.

                                      Year Ended September 30,
                          ------------------------------------------------
                          2001       2000       1999       1998       1997
                          ----       ----       ----       ----       ----
                                       (Dollars in thousands)

Allowance at beginning
 of year................ $2,640     $2,056     $1,728     $1,716     $1,133
Provision for loan
 losses.................  1,400        885        363        200        596
Recoveries:
 Mortgage loans:
  Commercial real
   estate...............     20        260         --         --         --
  Consumer loans........      2          2         --         --          9
                         ------     ------     ------     ------     ------
    Total recoveries....     22        262         --         --          9

Charge-offs:
 Mortgage loans:
  One- to- four family..     21         10         --         75         19
  Home equity and second
   mortgage.............     --         --         --         --
  Other.................    324        373         35        113          3
 Commercial business
  loans.................    667        180         --         --
                         ------     ------     ------     ------     ------
  Total charge-offs.....  1,012        563         35        188         22
                         ------     ------     ------     ------     ------
  Net charge-offs.......    990        301         35        188         13
                         ------     ------     ------     ------     ------
   Balance at end of
    year................ $3,050     $2,640     $2,056     $1,728     $1,716
                         ======     ======     ======     ======     ======

Allowance for loan
 losses as a  percentage
 of total loans (net)(1)
 outstanding at the end
 of the year............   0.93%      0.84%      0.80%      0.86%      0.91%

Net charge-offs as a
 percentage of average
 loans outstanding during
 the year...............   0.31%      0.01%        --%        --%      0.01%

Allowance for loan losses
 as a percentage of
 nonperforming loans
 at end of year.........  74.55%     73.09%     50.92%     35.96%     22.39%

---------------
(1) Total loans (net) includes loans held for sale and is before the allowance
    for loan losses.

                                       15

<PAGE>


<TABLE>

     The following table sets forth the breakdown of the allowance for loan losses by loan category at the
dates indicated.

                                                           At September 30,
                     --------------------------------------------------------------------------------------
                          2001             2000             1999             1998             1997
                     ---------------- ---------------- ---------------- --------------- -------------------
                             Percent          Percent          Percent          Percent          Percent
                             of Loans         of Loans         of Loans         of Loans         of Loans
                             in Category      in Category      in Category      in Category      in Category
                             to Total         to Total         to Total         to Total         to Total
                     Amount  Loans    Amount  Loans    Amount  Loans    Amount  Loans    Amount  Loans
                     ------  -----    ------  -----    ------  -----    ------  -----    ------  -----
                                                        (Dollars in thousands)

                 <c>      <c>     <c>      <c>     <c>      <c>      <c>     <c>      <c>     <c>
Mortgage loans:
One-to-four family..$  271   35.14%  $  374   38.85%  $  288   38.42%   $  311  43.48%   $  311  48.76%
 Multi-family.......   195    7.95      171    9.54       82    5.32        70   5.36       149   5.93
 Commercial.........   793   17.76      662   16.65      674   17.37       706  14.18       409  14.32
 Construction.......   845   28.71      968   25.52      633   30.24       368  27.65       646  21.93
 Land...............    96    3.68      220    3.56      170    3.02       180   3.34       138   3.38
Non-mortgage loans:
 Consumer loans.....   217    4.83      121    4.51      126    4.09        65   5.51        50   5.34
 Commercial business
  loans.............   633    1.93      124    1.37       83    1.54        28   0.48        13   0.34
                    ------  ------   ------  ------   ------  ------    ------ ------    ------ ------
 Total allowance for
  loan losses.......$3,050  100.00%  $2,640  100.00%  $2,056  100.00%   $1,728 100.00%   $1,716 100.00%
                    ======  ======   ======  ======   ======  ======    ====== ======    ====== ======

</TABLE>

                                                   16

<PAGE>



INVESTMENT ACTIVITIES

     At September 30, 2001, the Company's investment portfolio totaled $29.4
million, consisting of $10.2 million of securities available for sale and
$19.2 million of mortgage-backed securities available for sale.  This compares
with a total portfolio of $24.9 million at September 30, 2000, comprised of
$13.3 million of securities available for sale and $11.6 million of mortgage-
backed securities available for sale.  The composition of the portfolios by
type of security, at each respective date is presented in the table, which
follows.

     The investment policies of the Company are established and monitored by
the Board of Directors.  The policies are designed primarily to provide and
maintain liquidity, to generate a favorable return on investments without
incurring undue interest rate and credit risk, and to compliment the Bank's
lending activities.  These policies dictate the criteria for classifying
securities as either available for sale or held to maturity.  The policies
permit investment in various types of liquid assets permissible under
applicable regulations, which includes U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks,
banker's acceptances, federal funds, and mortgage-backed securities.  The
Company's investment policy also permits investment in equity securities in
certain financial service companies.

     The following table sets forth the investment securities portfolio and
carrying values at the dates indicated.

                                          At September 30,
                --------------------------------------------------------------
                       2001                  2000                1999
                --------------------  -------------------  -------------------
                Carrying  Percent of  Carrying  Percent of Carrying Percent of
                  Value     Total      Value       Total     Value    Total
                  -----     -----      -----       -----     -----    -----
                                     (Dollars in thousands)

Available-for-Sale (at fair value):

U.S. Agency
 Securities.....$    --       --%    $ 6,416       25.74%   $ 6,419   21.90%
Mortgage-backed
 securities..... 19,159    65.24      11,569       46.42     13,992   47.72
Municipal
 bonds..........     57     0.19          71        0.28         --      --
Mutual funds.... 10,060    34.25       6,472       25.97      8,845   30.17
Equity
 securities.....     93     0.32         397        1.59         62    0.21
                -------   ------     -------      ------    -------  ------
Total
 portfolio......$29,369   100.00%    $24,925      100.00%   $29,318  100.00%
                =======   ======     =======      ======    =======  ======

     The following table sets forth the maturities and weighted average yields
of the investment and mortgage-backed securities in the Company's investment
securities portfolio at September 30, 2001.  Mutual funds and equity
securities, which by their nature do not have maturities, are classified in
the less than one year category.

                   Less Than        One to        Five to        Over Ten
                    One Year      Five Years     Ten Years        Years
                 -------------  -------------  -------------  -------------
                 Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield
                 ------  -----  ------  -----  ------  -----  ------  -----
                                     (Dollars in thousands)
Available-for-Sale:

Mortgage-backed
 securities.....$    --    --%  $  --     --%  $6,318  6.15%  $12,841  6.06%
Municipal
 bonds..........     --    --      57   6.92       --    --        --    --
Mutual funds.... 10,060  4.80      --     --       --    --        --    --
Equity
 securities.....     93  2.42      --     --       --    --        --
                -------  ----   -----   ----   ------  ----   -------  ----
Total
 portfolio......$10,153  4.77%  $  57   6.92%  $6,318  6.15%  $12,841  6.06%
                =======         =====          ======         =======

                                       17

<PAGE>



DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

     GENERAL.  Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes.  Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions.  Borrowings through the FHLB-Seattle may be
used to compensate for reductions in the availability of funds from other
sources.

     DEPOSIT ACCOUNTS.  Substantially all of the Bank's depositors are
residents of Washington.  Deposits are attracted from within the Bank's market
area through the offering of a broad selection of deposit instruments,
including money market deposit accounts, checking accounts, regular savings
accounts and certificates of deposit.  Deposit account terms vary, according
to the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors.  In determining the terms
of its deposit accounts, the Bank considers current market interest rates,
profitability to the Bank, matching deposit and loan products and its customer
preferences and concerns.  In recent periods, the Bank has used deposit
interest rate promotions in connection with the opening of new branch offices.

     At September 30, 2001 the Bank had $44.2 million of jumbo certificates of
deposit of $100,000 or more, which includes $19.7 million in public unit
funds.  The Bank does not solicit brokered deposits and believes that its
jumbo certificates of deposit, which represented 18.2% of total deposits at
September 30, 2001, present similar interest rate risk compared to its other
deposit products.

     The following table sets forth information concerning the Bank's deposits
at September 30, 2001.

                                     Weighted                  Percentage
                                      Average                   of Total
Category                           Interest Rate     Amount     Deposits
--------                           -------------     ------     --------
                                                (In thousands)

Non-Interest Bearing                     --%       $ 16,976       7.00%
Negotiable order of..............
 withdrawal ("NOW") Checking.....      1.83          30,626      12.64
Passbook Savings.................      2.52          34,228      14.12
Money Market Accounts............      3.58          27,251      11.24

Certificates of Deposit(1)
--------------------------

Maturing within 1 year...........      4.98         113,735      46.93
Maturing after 1 year but
 within 2 years..................      4.65          15,577       6.43
Maturing after 2 years but
 within 5 years..................      5.34           3,128       1.29
Maturing after 5 years...........      5.91             851       0.35
                                                   --------     ------
                                       3.72%       $242,372     100.00%
                                                   ========     ======

---------------
(1)    Based on remaining maturity of certificates.

     The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 2001.  Jumbo
certificates of deposit have principal balances of $100,000 or more and the
rates paid on such accounts are generally negotiable.

Maturity Period                     Amount
---------------                     ------
                                (In thousands)
Three months or less.............  $27,158
Over three through six months....    7,242
Over six through twelve months...    7,627
Over twelve months...............    2,159
                                   -------
  Total..........................  $44,186
                                   =======

                                       18

<PAGE>


<TABLE>

     DEPOSIT FLOW.  The following table sets forth the balances of savings deposits in the various types of
savings accounts offered by the Bank at the dates indicated.

                                                               At September 30,
                        ------------------------------------------------------------------------------------
                                  2001                                 2000                       1999
                        -----------------------------       ----------------------------     ---------------
                                 Percent                             Percent                         Percent
                                   of       Increase                   of      Increase                of
                        Amount    Total     (Decrease)      Amount    Total    (Decrease)    Amount   Total
                        ------    -----      --------       ------    -----     --------     ------   -----
                                                             (Dollars in thousands)

                   <c>         <c>        <c>           <c>         <c>      <c>         <c>        <c>
Non-interest-bearing..$ 16,976    7.00%      $ 1,479       $15,497     7.29%    $ 4,266     $11,231    5.97%
NOW checking..........  30,626   12.64         6,159        24,467    11.51       3,228      21,239   11.29
Passbook savings
 accounts.............  34,228   14.12         5,581        28,647    13.47        (749)     29,396   15.62
Money market
 deposit..............  27,251   11.24         6,388        20,863     9.81       2,089      18,774    9.98
Certificates of deposit
 which mature in the
 year ending:
  Within 1 year....... 113,735   46.93        12,320       101,415    47.70      22,988      78,427   41.68
  After 1 year, but
   within 2 years.....  15,577    6.43        (1,803)       17,380     8.18      (5,530)     22,910   12.18
  After 2 years, but
   within 5 years.....   3,128    1.29          (748)        3,876     1.82      (1,442)      5,318    2.83
  Certificates maturing
   thereafter.........     851    0.35           385           466     0.22        (387)        853    0.45
                      --------  ------       -------      --------   ------     -------    --------  ------
    Total.............$242,372  100.00%      $29,761      $212,611   100.00%    $24,463    $188,148  100.00%
                      ========  ======       =======      ========   ======     =======    ========  ======

                                                   19
</TABLE>

<PAGE>



      TIME DEPOSITS BY RATES.  The following table sets forth the time
deposits in the Bank classified by rates as of the dates indicated.

                                 At September 30,
                          ------------------------------
                          2001         2000         1999
                          ----         ----         ----
                                  (In thousands)

2.00 - 3.99%.......... $ 31,110    $    109      $    222
4.00 - 4.99%..........   36,673       6,261        28,687
5.00 - 5.99%..........   30,843      50,198        74,565
6.00 - 6.99%..........   32,939      61,301         3,527
7.00% and over........    1,726       5,268           507
                       --------    --------      --------
Total................. $133,291    $123,137      $107,508
                       ========    ========      ========

     TIME DEPOSITS BY MATURITIES.  The following table sets forth the amount
and maturities of time deposits at September 30, 2001.

                                         Amount Due
                    -----------------------------------------------------
                                            After
                                  One to    Two to
                    Less Than      Two      Five        After
                    One Year      Years     Years     Five Years     Total
                    --------      -----     -----     ----------     -----
                                        (In thousands)
2.00 - 3.99%...... $ 29,885     $ 1,225   $    --        $ --      $ 31,110
4.00 - 4.99%......   26,206       9,182     1,060         225        36,673
5.00 - 5.99%......   25,200       4,128     1,304         211        30,843
6.00 - 6.99%......   30,860       1,028       719         332        32,939
7.00% and over....    1,584          14        45          83         1,726
                   --------     -------   -------        ----      --------
Total............. $113,735     $15,577   $ 3,128        $851      $133,291
                   ========     =======   =======        ====      ========

     DEPOSIT ACTIVITIES.  The following table sets forth the savings
activities of the Bank for the periods indicated.

                                  Year Ended September 30,
                             --------------------------------
                             2001          2000          1999
                             ----          ----          ----
                                      (In thousands)

Beginning balance........ $212,611       $188,148      $170,834
Net deposits before
 interest credited.......   20,270         16,07         10,038
Interest credited........    9,491         8,393          7,276
                          --------      --------       --------
Net increase in
 deposits................   29,761        24,463         17,314
                          --------      --------       --------
Ending balance........... $242,372      $212,611       $188,148
                          ========      ========       ========

     BORROWINGS.  Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for general business purposes.
The Bank has the ability to use advances from the FHLB-Seattle to supplement
its supply of lendable funds and to meet deposit withdrawal requirements.  The
FHLB-Seattle functions as a central reserve bank providing credit for member
financial institutions.  As a member of the FHLB-Seattle, the Bank is required
to own capital stock in the FHLB-Seattle and is authorized to apply for
advances on the security of such stock and certain of its mortgage loans and
other assets (principally securities which are obligations of, or guaranteed
by, the U.S.  Government) provided certain creditworthiness standards have
been met.  Advances are made pursuant to several different credit programs.
Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on
the financial condition of the member institution and the adequacy of
collateral pledged to secure the credit.  At September 30, 2001, the Bank
maintained an uncommitted credit facility with the FHLB-

                                       20

<PAGE>



Seattle that provided for immediately available advances up to an aggregate
amount of $129.6 million, under which $69.0 million was outstanding.

     The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated using
monthly average balance:

                                             At or For the
                                       Year Ended September 30,
                                  ----------------------------------
                                  2001           2000           1999
                                  ----           ----           ----
                                        (Dollars in thousands)

Maximum amount of short-term
 FHLB advances at any month
 end........................... $62,100        $76,700        $33,600

Approximate average short-term
 FHLB advances outstanding.....  29,619         62,967         10,150

Approximate weighted average
 rate paid on short-term FHLB
 advances......................    5.84%          6.24%          5.41%

Total short-term FHLB advances
 at end of period..............  15,996         64,800         33,600

                            REGULATION OF THE BANK

GENERAL

     As a state-chartered, federally insured savings bank, the Bank is subject
to extensive regulation.  Lending activities and other investments must comply
with various statutory and regulatory requirements, including prescribed
minimum capital standards.  The Bank is regularly examined by the FDIC and the
Division and files periodic reports concerning the Bank's activities and
financial condition with its regulators.  The Bank's relationship with
depositors and borrowers also is regulated to a great extent by both federal
law and the laws of Washington, especially in such matters as the ownership of
savings accounts and the form and content of mortgage documents.

     Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches.  Federal
and state bank regulatory agencies also have the general authority to limit
the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice.  The
respective primary federal regulators of the Company and the Bank have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.

STATE REGULATION AND SUPERVISION

     As a state-chartered savings bank, the Bank is subject to applicable
provisions of Washington law and the regulations of the Division adopted
thereunder.  Washington law and regulations govern the Bank's ability to take
deposits and pay interest thereon, to make loans on or invest in residential
and other real estate, to make consumer loans, to invest in securities, to
offer various banking services to its customers, and to establish branch
offices.  Under state law, savings banks in Washington also generally have all
of the powers that federal savings banks have under federal laws and
regulations.  The Bank is subject to periodic examination and reporting
requirements by and of the Division.

                                       21
<PAGE>

DEPOSIT INSURANCE

     The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of depository institutions.  The FDIC
currently maintains two separate insurance funds: the Bank Insurance Fund
("BIF") and the  SAIF.  As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over the Bank.

     The Bank's accounts are insured by the SAIF to the maximum extent
permitted by law. The Bank pays deposit insurance premiums based on a risk-
based assessment system established by the FDIC.  Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital "well capitalized,"
"adequately capitalized," and "undercapitalized" which are defined in the same
manner as the regulations establishing the prompt corrective action system, as
discussed below.  These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern.  The matrix created by these definitions results in nine
assessment risk classifications.

     Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points.  However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s.  This amount is currently equal to about
six basis points for each $100 in domestic deposits for SAIF members while BIF
insured institutions pay an assessment equal to about 1.50 basis points for
each $100 in domestic deposits.  These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature
in the year 2015.

     The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC.  It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital.  If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC.  Management is not aware of any existing circumstances that could
result in termination of the deposit insurance of the Bank.

PROMPT CORRECTIVE ACTION

     Federal statutes establish a supervisory framework based on five capital
categories:  well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.  An
institution's category depends upon where its capital levels are in relation
to relevant capital measure, which include a risk-based capital measure, a
leverage ratio capital measure, and certain other factors.  The federal
banking agencies have adopted regulations that implement this statutory
framework.  Under these regulations, an institution is treated as well
capitalized if its ratio of total capital to risk-weighted assets is 10% or
more, its ratio of core capital to risk-weighted assets is 6% or more, its
ratio of core capital to adjusted total assets is 5% or more, and it is not
subject to any federal supervisory order or directive to meet a specific
capital level.  In order to be adequately capitalized, an institution must
have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based
capital ratio of not less than 4%, and a leverage ratio of not less than 4%.
Any institution which is neither well capitalized nor adequately capitalized
will be considered undercapitalized.

     Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions which become more
extensive as an institution becomes more severely undercapitalized.  Failure
by the Bank to comply with applicable capital requirements would, if
unremedied, result in restrictions on its activities and lead to enforcement
actions, including, but not limited to, the issuance of a capital directive to
ensure the maintenance of required capital levels.  Banking regulators will
take prompt corrective action with respect to depository institutions that

                                       22

<PAGE>



do not meet minimum capital requirements.  Additionally, approval of any
regulatory application filed for their review may be dependent on compliance
with capital requirements.

     At September 30, 2001, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the FDIC.

STANDARDS FOR SAFETY AND SOUNDNESS

     The federal banking regulatory agencies have prescribed, by regulation,
standards for all insured depository institutions relating to: (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
(v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation,
fees and benefits ("Guidelines").  The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired.  If the FDIC determines that the Bank fails to meet any standard
prescribed by the Guidelines, the agency may require the Bank to submit to the
agency an acceptable plan to achieve compliance with the standard.

CAPITAL REQUIREMENTS

     FDIC regulations recognize two types or tiers of capital: core ("Tier 1")
capital and supplementary ("Tier 2") capital.  Tier 1 capital generally
includes common stockholders' equity and noncumulative perpetual preferred
stock, less most intangible assets.  Tier 2 capital, which is limited to 100
percent of Tier 1 capital, includes such items as qualifying general loan loss
reserves, cumulative perpetual preferred stock, mandatory convertible debt,
term subordinated debt and limited life preferred stock; however, the amount
of term subordinated debt and intermediate term preferred stock (original
maturity of at least five years but less than 20 years) that may be included
in Tier 2 capital is limited to 50 percent of Tier 1 capital.

     The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios.  The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average
total assets.  Most banks are required to maintain a minimum leverage ratio of
at least 4% to 5% of total assets.  The FDIC retains the right to require a
particular institution to maintain a higher capital level based on an
institution's particular risk profile.

     FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets.  Assets are placed in
one of four categories and given a percentage weight -- 0%, 20%, 50% or 100% -
- based on the relative risk of that category.  In addition, certain off-
balance-sheet items are converted to balance-sheet credit equivalent amounts,
and each amount is then assigned to one of the four categories.  Under the
guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to
risk-weighted assets must be at least 8%, and the ratio of Tier 1 capital to
risk-weighted assets must be at least 4%.  In evaluating the adequacy of a
bank's capital, the FDIC may also consider other factors that may affect a
bank's financial condition.  Such factors may include interest rate risk
exposure, liquidity, funding and market risks, the quality and level of
earnings, concentration of credit risk, risks arising from nontraditional
activities, loan and investment quality, the effectiveness of loan and
investment policies, and management's ability to monitor and control financial
operating risks.

     The Division requires that net worth equal at least 5% of total assets.
Intangible assets must be deducted from net worth and assets when computing
compliance with this requirement.  At September 30, 2001, the Bank had a Tier
1 leverage capital ratio of 16.5% and net worth of 16.3% of total assets.

     FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses.  The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, including off-balance
sheet risk, managerial resources and/or the future earnings prospects of a
bank are not adequate and/or a bank has a significant volume of assets
classified substandard, doubtful or loss or otherwise criticized, the FDIC

                                       23

<PAGE>



may determine that the minimum adequate amount of capital for that bank is
greater than the minimum standards established in the regulation.

     The Bank's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future.  However, events beyond the control of the Bank, such as a downturn in
the economy in areas where the Bank has most of its loans, could adversely
affect future earnings and, consequently, the ability of the Bank to meet its
capital requirements.

     The table below sets forth the Bank's capital position relative to its
FDIC capital requirements at September 30, 2001.  The definitions of the terms
used in the table are those provided in the capital regulations issued by the
FDIC.

                                          At September 30, 2001
                                       -----------------------------
                                                  Percent of Adjusted
                                       Amount        Total Assets(1)
                                       ------        ---------------
                                         (Dollars in thousands)

Tier 1 (leverage) capital...........  $61,930             16.47%
Tier 1 (leverage) capital
 requirement........................   15,038              4.00
                                      -------             -----
Excess..............................  $46,892             12.47%
                                      =======             =====

Tier 1 risk adjusted capital........  $61,930             22.71%
Tier 1 risk adjusted capital
 requirement........................   10,907              4.00
                                      -------             -----
Excess..............................  $51,023             18.71%
                                      =======             =====

Total risk-based capital............  $64,980             23.83%
Total risk-based capital
 requirement........................   21,814              8.00
                                      -------             -----
Excess..............................  $43,166             15.83%
                                      =======             =====

----------------
(1)  For the Tier 1 (leverage) capital and Washington regulatory capital
     calculations, percent of total average assets of $376.0 million.  For
     the Tier 1 risk-based capital and total risk-based capital calculations,
     percent of total risk-weighted assets of $272.7 million.
(2)  As a Washington-chartered savings bank, the Bank is subject to the
     capital requirements of the FDIC and the Division.  The FDIC requires
     state-chartered savings banks, including the Bank, to have a minimum
     leverage ratio of Tier 1 capital to total assets of at least 3%,
     provided, however, that all institutions, other than those (i) receiving
     the highest rating during the examination process and (ii) not
     anticipating any significant growth, are required to maintain a ratio of
     1% to 2% above the stated minimum, with an absolute total capital to
     risk-weighted assets of at least 8%.  The Bank has not been notified by
     the FDIC of any leverage capital requirement specifically applicable to
     it.

ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS

     Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks.  Under regulations dealing with equity investments, an insured state
bank generally may not directly or indirectly acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank.  An insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary, (ii) investing as
a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of
a qualified housing project, provided that such limited partnership
investments may not exceed 2% of the bank's total assets, (iii) acquiring up
to 10% of the voting stock of a company that solely provides or reinsures
directors', trustees' and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions, and
(iv) acquiring or retaining the voting shares of a depository institution if
certain requirements are met.

                                       24

<PAGE>



     Federal law provides that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements.  Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank or for which
the FDIC has granted and exception must cease the impermissible activity.

ENVIRONMENTAL ISSUES ASSOCIATED WITH REAL ESTATE LENDING

     The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), a federal statute, generally imposes strict liability on, among
other things, all prior and present "owners and operators" of hazardous waste
sites.  However, the U.S. Congress created a safe harbor provision for secured
creditors by providing that the term "owner and operator" excludes a person
who, without participating in the management of the site, holds indicia of
ownership primarily to protect its security interest in the site.  Since the
enactment of the CERCLA, this "secured creditor exemption" has been the
subject of judicial interpretations which have left open the possibility that
lenders could be liable for cleanup costs on contaminated property that they
hold as collateral for a loan.

     In response to the uncertainty created by judicial interpretations, in
April 1992, the United States Environmental Protection Agency ("EPA"), an
agency within the Executive Branch of the government, promulgated a regulation
clarifying when and how secured creditors could be liable for cleanup costs
under the CERCLA.  Generally, the regulation protected a secured creditor that
acquired full title to collateral property through foreclosure as long as the
creditor did not participate in the property's management before foreclosure
and undertook certain due diligence efforts to divest itself of the property.
However, in February 1994, the U.S. Court of Appeals for the District of
Columbia Circuit held that the EPA lacked authority to promulgate such
regulation on the grounds that Congress meant for decisions on liability under
the CERCLA to be made by the courts and not the Executive Branch.  In January
1995, the U.S. Supreme Court denied to review the U.S. Court of Appeal's
decision.  In light of this adverse court ruling, in October 1995 the EPA
issued a statement entitled "Policy on CERCLA Enforcement Against Lenders and
Government Entities that Acquire Property Involuntarily" explaining that as an
enforcement policy, the EPA intended to apply as guidance the provisions of
the EPA lender liability rule promulgated in 1992.

     To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board requires under Regulation D that all depository
institutions, including savings banks, maintain reserves on transaction
accounts or non-personal time deposits.  These reserves may be in the form of
cash or non-interest-bearing deposits with the regional Federal Reserve Bank.
NOW accounts and other types of accounts that permit payments or transfers to
third parties fall within the definition of transaction accounts and are
subject to Regulation D reserve requirements, as are any nonpersonal time
deposits at a bank. Under Regulation D, a bank must establish reserves equal
to 0% of the first $4.9 million of net transaction accounts, 3% of the next
$41.6 million, and 10% plus $1.56 million of the remainder.  The reserve
requirement on non-personal time deposits with original maturities of less
than 1.5 years is 0%.  As of September 30, 2001, the Bank met its reserve
requirements.

AFFILIATE TRANSACTIONS

     The Company and the Bank are legal entities separate and distinct.
Various legal limitations restrict the Bank from lending or otherwise
supplying funds to the Company (an "affiliate"), generally limiting such
transactions with the affiliate to 10% of the bank's capital and surplus and
limiting all such transactions to 20% of the bank's capital and surplus.  Such
transactions, including extensions of credit, sales of securities or assets
and provision of services, also must be on terms and conditions consistent
with safe and sound banking practices, including credit standards, that are
substantially the same or at least as favorable to the bank as those
prevailing at the time for transactions with unaffiliated companies.

                                       25

<PAGE>



     Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower.  In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.

COMMUNITY REINVESTMENT ACT

     Banks are also subject to the provisions of the Community Reinvestment
Act of 1977 ("CRA"), which requires the appropriate federal bank regulatory
agency, in connection with its regular examination of a bank, to assess the
bank's record in meeting the credit needs of the community serviced by the
bank, including low and moderate income neighborhoods.  The regulatory
agency's assessment of the bank's record is made available to the public.
Further, such assessment is required of any bank which has applied, among
other things, to establish a new branch office that will accept deposits,
relocate an existing office or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial
institution.  The Bank received a "satisfactory" rating during its most recent
CRA examination.

DIVIDENDS

     Dividends from the Bank constitute the major source of funds for
dividends which may be paid by the Company.  The amount of dividends payable
by the Bank to the Company depends upon the Bank's earnings and capital
position, and is limited by federal and state laws, regulations and policies.
According to Washington law, the Bank may not declare or pay a cash dividend
on its capital stock if it would cause its net worth to be reduced below (i)
the amount required for liquidation accounts or (ii) the net worth
requirements, if any, imposed by the Director of the Division.  Dividends on
the Bank's capital stock may not be paid in an aggregate amount greater than
the aggregate retained earnings of the Bank, without the approval of the
Director of the Division.

     The amount of dividends actually paid during any one period will be
strongly affected by the Bank's management policy of maintaining a strong
capital position.  Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the federal bank regulatory agencies also have the general authority
to limit the dividends paid by insured banks if such payments should be deemed
to constitute an unsafe and unsound practice.

                        REGULATION OF THE COMPANY

GENERAL

     The Company, as the sole shareholder of the Bank is a bank holding
company and is registered as such with the Federal Reserve.  Bank holding
companies are subject to comprehensive regulation by the Federal Reserve under
the Bank Holding Company Act of 1956, as amended ("BHCA"), and the regulations
of the Federal Reserve.  As a bank holding company, the Company is required to
file with the Federal Reserve annual reports and such additional information
as the Federal Reserve may require and will be subject to regular examinations
by the Federal Reserve.  The Federal Reserve also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including
its bank subsidiaries).  In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.

RECENT LEGISLATION

     On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 was signed into law.  The Act contains federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the Act:

                                     26

<PAGE>



     (1)   repeals the historical restrictions and eliminates many federal
           and state law barriers to affiliations among banks, securities
           firms, insurance companies and other financial service providers;

     (2)   provides a uniform framework for the functional regulation of the
           activities of banks, savings institutions and their holding
           companies;

     (3)   broadens the activities that may be conducted by national banks,
           banking subsidiaries of bank holding companies and their financial
           subsidiaries;

     (4)   provides an enhanced framework for protecting the privacy of
           consumer information;

     (5)   adopts a number of provisions related to the capitalization,
           membership, corporate governance and other measures designed to
           modernize the FHLB system;

     (6)   modifies the laws governing the implementation of the Community
           Reinvestment Act; and

     (7)   addresses a variety of other legal and regulatory issues affecting
           day-to-day operations and long-term activities of financial
           institutions.

     As of September 30, 2001, the Company had not elected to come a financial
holding company. Under the BHCA, a bank holding company must obtain Federal
Reserve approval before: (1) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless
it already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.

ACQUISITIONS

     The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries.  Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely
related to the business of banking or managing or controlling banks as to be a
proper incident thereto.  The list of activities determined by regulation to
be closely related to banking within the meaning of the BHCA includes, among
other things:  operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of credit-
related insurance; leasing property on a full-payout, non-operating basis;
selling money orders, travelers' checks and U.S. Savings Bonds; real estate
and personal property appraising; providing tax planning and preparation
services; and, subject to certain limitations, providing securities brokerage
services for customers.

INTERSTATE BANKING

     The Federal Reserve must approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a
state other than such holding company's home state, without regard to whether
the transaction is prohibited by the laws of any state.  The Federal Reserve
may not approve the acquisition of a bank that has not been in existence for
the minimum time period, not exceeding five years, specified by the statutory
law of the host state.  Nor may the Federal Reserve approve an application if
the applicant, and its depository institution affiliates, controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch.  Federal law does not affect the authority
of states to limit the percentage of total insured deposits in the state which
may be held or controlled by a bank holding company to the extent such

                                     27

<PAGE>



limitation does not discriminate against out-of-state banks or bank holding
companies.  Individual states may also waive the 30% state-wide concentration
limit contained in the federal law.

     The Federal banking agencies are authorized to approve interstate merger
transactions without regard to whether such transaction is prohibited by the
law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997 which applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions.  Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.

DIVIDENDS

     The Federal Reserve has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both
the cash dividends and a rate of earnings retention that is consistent with
the company's capital needs, asset quality and overall financial condition.
The Federal Reserve also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends.  Furthermore, under the prompt corrective action regulations
adopted by the Federal Reserve, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized" under the prompt corrective
action regulations.

STOCK REPURCHASES

     Bank holding companies, except for certain "well-capitalized" and highly
rated bank holding companies, are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth.  The Federal Reserve may disapprove such a purchase or redemption
if it determines that the proposal would constitute an unsafe or unsound
practice or would violate any law, regulation, Federal Reserve order, or any
condition imposed by, or written agreement with, the Federal Reserve.

     On September 24, 2001, the Company announced a plan to repurchase 200,872
shares of the Company's stock.  This marked the Company's ninth  5% stock
repurchase plan.  As of September 30, 2001, the Company had repurchased 44,000
shares at an average price of $14.43.   The Company has now repurchased
2,248,032 (34.0%) of the 6,612,500 shares that were issued when the Company
went public in January 1998.

CAPITAL REQUIREMENTS

     The Federal Reserve has established capital adequacy guidelines for bank
holding companies that generally parallel the capital requirements of the FDIC
for the Bank.  The Federal Reserve regulations provide that capital standards
will be applied on a consolidated basis in the case of a bank holding company
with $150 million or more in total consolidated assets.

     The Company's total risk based capital must equal 8% of risk-weighted
assets and one half of the 8%, or  4%, must consist of Tier 1 (core) capital.
As of September 30, 2001, the Company's total risk based capital was 27.3% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
26.2% of risk-weighted assets.

                                 TAXATION

FEDERAL TAXATION

     GENERAL.  The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,

                                     28

<PAGE>



including particularly the Bank's reserve for bad debts discussed below.  The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.

     BAD DEBT RESERVE.  Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income.  The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve.  Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.

     The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996."  The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995.  These rules also require that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988).  The Bank has previously recorded
deferred taxes equal to the bad debt recapture and as such the new rules will
have no effect on the net income or federal income tax expense.  For taxable
years beginning after December 31, 1995, the Bank's bad debt deduction will be
determined under the experience method using a formula based on actual bad
debt experience over a period of years or, if the Bank is a "large"
association (assets in excess of $500 million) on the basis of net charge-offs
during the taxable year.  The new rules allow an institution to suspend bad
debt reserve recapture for the 1996 and 1997 tax years if the institution's
lending activity for those years is equal to or greater than the institutions
average mortgage lending activity for the six taxable years preceding 1996
adjusted for inflation.  For this purpose, only home purchase or home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation.  If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year.  The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking.  In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.

     DISTRIBUTIONS.  To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income.  Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation.  However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve.  The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution.  Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately
one and one-half times the Excess Distribution would be includable in gross
income for federal income tax purposes, assuming a 34% corporate income tax
rate (exclusive of state and local taxes).  See "REGULATION OF THE BANK --
Dividends" for limits on the payment of dividends by the Bank.  The Bank does
not intend to pay dividends that would result in a recapture of any portion of
its tax bad debt reserve.

     CORPORATE ALTERNATIVE MINIMUM TAX.  The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%.  In addition, only 90% of
AMTI can be offset by net operating loss carryovers.  AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses).

     DIVIDENDS-RECEIVED DEDUCTION.  The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations.  The corporate dividends-received deduction is

                                     29

<PAGE>



generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.

     AUDITS.  The Bank's federal income tax returns have been audited through
September 30, 1997.  The Bank did not incur any net increase in tax liability
as a result of the audit.

WASHINGTON TAXATION

     The Bank is subject to a business and occupation tax imposed under
Washington law at the rate of 1.50% of gross receipts. Interest received on
loans secured by mortgages or deeds of trust on residential properties is
exempt from such tax.

COMPETITION

     The Bank operates in an intensely competitive market for the attraction
of savings deposits (its primary source of lendable funds) and in the
origination of loans.  Historically, its most direct competition for savings
deposits has come from large commercial banks, thrift institutions and credit
unions in its primary market area.  Particularly in times of high interest
rates, the Bank has faced additional significant competition for investors'
funds from short-term money market securities and other corporate and
government securities.  The Bank's competition for loans comes principally
from mortgage bankers, commercial banks and other thrift institutions.  Such
competition for deposits and the origination of loans may limit the Bank's
future growth and earnings prospects.

SUBSIDIARY ACTIVITIES

     The Bank has one wholly-owned subsidiary, Timberland Service Corporation
("Timberland Service"), whose primary function is to act as the Bank's escrow
department.

PERSONNEL

     As of September 30, 2001, the Bank had 130 full-time employees and 20
part-time employees.  The employees are not represented by a collective
bargaining unit and the Bank believes its relationship with its employees is
good.

ITEM 2.  PROPERTIES
-------------------

     The Bank operates 13 full-service facilities.  The Bank owns all of its
offices, except for the Tacoma office, which is leased.  In March 2001, the
Bank opened a full-service branch in Tumwater (Thurston County), Washington
and in June 2001, the Bank opened a full-service branch in Tacoma (Pierce
County), Washington.

     The following table sets forth certain information regarding the Bank's
offices at September 30, 2001, all of which are owned, except for the Tacoma
office, which is leased.

                                       30

<PAGE>



                                                   Approximate
Location                         Year Opened     Square Footage    Deposits
--------                         -----------     --------------    --------
                                                                (In thousands)
Main Office:

624 Simpson Avenue                   1966            7,700         $ 63,887
Hoquiam, Washington 98550

Branch Offices:

300 N. Boone Street                  1974            3,400           26,746
Aberdeen, Washington 98520

314 Main South                       1975            2,800           33,806
Montesano, Washington 98563

361 Damon Road                       1977            2,100           22,215
Ocean Shores, Washington 98569

2418 Meridian East                   1980            2,400           36,493
Edgewood, Washington 98371

202 Auburn Way South                 1994            4,200           15,570
Auburn, Washington 98002

12814 Meridian East (South Hill)     1996            4,200           13,607
Puyallup, Washington 98373

1201 Marvin Road, N.E.               1997            4,400           10,051
Lacey, Washington 98516

101 Yelm Avenue W.                   1999            1,800            5,131
Yelm, Washington 98597

20464 Viking Way NW                  1999            3,380            3,751
Poulsbo, Washington  98370

2419 224th Street E.                 1999            3,865            6,029
Spanaway, Washington  98387

801 Trosper Road SW
Tumwater, Washington 98512           2001            3,300            3,923

7805 South Hosmer Street
Tacoma, Washington 98408             2001            5,000            1,163

Data Center:

422 6th Street                       1990            2,700
Hoquiam, Washington 98550

     The Bank also operates 16 proprietary ATMs that are part of a nationwide
cash exchange network.

                                        31
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties
in which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business.  The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2001.

                                 PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS
--------------------------------------------------------------------------

     The Company's common stock is traded on the Nasdaq National Market under
the symbol "TSBK".  As of September 30, 2001, there were 4,570,995 shares of
common stock issued and approximately 780 shareholders of record, excluding
persons or entities who hold stock in nominee or "street name" accounts with
brokers.  Dividend payments by the Company are dependent primarily on
dividends received by the Company from the Bank.  Under federal regulations,
the dollar amount of dividends the Bank may pay is dependent upon its capital
position and recent net income.  Generally, if the Bank satisfies its
regulatory capital requirements, it may make dividend payments up to the
limits prescribed in the FDIC regulations.  However, institutions that have
converted to a stock form of ownership may not declare or pay a dividend on,
or repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in connection with the
mutual to stock conversion.

     The following table sets forth the market price range of the Company's
common stock for the years ended September 30, 2001, 2000 and 1999.  This
information was provided by the Nasdaq Stock Market.

                               High         Low       Dividends
                               ----         ---       ---------
       Fiscal 2001
       -----------
       First Quarter          $13.25     $ 11.19        $0.10
       Second Quarter          14.63       12.38         0.10
       Third Quarter           16.31       13.25         0.10
       Fourth Quarter          16.22       13.75         0.11

       Fiscal 2000
       -----------
       First Quarter          $12.06      $10.75        $0.08
       Second Quarter          11.25        9.81         0.08
       Third Quarter           10.88        9.06         0.09
       Fourth Quarter          12.56       10.31         0.10

       Fiscal 1999
       -----------
       First Quarter          $14.38      $10.00        $0.06
       Second Quarter          13.00       11.41         0.06
       Third Quarter           12.06       10.69         0.07
       Fourth Quarter          13.25       11.44         0.08

                                        32
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The following table sets forth certain information concerning the
consolidated financial position and results of operations of the Company and
subsidiaries at and for the dates indicated.  Since the Company had not
commenced operations prior to the Bank's mutual-to-stock conversion in January
1998, the financial information presented for the periods prior to 1998 is
that of the Bank only.  The consolidated data is derived in part from, and
should be read in conjunction with, the Consolidated Financial Statements of
the Company and its subsidiary presented herein.


<TABLE>



                                                                      At September 30,
                                                    ------------------------------------------------------
                                                      2001        2000      1999        1998        1997
                                                      ----        ----      ----        ----        ----
                                                                       (In thousands)
SELECTED FINANCIAL CONDITION DATA:

                                                <c>         <c>        <c>         <c>         <c>
Total assets......................................  $386,305   $368,080   $307,116   $ 265,709   $ 211,553
Loans receivable and loans held for sale, net.....   323,768    313,006    256,085     199,221     187,027
Investment securities available-for-sale..........    10,210     13,356     15,326      16,147          --
Mortgage-backed securities held-to-maturity.......        --         --         --          --       3,990
Mortgage-backed securities available-for-sale.....    19,159     11,569     13,992      17,555          --
FHLB Stock........................................     4,830      4,150      2,338       1,713       1,587
Cash and due from financial institutions
  interest-bearing deposits in banks..............    13,439     12,002      8,126      21,784      11,446
Deposits..........................................   242,372    212,611    188,148     170,834     173,003
FHLB advances.....................................    68,978     81,137     45,084      11,618      12,241
Shareholders' equity..............................    71,809     72,312     72,245      81,780      24,645

</TABLE>

<TABLE>
                                                                  Year Ended September 30,
                                                    ------------------------------------------------------
                                                      2001        2000      1999        1998        1997
                                                      ----        ----      ----        ----        ----
                                                            (In thousands, except per share data)
SELECTED OPERATING DATA:

                                                <c>         <c>        <c>         <c>         <c>
Interest and dividend income...................... $ 31,692    $ 28,362   $ 23,109    $ 20,650    $ 17,947
Interest expense..................................   13,924      12,427      8,363       8,144       8,386
                                                   --------    --------   --------    --------    --------
Net interest income...............................   17,768      15,935     14,746      12,506       9,561
Provision for loan losses.........................    1,400         885        363         200         597
                                                   --------    --------   --------    --------    --------
Net interest income after
  provision for loan losses.......................   16,368      15,050     14,383      12,306       8,964
Noninterest income................................    2,927       1,738        592       1,540       1,235
Noninterest expense...............................   11,092       7,966      7,160       6,340       5,040
Income before income taxes........................    8,203       8,822      7,815       7,506       5,159
Provision for income taxes........................    2,741       2,925      2,597       2,410       1,830
                                                   --------    --------   --------    --------    --------
Net income........................................ $  5,462    $  5,897   $  5,218    $  5,096    $  3,329
                                                   ========    ========   ========    ========    ========
Earnings per common share:
  Basic........................................... $   1.30    $   1.31   $   1.03    $   0.84         N/A
  Diluted......................................... $   1.28    $   1.31   $   1.03    $   0.84         N/A
Dividends per share............................... $   0.41    $   0.35   $   0.27    $   0.12         N/A
Dividend payout ratio.............................    31.54%       26.72%    26.21%      14.29%         --

</TABLE>

                                                                     33
<PAGE>



<TABLE>

                                                                      At September 30,
                                                    ------------------------------------------------------
                                                      2001        2000      1999        1998        1997
                                                      ----        ----      ----        ----        ----
                                                                       (In thousands)

OTHER DATA:

                                                <c>         <c>        <c>         <c>         <c>

Number of real estate loans outstanding...........     3,041      3,000      2,797       2,708       2,679
Deposit accounts..................................    30,893     24,195     22,527      22,014      21,668
Full-service offices..............................        13         11          9           8           8

</TABLE>

<TABLE>

                                                           At or For the Year Ended September 30,
                                                    ------------------------------------------------------
                                                      2001        2000      1999        1998        1997
                                                      ----        ----      ----        ----        ----
                                                                       (In thousands)

KEY FINANCIAL RATIOS:

                                                    <c>        <c>        <c>         <c>         <c>
Performance Ratios:
 Return on average assets (1).....................      1.47%      1.75%      1.89%       1.99%       1.62%

 Return on average equity (2).....................      7.53       8.27       6.95        7.56       14.39
 Interest rate spread (3).........................      3.95       3.85       4.25        3.87        4.18
 Net interest margin (4)..........................      4.99       4.95       5.56        5.13        4.84
 Average interest-earning assets to average
   interest-bearing liabilities...................    126.58     128.55     141.50      137.84      115.60
 Noninterest expense as a  percent of
   average total assets...........................      2.99       2.37       2.60        2.47        2.46
 Efficiency ratio (5).............................     53.60      45.07      46.68       45.14       46.68
 Book value per share (6).........................    $15.71     $15.09     $13.85      $13.02         N/A
 Book value per share (7).........................     17.20      16.58      15.21       14.15         N/A

Asset Quality Ratios:
 Nonaccrual and 90 days or more past due loans
   as a percent of loans receivable, net (8)......      1.25%      1.14%      1.56%       2.39%       4.06%
 Nonperforming assets as a
   percent of total assets........................      1.32       1.52       1.60        2.46        3.83
 Allowance for loan losses as a percent of total
   loans receivable, net (8)......................      0.93       0.84       0.80        0.86        0.91
 Allowance for losses as a percent
   of nonperforming loans.........................     74.55      73.09      50.92       36.00       22.39
 Net charge-offs to average outstanding loans.....      0.31       0.01         --          --        0.01
Capital Ratios:
 Total equity-to-assets ratio.....................     18.59      19.65      23.52       30.78       11.65
 Average equity to average assets (9).............     19.52      21.19      27.25       26.27       11.28
-------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and
    weighted average interest-bearing liabilities.
(4) Net interest income (before provision for loan losses) as a percentage
    of average interest-earning assets.
(5) Other expenses (excluding federal income tax expense) divided by the sum
    of net interest income and noninterest income.
(6) Calculation includes ESOP shares not committed to be released.
(7) Calculation excludes ESOP shares not committed to be released.
(8) Loans receivable includes loans held for sale and is not net of
    allowance for loan losses.
(9) Average total equity divided by average total assets.

</TABLE>

                                                                 34
<PAGE>




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
------------------------------------------------------------------------

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF  OPERATIONS

GENERAL

     Management's Discussion and Analysis of Financial Condition and Results
of Operations is intended to assist in understanding the consolidated
financial condition and results of operations of the Company.  The information
contained in this section should be read in conjunction with the Consolidated
Financial Statements and accompanying notes thereto.  Management's Discussion
and Analysis of Financial Condition and Results of Operations and other
portions of this Annual Report contain certain "forward-looking statements"
concerning the future operations of Timberland Bancorp, Inc.  Management
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing the Company of the protections of such safe
harbor with respect to all "forward-looking statements" contained in our
Annual Report.  We have used "forward-looking statements" to describe future
plans and strategies, including our expectations of the Company's future
financial results.  Management's ability to predict results or the effect of
future plans or strategies is inherently uncertain.  Factors which could
affect actual results include interest rate trends, the general economic
climate in the Company's market area and the country as a whole, the ability
of the Company to control costs and expenses, the ability of the Company to
efficiently incorporate acquisitions into its operations, competitive products
and pricing, loan delinquency rates, and changes in federal and state
regulation.  These factors should be considered in evaluating the "forward-
looking statements," and undue reliance should not be placed on such
statements.

OPERATING STRATEGY

     The Bank is a community-oriented bank which has traditionally offered a
wide variety of savings products to its retail customers while concentrating
its lending activities on real estate loans.  The primary elements of the
Bank's operating strategy include:

     EMPHASIZE RESIDENTIAL MORTGAGE LENDING AND RESIDENTIAL CONSTRUCTION
LENDING.  The Bank has attempted to establish itself as a niche lender in its
primary market areas by focusing its lending activities primarily on the
origination of loans secured by one- to- four family residential dwellings,
including an emphasis on loans for the construction of residential dwellings.
In an effort to meet the credit needs of borrowers in its primary area, the
Bank actively originates one- to- four family mortgage loans that do not
qualify for sale in the secondary market under FHLMC guidelines.  The Bank
also originates loans secured by multi-family and commercial real estate
properties and, to a lesser extent, originates consumer loans.   The Bank has
also been an active participant in the secondary market, originating
residential loans for sale to the FHLMC on a servicing retained basis.  The
Bank also established a business banking division in July 1998 to increase the
Bank's origination of commercial business loans.

     DIVERSIFY PRIMARY MARKET AREA BY EXPANDING BRANCH OFFICE NETWORK.  In an
effort to lessen its dependence on the Grays Harbor County market whose
economy has historically been tied to the timber and fishing industries, the
Bank has opened branch offices in Pierce, King, Thurston and Kitsap Counties.
Thurston, Pierce, King and Kitsap Counties contain the Olympia, Bremerton, and
Seattle-Tacoma metropolitan areas and their economies are more diversified
with the presence of government, aerospace and computer industries.

     LIMIT EXPOSURE TO INTEREST RATE RISK.  In recent years, the loans that
the Bank has retained in its portfolio generally have periodic interest rate
adjustment features or have been relatively short-term in nature.  Loans
originated for portfolio retention primarily have included ARM loans and
short-term construction loans.  Longer fixed-rate mortgage loans have
generally been originated for sale in the secondary market.  Management
believes that the interest rate sensitivity of these adjustable rate and
short-term loans more closely match the interest rate sensitivity of the
Bank's funding sources than do other longer duration assets with fixed
interest rates.

                                       35

<PAGE>



MARKET RISK AND ASSET AND LIABILITY MANAGEMENT

     GENERAL.  Market risk is the risk of loss from adverse changes in market
prices and rates.  The Company's market risk arises primarily from interest
rate risk inherent in its lending, investment, deposit and borrowing
activities.  The Bank, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities.  Management actively
monitors and manages its interest rate risk exposure.  Although the Bank
manages other risks, such as credit quality and liquidity risk, in the normal
course of business management considers interest rate risk to be its most
significant market risk that could potentially have the largest material
effect on the Bank's financial condition and results of operations.  The Bank
does not maintain a trading account for any class of financial instruments nor
does it engage in hedging activities or derivative instruments.  Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.

     QUALITATIVE ASPECTS OF MARKET RISK.  The Bank's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates.  The Bank has sought to reduce the exposure
of its earnings to changes in market interest rates by attempting to manage
the mismatch between asset and liability maturities and interest rates.  The
principal element in achieving this objective is to increase the interest-rate
sensitivity of the Bank's interest-earning assets by retaining in its
portfolio, short-term loans and loans with interest rates subject to periodic
adjustments.  The Bank relies on retail deposits as its primary source of
funds.  Management believes retail deposits, compared to brokered deposits,
reduce the effects of interest rate fluctuations because they generally
represent a more stable source of funds.  As part of its interest rate risk
management strategy, the Bank promotes transaction accounts and certificates
of deposit with terms of up to six years.

     The Bank has adopted a strategy that is designed to substantially match
the interest rate sensitivity of assets relative to its liabilities.  The
primary elements of this strategy involve originating ARM loans for its
portfolio; maintaining residential construction loans as a portion of total
net loans receivable because of their generally shorter terms and higher
yields than other one- to- four family residential mortgage loans; matching
asset and liability maturities; investing in short-term securities;
originating fixed-rate loans for retention or sale in the secondary market and
retaining the related loan servicing rights.

     Sharp increases or decreases in interest rates may adversely affect the
Bank's earnings.  However, based on a rate shock analysis prepared by the FHLB
of Seattle, an increase in interest rates of up to 300 basis points would
increase the Bank's projected net interest income, primarily because a larger
portion of the Bank's interest rate sensitive assets than interest rate
sensitive liabilities would reprice within a one year period.  Similarly,
further decreases in interest rates would negatively affect net interest
income, as repricing would have the opposite effect.  Management has sought to
sustain the match between asset and liability maturities and rates, while
maintaining an acceptable interest rate spread.  Pursuant to this strategy,
the Bank actively originates adjustable rate loans for retention in its loan
portfolio.  Fixed-rate mortgage loans generally are originated for the
immediate or future resale in the secondary mortgage market.   At September
30, 2001, adjustable rate mortgage loans and adjustable rate mortgage-backed
securities constituted $184.7 million or 47.5%, of the Bank's total combined
mortgage loan and mortgage-backed securities portfolio.  Although the Bank has
sought to originate ARM loans, the ability to originate such loans depends to
a great extent on market interest rates and borrowers' preferences.
Particularly in lower interest rate environments, borrowers often prefer to
obtain fixed rate loans.

     Consumer loans and construction and land development loans typically have
shorter terms and higher yields than permanent residential mortgage loans, and
accordingly reduce the Bank's exposure to fluctuations in interest rates.  At
September 30, 2001, the construction and land development, and consumer loan
portfolios amounted to $106.2 million and $17.9 million, or 28.7% and 4.8% of
total loans receivable (including loans held for sale), respectively.

     QUANTITATIVE ASPECTS OF MARKET RISK.  Management of the Bank monitors the
Bank's interest rate sensitivity through the use of a model provided for the
Bank by the FHLB of Seattle. The model estimates the changes in NPV (net
portfolio value) and net interest income in response to a range of assumed
changes in market interest rates.  The model first estimates the level of the
Bank's NPV (market value of assets, less market value of liabilities, plus or
minus the market value of any off-balance sheet items) under the current rate
environment.  In general, market values are estimated by discounting the
estimated cash flows of each instrument by appropriate discount rates.  The
model then recalculates

                                    36

<PAGE>



the Bank's NPV under different interest rate scenarios.  The change in NPV
under the different interest rate scenarios provides a measure of the Bank's
exposure to interest rate risk.  The following table is provided by the FHLB
of Seattle based on data at September 30, 2001.

Projected           Net Interest Income             Current Market Value
Interest     --------------------------------   ------------------------------
Rate          Estimated  $ Change   % Change    Estimated $ Change   % Change
Scenario        Value    from Base  from Base     Value   from Base  from Base
---------     ---------  ---------  ---------   --------- ---------  ---------
                                 (Dollars in thousands)

+300         $ 14,860    $   716      5.06%     $ 58,075   $ 2,145      3.84%
+200           15,069        925      6.54        60,620     4,691      8.39
+100           15,172      1,028      7.27        62,607     6,678     11.94
BASE           14,144         --        --        55,929        --        --
-100           13,650       (494)    (3.49)       52,367    (3,563)    (6.37)
-200           12,904     (1,240)    (8.77)       48,308    (7,622)   (13.63)
-300           11,473     (2,671)   (18.88)       47,795    (8,134)   (14.54)

     Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market
interest rates, loan repayments and deposit decay, and should not be relied
upon as indicative of actual results.  Furthermore, the computations do not
reflect any actions management may undertake in response to changes in
interest rates.

     In the event of a 200 basis point decrease in interest rates, the Bank
would be expected to experience a 13.6% decrease in NPV and a 8.8% decrease in
net interest income.  In the event of a 200 basis point increase in interest
rates, an 8.4% increase in NPV and a 6.5% increase in net interest income
would be expected.  Based upon the modeling described above, the Bank's asset
and liability structure generally results in decreases in NPV and decreases in
net interest income in a declining interest rate scenario.  This structure
also generally results in increases in NPV and increases in net interest
income in a rising interest rate environment.

     As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table.  For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates.  Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets have features which restrict changes in interest
rates on a short-term basis and over the life of the asset.  Further, in the
event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could possibly deviate significantly
from those assumed in calculating the table.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND 2000

     TOTAL ASSETS: Total assets increased to $386.3 million at September 30,
2001 from $368.1 million at September 30, 2000, with the increase primarily
reflected in a $10.8 million increase in loans receivable, a $5.1 million
increase in investments and mortgage backed securities, and a $2.0 million
increase in premises and equipment.

     CASH AND DUE FROM FINANCIAL INSTITUTIONS:  Cash and due from financial
institutions and interest-bearing deposit balances in banks increased to $13.4
million at September 30, 2001 from $12.0 million at September 30, 2000.

     INVESTMENTS, MORTGAGE-BACKED SECURITIES AND FHLB STOCK: Investments,
mortgage-backed securities and FHLB stock  increased to $34.2 million at
September 30, 2001 from $29.1 million at September 30, 2000.  The increase is
primarily a result of the purchase of $10.0 million in mortgage-backed
securities in connection with the Bank's asset liability management
strategies, and was partially offset by redemptions to fund share repurchases,
and scheduled amortization and prepayments.  During the year, the Bank
converted  $11.9 million in fixed rate loans held for sale to mortgage-backed
securities.  These newly created securities were then sold and the proceeds
were used to purchase other mortgage-backed securities with shorter
maturities.   For additional details on investments and mortgage-backed

                                    37

<PAGE>



securities, see Note 2 to the Notes to Consolidated Financial Statements
contained in "Item 8, Financial Statements and Supplementary Data."

     LOANS RECEIVABLE AND LOANS HELD FOR SALE, NET OF ALLOWANCE FOR LOAN
LOSSES: Net loans receivable, including loans held-for-sale, increased 3.4% to
$323.8 million at September 30, 2001 from $313.0 at September 30, 2000.  This
increase is primarily a result of $9.3 million increase in net construction
loans, a $7.1 million increase in commercial real estate loans, and a $2.3
million increase in commercial business loans. These increases are partially
offset by a $6.7 million decrease in one-to-four family mortgage loans as the
Company sold $27.6 million in fixed rate mortgage loans during the year and
converted $11.9 million in fixed rate mortgages to mortgage backed securities
during the year.

     REAL ESTATE OWNED, NET:  Real Estate Owned, net, decreased to $1.0
million at September 30, 2001 from $2.0 million at September 30, 2000.  This
balance decreased primarily due to the sale of the Bank's largest REO, a
convenience store with retail space in Kitsap County, Washington.  For
additional information see "Item 1, Business - - Lending Activities --
Nonperforming Assets" and Note 6 to the Notes to Consolidated Financial
Statements contained in "Item 8, Financial Statements and Supplementary Data."

     DEPOSITS: Deposits increased by 14.0% to $242.4 million at September 30,
2001 from $212.6 million at September 30, 2000, with the Bank's certificate of
deposit accounts, checking accounts, passbook savings accounts, and money
market accounts all indicating increases from September 30, 2000 totals.

     BORROWINGS: Borrowings decreased by 15.0% to $69.0 million at September
30, 2001 from $81.1 million at September 30, 2000, as funds from increased
deposits were used to pay down the level of FHLB advances.

     SHAREHOLDERS' EQUITY: Total shareholders' equity decreased by $503,000 to
$71.8 million at September 30, 2001 from $72.3 million at September 30, 2000.
The components of shareholders' equity were affected by the repurchase of
428,827 shares of the Company's stock for $5.9 million, net income of $5.5
million, the payment of $1.9 million in dividends to shareholders, and a
$580,000 increase (net of tax) in the fair value of investments available for
sale.  Also affecting shareholders' equity was a $529,000 increase in the
equity component related to the unearned shares issued to the Employee Stock
Ownership Trust and a net reduction of $753,000 in the equity components
related to unearned shares issued to the Management Recognition and
Development Plan.

     On September 24, 2001 the Company announced a plan to repurchase 200,872
shares of the Company's stock.  This marked the Company's ninth 5% stock
repurchase plan.  As of September 30, 2001, the Company had repurchased 44,000
of these shares.   The Company has repurchased a total of 2,248,032 (34.0%) of
the 6,612,500 shares that were issued when the Company went public in January
1998.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND 1999

     TOTAL ASSETS: Total assets increased 19.9% to $368.1 million at September
30, 2000 from $307.1 million at September 30, 1999.  The increase was
concentrated on loans receivable and loans held for sale, which grew $56.9
million,  primarily funded by increased Federal Home Loan Bank ("FHLB")
borrowings and increased deposits.  Asset growth was partially offset by the
use of $4.6 million to repurchase shares of the Company's stock.

     CASH AND DUE FROM FINANCIAL INSTITUTIONS: Cash and due from financial
institutions and interest-bearing deposit balances in banks increased to $12.0
million at September 30, 2000 from $8.1 million at September 30, 1999.

     INVESTMENTS, MORTGAGE-BACKED SECURITIES AND FHLB STOCK: Investments,
mortgage-backed securities and FHLB stock decreased 8.2% to $29.1 million at
September 30, 2000 from $31.7 million at September 30, 1999, primarily as a
result of redemptions to fund share repurchases and scheduled amortization and
prepayments.  For additional details on investments and mortgage-backed
securities see Note 2 to the Notes to Consolidated Financial Statements
contained in "Item 8, Financial Statements and Supplementary Data."

     LOANS RECEIVABLE, AND LOANS HELD-FOR-SALE, NET OF ALLOWANCE FOR LOAN
LOSSES: Loans receivable, including loans held-for-sale, net, increased 22.2%
to $313.0 million at September 30, 2000 from $256.1 million at September 30,

                                        38

<PAGE>



1999.  This increase is primarily centered in one-to-four family mortgage
loans, multi-family mortgage loans, commercial mortgage loans and land loans
held in the Bank's portfolio.

     REAL ESTATE OWNED, NET: Real estate owned, net, increased to $2.0 million
at September 30, 2000 from $867,000 at September 30, 1999.  This balance
increased as the Bank foreclosed on a convenience store (with retail space)
and was the successful bidder on the property at a sheriff's sale in January
2000.  The property is classified as REO with a balance of $1.3 million at
September 30, 2000.  For additional information see "Item 1, Business --
Lending Activities -- Nonperforming Assets" and Note 6 to the Notes to
Consolidated Financial Statements contained in "Item 8, Financial Statements
and Supplementary Data."

     DEPOSITS: Deposits increased 13.0% to $212.6 million at September 30,
2000 from $188.1 million at September 30, 1999, primarily due to growth of
$15.6 million in the Bank's certificate of deposit accounts and smaller
increases in the non-interest bearing accounts, N.O.W. checking accounts and
money market accounts.

     BORROWINGS: Borrowings increased 80.0% to $81.1 million at September 30,
2000 from $45.1 million at September 30, 1999, due to increased FHLB advances,
which were primarily used to fund loan portfolio growth.

     SHAREHOLDERS' EQUITY: Total shareholders' equity increased to $72.3
million at September 30, 2000 from $72.2 million at September 30, 1999,
primarily as a result of net income of $5.9 million, a $528,000 reduction in
the equity component related to the unearned shares issued to the Employee
Stock Ownership Trust, and an $87,000 decrease in Accumulated Other
Comprehensive Loss category.  These increases to shareholder's equity were
partially offset by the repurchase of 424,127 shares of the Company's stock
for $4.6 million and the payment of $1.7 million in dividends to shareholders.

COMPARISON OF OPERATING RESULTS FOR YEARS ENDED SEPTEMBER 30, 2001 AND 2000

     NET INCOME: Net income for the year ended September 30, 2001 was $5.5
million, or $1.28 per diluted share ($1.30 per basic share) compared to $5.9
million, or $1.31 per diluted share ($1.31 per basic share) for the year ended
September 30, 2000.  Income for the year ended September 30, 2001 was
increased by a $205,000 ($135,000 after income tax) gain on sale of
securities, a $175,000 ($116,000 after income tax) market value recovery on
loans held for sale, and a $150,000 ($99,000 after income tax) recovery of a
kiting-related NSF expense.  Income for the year ended September 30, 2001 was
reduced by a $770,000 ($508,000 after income tax) expense related to the
initial vesting of MRDP shares, $356,000 ($235,000 after income tax) in REO
market value writedowns, and a $515,000 ($340,000 after income tax) increase
in loan loss provisions.  Income for the year ended September 30, 2000 was
increased by a $408,000 ($269,000 after income tax) market value recovery on
loans held for sale and the recovery of $290,000 ($191,000 after income tax)
of delinquent interest and fees on a non-performing asset and reduced by a
$150,000 ($99,000 after income tax) kiting related NSF expense.  Net income
per share for the year ended September 30, 2001 was increased by $0.05 (basic)
and  $0.05 (diluted) as a result of the Company's repurchase of its common
shares during the year.

     NET INTEREST INCOME: Net interest income increased 11.5% to $17.8 million
for the year ended September 30, 2001 from $15.9 million for the year ended
September 30, 2000, primarily due to the Bank's larger loan portfolio.  Total
interest income increased $3.3 million to $31.7 million for the year ended
September 30, 2001 from $28.4 million for the year ended September 30, 2000.
The increase in net interest income was primarily a result of increased
interest income from the Bank's larger loan portfolio as average loan balances
increased to $323.9 million for the year ended September 30, 2001 from $289.4
million for the year ended September 30, 2000.  The increased interest income
was partially offset by a $1.5 million increase in interest expense, primarily
due to increased deposits and increased average FHLB advances.  The net
interest margin increased to 4.99% for the year ended September 30, 2001 from
4.95% for the year ended September 30, 2000.

     PROVISION FOR LOAN LOSSES: The provision for loan losses for the year
ended September 30, 2001 was $1.4 million compared to $885,000 for the twelve
months ended September 30, 2000.  Management deemed the allowance for loan
losses of $3.1 million at September 30, 2001 (0.93% of loans receivable and
loans held for sale and 74.6% of

                                      39

<PAGE>



non-performing loans) adequate to provide for estimated losses based on an
evaluation of known and inherent risks in the loan portfolio at that date.
For the twelve months ended September 30, 2001 and 2000, net charge-offs were
$990,000 and $301,000, respectively.  For additional information, see "Item 1,
Business -- Lending Activities - - Allowance for Loan Losses" included herein.

     NON-INTEREST INCOME:  Noninterest income increased $1.2 million to $2.9
million, for the year ended September 30, 2001 from $1.7 million for the year
ended September 30, 2000.  The increase was primarily due to a $533,000
increase in service charge on deposits, a $264,000 increase in gain on sale of
loans, a $227,000 net increase in gain on sales of securities, a $154,000
increase in servicing income on loans sold and a $129,000 increase in ATM
fees.  These increases are partially offset by a $233,000 net reduction in
market value recoveries on loans held for sale.

     NON-INTEREST EXPENSE: Total non-interest expense increased to $11.1
million for the year ended September 30, 2001 from $8.0 million for the year
ended September 30, 2000.  This increase is primarily due to a $1.5 million
increase in salary and employee benefits (of which $770,000 related to the
MRDP plan implemented in 2001), a $561,000 increase in advertising expense
largely related to the Bank's checking account acquisition program, a $348,000
increase in REO related expenses, and a $248,000 increase in premises and
equipment expenses. Partially offsetting these expense increases was a
$150,000 recovery in June 2001 of a kiting-related NSF expense that the
Company incurred during the year ended September 30, 2000.

     PROVISION FOR INCOME TAXES:  The provision for income taxes decreased to
$2.7 million for the year ended September 30, 2001 from $2.9 million for the
year ended September 30, 2000 primarily as a result of lower income before
income taxes.  The effective rate was 33.4% for the year ended September 30,
2001 and 33.2% for the year ended September 30, 2000.

COMPARISON OF OPERATING RESULTS FOR YEARS ENDED SEPTEMBER 30, 2000 AND 1999

     NET INCOME: Net income increased to $5.9 million or $1.31 per basic share
($1.31 per diluted share) for the year ended September 30, 2000 from net
income of $5.2 million or $1.03 per basic share ($1.03 per diluted share) for
the year ended September 30, 1999.  Income for the year ended September 30,
2000 was increased by a $408,000 ($269,000 after income tax) market value
recovery on loans held for sale and the receipt of $290,000 ($191,000 after
income tax) of delinquent interest and fee income on a large non-performing
asset. Also affecting net income for the current year was a $522,000 ($345,000
after income tax) increase in the provision for loan losses (compared to the
same period in 1999) primarily due to loan portfolio growth.  Income for the
year ending September 30, 1999 was reduced by market value writedowns on loans
held for sale of $583,000 ($385,000 after income tax), and was partially
offset by the recognition of $442,000 ($292,000 after income tax) of
delinquent interest and fee income on two large non-performing loans.  Net
income per share for the year ended September 30, 2000 was increased by $0.07
as a result of the Company's repurchase of its common shares during the year.

     NET INTEREST INCOME: Net interest income increased 8.1% to $15.9 million
for the year ended September 30, 2000 from $14.7 million for the year ended
September 30, 1999.  Interest income for the twelve months ended September 30,
2000 and September 30, 1999 included $281,000 and $442,000 of delinquent
interest received on large non-performing loans, respectively.  The increase
in net interest income was primarily a result of increased interest income
from the Bank's larger loan portfolio.  Average loan balances increased to
$289.4 million for the twelve months ended September 30, 2000 from $223.7
million for the twelve months ended September 30, 1999.  The increased
interest income from the larger loan portfolio was partially offset by
increased interest expense due to increased deposits and FHLB advances.

     Net interest margin was 4.95% (or 4.86% without the $281,000 in
delinquent interest received) for the year ended September 30, 2000 compared
to a net interest margin of 5.56% (or 5.40% without the $442,000 in delinquent
interest received) for the year ended September 30, 1999.  The Company's lower
net interest margin is primarily a result of the increased use of higher
costing funds (FHLB advances and certificates of deposit) to support the
Bank's loan growth.  Also, the Company's net interest margin has been impacted
by reduced earnings resulting from a smaller

                                        40

<PAGE>



investment portfolio, as a portion of the interest bearing investments has
been used to fund the Company's stock repurchase program.

     Interest expense increased 48.6% to $12.4 million for the year ended
September 30, 2000 from $8.4 million at September 30, 1999, due to a $2.9
million increase in interest expense on deposits (resulting from both volume
and average rate increases) and $3.0 million in increased interest related to
borrowings primarily used to fund loan growth.

     PROVISION FOR LOAN LOSSES: The provision for loan losses increased to
$885,000 for the year ended September 30, 2000 from $363,000 for the year
ended September 30, 1999.  Management increased the provision for loan losses
primarily due to growth in the Bank's loan portfolio.  Management deemed the
allowance for loan losses of $2.6 million at September 30, 2000 (0.84% of
loans receivable and loans held for sale and 73.1% of non-performing loans)
adequate to provide for estimated losses based on an evaluation of known and
inherent risks in the loan portfolio at that date.

     Despite experiencing a higher percentage of non-performing loans than
some peer group averages, the Company's actual net charge-offs continue to
remain relatively small.  For the year ended September 30, 2000 net charge-
offs and transfers were $301,000.  For additional information see "Item 1,
Business -- Lending Activities --Allowance for Loan Losses."

     NONINTEREST INCOME: Total noninterest income increased to $1.7 million
for the year ended September 30, 2000 from $592,000 for the year ended
September 30, 1999. This increase is primarily due to a combined change of
$991,000 in the market value adjustments on loans held for sale as the Company
had a $408,000 market value recovery for the year ended September 30, 2000
compared to a $583,000 market value writedown for the year ended September 20,
1999.  Smaller increases in service charges on deposits, gains on sale of
loans and other fees also contributed to the overall increase.

     NONINTEREST EXPENSE: Total noninterest expense increased 11.3% to $8.0
million for the year ended September 30, 2000 from $7.2 million for the year
ended September 30, 1999.  The increase in noninterest expense is primarily
due to a $289,000 increase in salary and employee benefit expense, a $103,000
increase in premises and equipment expense, a $90,000 increase in advertising
expense, and an $88,000 increase in the cost of REO operations.  The increase
in noninterest expense was also in connection with the establishment of a
$150,000 reserve associated with a check-kiting situation that resulted in a
checking account overdraft, which was fully recovered in 2001.

     PROVISION FOR INCOME TAXES: The provision for income taxes increased to
$2.9 million for the year ended September 30, 2000 from $2.6 million for the
year ended September 30, 1999 primarily as a result of higher income before
income taxes.  The effective tax rate in both years was 33.2%.

NONPERFORMING ASSETS

     Information with respect to the Bank's nonperforming assets at September
30, 2001 and September 30, 2000 is contained in "Item 1, Business -- Lending
Activities -- Nonperforming Assets and Delinquencies."

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST

     The earnings of the Company depend largely on the spread between the
yield on interest-earning assets and the cost of interest-bearing liabilities,
as well as the relative amount of the Company's interest-earning assets and
interest- bearing liability portfolios.

     The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields
and costs.  Such yields and costs for the periods indicated are derived by
dividing income or expense by the average weekly balance of assets or
liabilities, respectively, for the periods presented.  Average balances are
derived from weekly balances.  Management does not believe that the use of
weekly balances instead of daily balances has caused any material difference
in the information presented.


                                       41

<PAGE>


<TABLE>

                                                    Year Ended September 30,
                              ---------------------------------------------------------------------------
                                       2001                      2000                     1999
                              ------------------------  ------------------------- -----------------------
                                      Interest                   Interest                 Interest
                              Average and       Yield/  Average  and       Yield/ Average and       Yield/
                              Balance Dividends  Cost   Balance  Dividends Cost   Balance Dividends  Cost
                              ------- ---------  ----   -------  --------- ----   ------- ---------  ----
                                                        (Dollars in thousands)


                           <c>       <c>      <c>    <c>       <c>      <c>    <c>       <c>      <c>
Interest-earning assets:
  Loans receivable (1)(2)...  $323,889  $29,777  9.19%  $289,377  $26,325  9.10%  $223,691  $20,721  9.26%
  Mortgage-backed and
   investment securities....    15,735      962  6.11     18,966    1,183  6.24     23,087    1,382  5.99
  FHLB stock and equity
   securities...............    13,058      791  6.06     11,009      713  6.48     13,106      766  5.84
  Interest-bearing deposits.     3,400      162  4.76      2,697      141  5.23      5,132      240  4.68
                              --------  -------         --------  -------         --------  -------
    Total interest-
     earning assets.........   356,082   31,692  8.90    322,049   28,362  8.81    265,016   23,109  8.72
Non-interest-earning assets.    15,421                    14,457                    10,653
                              --------                  --------                  --------
    Total assets............  $371,503                  $336,506                  $275,669
                              ========                  ========                  ========
Interest-bearing liabilities:
  Passbook accounts.........    28,956      728  2.51     27,183      694  2.55   $ 26,783      695  2.59
  Money market accounts.....    22,875      921  4.03     18,947      741  3.91     16,752      628  3.75
  NOW accounts..............    25,436      447  1.76     22,414      384  1.71     21,283      363  1.71
  Certificates of deposit...   128,174    7,395  5.77    117,466    6,574  5.60    102,506    5,590  5.45
  FHLB advances-other
   borrowed money...........    75,867    4,433  5.84     64,518    4,034  6.25     19,967    1,087  5.44
                              --------  -------         --------  -------         --------  -------
    Total interest bearing
      liabilities...........   281,308   13,924  4.95    250,528   12,427  4.96    187,291    8,363  4.47
Non-interest bearing
  liabilities...............    17,683                    14,656                    13,271
    Total liabilities.......   298,991                   265,184                   200,562

Shareholders' equity........    72,512                    71,322                    75,107
                              --------                  --------                  --------
    Total liabilities and
     shareholders' equity...  $371,503                  $336,506                  $275,669
                              ========                  ========                  ========

Net interest income.........            $17,768                   $15,935                   $14,746
                                        =======                   =======                   =======
Interest rate spread........                     3.95%                     3.85%                     4.25%
                                               ======                    ======                    ======
Net interest margin (3).....                     4.99%                     4.95%                     5.56%
                                               ======                    ======                    ======

Ratio of interest-earning
 assets to average interest-
 bearing liabilities........                   126.58%                   128.55%                   141.50%
                                               ======                    ======                    ======
------------------
(1) Does not include interest on loans 90 days or more past due.  Includes
    loans originated for sale.
(2) Average balance includes nonaccrual loans.
(3) Net interest income divided by total interest earning assets.
</TABLE>

                                                           42

<PAGE>

RATE/VOLUME ANALYSIS

     The following table sets forth the effects of changing rates and volumes
on net interest income on the Company.  Information is provided with respect
to the (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); and (ii) effects on interest
income attributable to changes in rate (changes in rate multiplied by prior
volume); and (iii) the net change (sum of the prior columns).  Changes in
rate/volume have been allocated to rate and volume variances based on the
absolute values of each.

                          Year Ended September 30,   Year Ended September 30,
                           2001 Compared to Year      2000 Compared to Year
                          Ended September 30, 2000   Ended September 30, 1999
                            Increase (Decrease)         Increase (Decrease)
                                   Due to                     Due to
                          ------------------------   ------------------------
                                              Net                        Net
                            Rate   Volume   Change   Rate     Volume   Change
                            ----   ------   ------   ----     ------   ------
                                              (In thousands)

Interest-earning assets:
 Loans receivable (1).....  $263   $3,189   $3,452   $(368)   $5,972   $5,604
 Investments and mortgage-
  backed securities.......   (24)    (197)    (221)     55      (254)    (199)
 FHLB stock and equity
  securities..............   (47)     125       78      77      (130)     (53)
 Interest-bearing
  deposits................   (14)      35       21      27      (126)     (99)
                            ----   ------   ------   -----    ------   ------
Total net change in
 income on interest-
 earning assets...........   178    3,152    3,330    (209)    5,462    5,253

Interest-bearing liabilities:
 Passbook accounts........   (11)      44       33     (11)       10       (1)
 NOW accounts.............    24      158      182      --        21       21
 Money market accounts....    11       54       65      27        86      113
 Certificate accounts.....   204      614      818     156       828      984
 FHLB advances and other
  borrowed money..........  (276)     675      399     185     2,762    2,947
                            ----   ------   ------   -----    ------   ------
Total net change in
 expense on interest-
 bearing liabilities......   (48)   1,545    1,497     357     3,707    4,064
                            ----   ------   ------   -----    ------   ------
Net change in net
 interest income..........  $226   $1,607   $1,833   $(566)   $1,755   $1,189
                            ====   ======   ======   =====    ======   ======
--------------
(1) Excludes interest on loans 90 days or more past due.  Includes loans
    originated for sale.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds are customer deposits, proceeds
from principal and interest payments on and the sale of loans, maturing
securities and FHLB advances.  The Company also raised $65.0 million in net
proceeds from the January 1998 stock offering.  While the maturity and
scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.

     The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities.  The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs.  At September 30,
2001, the Bank's regulatory liquidity ratio (net cash, and short-term and
marketable assets, as a percentage of net deposits and short-term liabilities)
was 22.9%.  At September 30, 2001, the Bank also maintained

                                    43
<PAGE>




an uncommitted credit facility with the FHLB of Seattle that provided for
immediately available advances up to an aggregate amount of $129.6 million,
under which $69.0 million was outstanding.

     Liquidity management is both a short- and long-term responsibility of the
Bank's management.  The Bank adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) projected loan
sales, (iii) expected deposit flows, and (iv) yields available on interest-
bearing deposits.  Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations.  If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral for repurchase
agreements.

     The Bank's primary investing activity is the origination of one- to- four
family mortgage loans and construction and land development loans.  During the
years ended September 30, 2001, 2000, and 1999, the Bank originated $47.5
million, $34.2 million and $41.1 million of one- to- four family mortgage
loans and $80.1 million, $69.6 million and $63.2 million of construction and
land development loans, respectively.  At September 30, 2001, the Bank had
mortgage loan commitments totaling $17.8 million, standby letters of credit
totaling $350,000, and undisbursed loans in process totaling $39.8 million.
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments.  Certificates of deposit that are scheduled to
mature in less than one year from September 30, 2001 totaled $113.7 million.
Historically, the Bank has been able to retain a significant amount of its
deposits as they mature.

     Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital.  Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%.  At September 30, 2001, the Bank was in compliance with all
applicable capital requirements.  For additional details see the regulatory
capital table in Note 18 to the Notes to Consolidated Financial Statements
contained in "Item 8, Financial Statements and Supplementary Data" and "Item
1, Business -- Regulation of the Bank -- Capital Requirements."

EFFECT OF INFLATION AND CHANGING PRICES

     The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering the
change in the relative purchasing power of money over time due to inflation.
The primary impact of inflation on the operation of the Company is reflected
in increased operating costs.  Unlike most industrial companies, virtually all
the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates generally have a more significant impact on a
financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------

     The information contained under "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset and Liability Management" of this Form 10-K is incorporated herein by
reference.

                                    44
<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

                   TIMBERLAND BANCORP, INC. AND SUBSIDIARY

                 Index to Consolidated Financial Statements

                                                                        Page
                                                                        ----

Independent Auditor's Report                                             46
Consolidated Balance Sheets as of September 30, 2001 and 2000            47
Consolidated Statements of Income For the Years Ended
   September 30, 2001, 2000, and 1999                                    48
Consolidated Statements of Shareholders' Equity For the
   Years Ended September 30, 2001, 2000 and 1999                         49
Consolidated Statements of Cash Flows For the Years Ended
   September 30, 2001, 2000 and 1999                                     50
Consolidated Statements of Comprehensive Income For the
   Years Ended September 30, 2001, 2000 and 1999                         52
Notes to Consolidated Financial Statements                               53

                                        45
<PAGE>




                     INDEPENDENT AUDITOR'S REPORT


The Board of Directors
Timberland Bancorp, Inc.
Hoquiam, Washington

We have audited the accompanying consolidated balance sheet of Timberland
Bancorp, Inc. and Subsidiaries as of September 30, 2001, and the related
consolidated statements of income, shareholders' equity, cash flows and
comprehensive income for the year then ended.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.  The consolidated financial statements of
Timberland Bancorp, Inc. and Subsidiaries as of September 30, 2000 and for the
years ended September 30, 2000 and 1999 were audited by Knight Vale & Gregory
PLLC, independent accountants, whose members became partners  of McGladrey &
Pullen, LLP on September 1, 2001.  Knight Vale & Gregory PLLC's report, dated
November 2, 2000, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America.  Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the 2001 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Timberland
Bancorp, Inc. and Subsidiaries as of September 30, 2001, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.

McGladrey & Pullen,LLP


/s/McGladrey & Pullen,LLP

October 31, 2001
Tacoma, Washington

                                   46

<PAGE>



CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------
(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

                                                            2001      2000

ASSETS
  Cash and due from financial institutions              $  10,017  $   8,893
  Interest bearing deposits in banks                        3,422      3,109
  Investments and mortgage-backed securities
   (available for sale)                                    29,369     24,925
  Federal Home Loan Bank stock (at cost)                    4,830      4,150

  Loans receivable, net                                   305,746    284,663
  Loans held for sale                                      18,022     28,343
                                                          323,768    313,006

  Accrued interest receivable                               1,880      1,756
  Premises and equipment                                   10,660      8,614
  Real estate owned                                         1,006      1,966
  Accrued interest receivable                               1,880      1,756
  Other assets                                              1,353      1,661

  TOTAL ASSETS                                           $386,305   $368,080


LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Deposits                                               $242,372   $212,611
  Federal Home Loan Bank advances                          68,978     81,137
  Other liabilities and accrued expenses                    3,146      2,020
  TOTAL LIABILITIES                                       314,496    295,768

SHAREHOLDERS' EQUITY
  Preferred stock, $0.01 par value; 1,000,000 shares
    authorized; none issued                                    --         --
  Common stock, $0.01 par value; 50,000,000 shares
  authorized;
    2001 - 4,570,995 shares issued, 4,010,303
      shares outstanding
    2000 - 4,793,295 shares issued, 4,361,279
      shares outstanding                                       46         48
  Additional paid-in capital                               39,574     42,250
  Unearned shares issued to employee stock
    ownership trust                                        (5,948)    (6,477)
  Unearned shares issued to management recognition
    and & development plan                                 (2,471)        --
  Retained earnings                                        40,332     36,795
  Accumulated other comprehensive income (loss)                276      (304)
  TOTAL SHAREHOLDERS' EQUITY                                71,809    72,312

  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY              $386,305  $368,080


See notes to consolidated financial statements.

                                       47
<PAGE>




CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2001, 2000 and 1999

                                                2001        2000      1999

INTEREST AND DIVIDEND INCOME
  Loans receivable                            $29,777     $26,325    $20,721
  Investments and mortgage-backed securities      962       1,183      1,382
  Dividends from investments                      791         713        766
  Interest bearing deposits in banks              162         141        240
  TOTAL INTEREST AND DIVIDEND INCOME           31,692      28,362     23,109

INTEREST EXPENSE
  Deposits                                      9,491       8,393      7,276
  Federal Home Loan Bank advances               4,433       4,034      1,087
  TOTAL INTEREST EXPENSE                       13,924      12,427      8,363

  NET INTEREST INCOME                          17,768      15,935     14,746

PROVISION FOR LOAN LOSSES                       1,400         885        363

  NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                            16,368      15,050     14,383

NON-INTEREST INCOME
  Service charges on deposits                   1,040         507        440
  Gain on sale of loans, net                      367         103         74
  Market value adjustment on loans
    held for sale                                 175         408       (583)
  Gain (loss) on sale of securities
    available for sale, net                       205         (22)        --
  Escrow fees                                     205         198        240
  Servicing income (expenses) on loans sold       152         (2)       (17)
  ATM transaction fees                            379         250        156
  Other                                           404         296        282
  TOTAL NON-INTEREST INCOME                     2,927       1,738        592

NON-INTEREST EXPENSE
  Salaries and employee benefits                6,042       4,535      4,246
  Premises and equipment                        1,208         960        856
  Advertising                                     950         389        299
  Loss from real estate operations
    and write-downs                               481         134         45
  Other                                         2,411        1,948     1,714
  TOTAL NON-INTEREST EXPENSE                   11,092       7,966      7,160

  INCOME BEFORE FEDERAL INCOME TAXES            8,203       8,822      7,815

FEDERAL INCOME TAXES                            2,741       2,925      2,597

  NET INCOME                                 $  5,462    $  5,897   $  5,218

EARNINGS PER COMMON SHARE
  Basic                                         $1.30       $1.31      $1.03
  Diluted                                        1.28        1.31       1.03

See notes to consolidated financial statements.

                                        48
<PAGE>


<PAGE>
<TABLE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2001, 2000 and 1999

                                                              UNEARNED   UNEARNED
                                                              SHARES     SHARES            ACCUMULATED
                                                              ISSUED TO  ISSUED TO         OTHER
                                                              EMPLOYEE   MANAGEMENT        COMPRE-
                                 COMMON STOCK      ADDITIONAL STOCK      RECOG-            HENSIVE
                                                   PAID-IN    OWNERSHIP  NITION  RETAINED  INCOME
                                 SHARES    AMOUNT  CAPITAL    TRUST      PLAN    EARNINGS  (LOSS)    TOTAL


                             <c>          <c>   <c>       <c>         <c>      <c>       <c>     <c>
Balance, September 30, 1998     5,779,325    $63   $60,183   ($7,534)    $  --    $28,948   $120    $81,780

Net income                             --     --        --        --        --      5,218     --      5,218
Repurchase of common stock     (1,064,453)   (11)  (13,139)       --        --         --     --    (13,150)
Cash dividends ($.27 per share)        --     --        --        --        --     (1,520)    --     (1,520)
Earned ESOP shares                 35,267     --      (101)      529        --         --     --        428
Change in fair value of
 unrealized loss on securities
 available for sale, net of tax        --     --        --        --        --         --   (511)      (511)

  BALANCE,
  SEPTEMBER 30, 1999            4,750,139     52    46,943    (7,005)       --     32,646   (391)    72,245

Net income                             --     --        --        --        --      5,897     --      5,897
Repurchase of common stock       (424,127)    (4)   (4,599)       --        --         --     --     (4,603)
Cash dividends ($.35 per share)        --     --        --        --        --     (1,748)    --     (1,748)
Earned ESOP shares                 35,267     --       (94)      528        --         --     --        434
Change in fair value of
  unrealized loss on securities
  available for sale, net of tax       --     --        --        --        --         --     87         87

  BALANCE,
  SEPTEMBER 30, 2000            4,361,279     48    42,250    (6,477)       --     36,795   (304)    72,312

Net income                             --     --        --        --        --      5,462     --      5,462
Issuance of MRDP shares                --      2     3,222        --    (3,224)        --     --         --
Repurchase of common stock       (428,827)    (4)   (5,914)       --        --         --     --     (5,918)
Exercise of stock options           1,600     --        19        --        --         --     --         19
Cash dividends ($.41 per share)        --     --        --        --        --     (1,925)    --     (1,925)
Earned ESOP shares                 35,266     --       (26)      529        --         --     --        503
Earned MRDP shares                 40,985     --        23        --       753         --     --        776
Change in fair value of
  unrealized loss on securities
  available for sale, net of tax       --     --        --        --        --         --    580        580

  BALANCE,
  SEPTEMBER 30, 2001            4,010,303    $46   $39,574   ($5,948)  ($2,471)   $40,332   $276    $71,809

</TABLE>

See notes to consolidated financial statements.
                                                                        49
<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2001, 2000 and 1999


                                                2001       2000        1999

CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                $   5,462    $  5,897   $  5,218
  Noncash revenues, expenses, gains and losses
    included in net income:
     Depreciation                                 527         424        364
     Deferred federal income taxes               (207)       (231)      (449)
     Earned ESOP shares                           503         434        428
     Earned MRDP Shares                           776          --         --
     Federal Home Loan Bank stock dividends      (310)       (224)      (134)
     Market value adjustment on loans held
       for sale                                  (175)       (408)       583
     Loss on sale of real estate owned, net        21          25         --
     (Gain) loss on sale of securities
       available for sale                        (205)         22         --
     Gain on sale of loans                       (367)       (103)       (74)
     Provision for loan and real estate
       owned losses                             1,756         936        391
  Net increase (decrease) in loans originated
    for sale                                   (1,063)     (5,169)   (14,783)
  Net change in accrued interest receivable
    and other assets, and other liabilities
    and accrued expenses                        1,167         (89)     1,339
  NET CASH PROVIDED BY (USED IN) OPERATING
    ACTIVITIES                                  7,885       1,514     (7,117)

CASH FLOWS FROM INVESTING ACTIVITIES
  Net (increase) decrease in interest-
    bearing deposits in banks                    (313)     (1,793)    13,429
  Activity in securities available for sale:
    Sales                                      12,334       2,482         --
    Maturities, prepayments and calls          10,549       2,421     29,889
    Purchases                                 (14,720)     (1,989)   (26,826)
  Increase in loans receivable, net           (23,653)    (54,139)   (44,568)
  Additions to premises and equipment          (2,573)     (1,416)    (2,664)
  Additions to real estate owned                 (198)       (271)        --
  Proceeds from sale of real estate owned       2,035       1,109      1,498
  Proceeds from sale of premises and equipment     --          --         20
  NET CASH USED IN INVESTING ACTIVITIES       (16,539)    (53,596)   (29,222)

CASH FLOWS FROM FINANCING ACTIVITIES
  Increase in deposits                         29,761      24,463     17,314
  Increase (decrease) in Federal Home
    Loan Bank advances                        (12,159)     36,053     33,466
  Proceeds from exercise of stock options          19          --         --
  Repurchase of common stock                   (5,918)     (4,603)   (13,150)
  Payment of dividends                         (1,925)     (1,748)    (1,520)
  Common stock purchased for ESOP                  --          --         --
  NET CASH PROVIDED BY FINANCING ACTIVITIES     9,778      54,165     36,110

  NET INCREASE (DECREASE) IN CASH               1,124       2,083       (229)

CASH AND DUE FROM FINANCIAL INSTITUTIONS
  Beginning of year                             8,893       6,810      7,039

  END OF YEAR                                 $10,017    $  8,893   $  6,810


(continued)

See notes to consolidated financial statements.

                                     50

<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
(concluded)  (Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2001, 2000 and 1999


                                               2001        2000        1999

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Income taxes paid                         $  2,260     $  3,195     $2,975
  Interest paid                               14,024       12,151      8,171

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES
    Market value adjustment of securities
      held for sale, net of tax             $    580     $     87      ($511)
    Loans transferred to real estate owned     1,254        2,013        581
    Shares issued to management recognition
      and development plan                     3,224           --         --
    Investment securities acquired in loan
      securitization                          11,926           --         --


See notes to consolidated financial statements.

                                       51

<PAGE>



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
------------------------------------------------------------------------------
(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2001, 2000 and 1999


                                                 2001       2000       1999

COMPREHENSIVE INCOME
  Net income                                   $5,462      $5,897     $5,218
  Change in fair value of unrealized gains
    (losses) securities available for sale,
    net of tax                                    580          87       (511)

  TOTAL COMPREHENSIVE INCOME                   $6,042      $5,984     $4,707

See notes to consolidated financial statements.

                                       52

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Timberland
Bancorp, Inc. (the Company); its wholly owned subsidiary, Timberland Bank (the
Bank); and the Bank's wholly owned subsidiary, Timberland Service Corp.  All
significant intercompany transactions and balances have been eliminated.

NATURE OF OPERATIONS

The Company is a holding company which operates primarily through its
subsidiary, the Bank.  The Bank was established in 1915 and, through its
thirteen branches located in Grays Harbor, Pierce, Thurston, Kitsap and King
Counties in Washington State, attracts deposits from the general public, and
uses those funds, along with other borrowings, to provide primarily real
estate loans to borrowers in western Washington, and to invest in investment
securities and mortgage-backed securities.

CONSOLIDATED FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry.  The preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and the disclosure of contingent assets and
liabilities, as of the date of the balance sheet, and the reported amounts of
revenues and expenses during the reporting period.  Actual results could
differ from those estimates.  Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses and the valuation of real estate owned and
deferred tax assets.

Certain prior year amounts have been reclassified to conform to the 2001
presentation.

INVESTMENTS AND MORTGAGE-BACKED SECURITIES

Debt and equity securities that will be held for indefinite periods of time,
including securities that may be sold in response to changes in market
interest rates, prepayment rates, need for liquidity, and changes in the
availability of and the yield of alternative investments, are considered
securities available for sale, and are reported at fair value.  Fair value is
determined using published quotes as of the close of business on reporting
dates.  Unrealized gains and losses are excluded from earnings, and are
reported as a separate component of shareholders' equity, net of the related
deferred tax effect, entitled "Accumulated other comprehensive income (loss)."
Realized gains and losses on securities available for sale, determined using
the specific identification method, are included in earnings.  Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.


(continued)

                                       53
<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

LOANS HELD FOR SALE

Mortgage loans originated and intended for sale in the secondary market are
stated in the aggregate at the lower of cost or estimated market value.  Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.  Gains or losses on sales of loans are recognized at the
time of sale.  The gain or loss is determined by the difference between the
net sales proceeds and the recorded value of the loans, including any
remaining unamortized deferred loan fees.

LOANS RECEIVABLE

Loans are stated at the amount of unpaid principal, reduced by the undisbursed
portion of loans in process, unearned income and an allowance for loan losses.

ALLOWANCES FOR LOSSES

Allowances for losses on specific problem loans and real estate owned are
charged to earnings when it is determined that the value of these loans and
properties, in the judgment of management, is impaired.  In addition to
specific reserves, the Bank also maintains general provisions for loan losses
based on evaluating known and inherent risks in the loan portfolio, including
management's continuing analysis of the factors and trends underlying the
quality of the loan portfolio.  These factors include changes in the size and
composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for
which full collectibility may not be assured, and determination of the
existence and realizable value of the collateral and guarantees securing the
loans.  The ultimate recovery of loans is susceptible to future market factors
beyond the Bank's control, which may result in losses or recoveries differing
significantly from those provided in the consolidated financial statements.

The Bank accounts for impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118.
These statements address the disclosure requirements and allocation of the
allowance for loan losses for certain impaired loans.  A loan within the scope
of these statements is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement,
including scheduled interest payments.  The Bank excludes smaller balance
homogenous loans, including single-family residential and consumer loans, from
the scope of these statements.

When a loan has been identified as being impaired, the amount of the
impairment is measured by using discounted cash flows, except when it is
determined that the sole source of repayment for the loan is the operation or
liquidation of the underlying collateral.  In such case, impairment is
measured at current fair value of the collateral, reduced by estimated selling
costs.  When the measurement of the impaired loan is less than the recorded
investment in the loan, including accrued interest and net unamortized
deferred loan fees or costs, loan impairment is recognized by establishing or
adjusting an allocation of the allowance for loan losses.  SFAS No. 114, as
amended, does not change the timing of charge-offs of loans to reflect the
amount ultimately expected to be collected.


(continued)
                                       54
<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

INTEREST ON LOANS AND LOAN FEES

Interest on loans is recorded as income when borrowers' monthly payments
become due.  Allowances are established for uncollected interest on loans for
which the interest is determined to be uncollectible.  Generally, all loans
past due 90 days or morethree or more payments are placed on nonaccrual status
and internally classified as substandard.  Any interest income recorded in the
current reporting period is fully reserved.  Subsequent collections are
applied proportionately to past due principal and interest.  Loans are removed
from nonaccrual status only when the loan is deemed current, and the
collectibility of principal and interest is no longer doubtful.

The Bank charges fees for originating loans.  These fees, net of certain loan
origination costs are deferred and amortized to income, on the level-yield
basis, over the loan term.  If the loan is repaid prior to maturity, the
remaining unamortized deferred loan fee is recognized in income at the time of
repayment.

LOAN SERVICING RIGHTS

Loan servicing rights are capitalized when acquired through the origination of
loans that are subsequently sold or securitized with the servicing rights
retained.  The value of loan servicing rights at the date of the sale of loans
is determined based on the discounted present value of expected future cash
flows using key assumptions for servicing income and costs and prepayment
rates on the underlying loans.  The estimated fair value is periodically
evaluated for impairment by comparing actual cash flows and estimated future
cash flows from the servicing assets to those estimated at the time servicing
assets were originated.  Loan servicing rights are amortized as an offset to
service fees in proportion to and over the period of estimated net servicing
income.

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125.  This statement revised the standards for
accounting for securitizations and other transfers of financial assets and
collateral, and requires certain disclosures; however, it carries over most of
SFAS No. 125's provisions without reconsideration.  The standards addressed in
this statement are based on consistent application of a financial components
approach that focuses on control.  Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes The Bank records its
mortgage servicing rights at fair value in accordance with SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities, which requires the Bank to allocate the total cost of all
mortgage loans, whether originated or purchased, to the loans (without the
mortgage servicing rights), and to mortgage servicing rights based on their
relative fair values.  The Bank is amortizing the mortgage servicing assets,
which totaled $508,000 and $356,000 at September 30, 2001 and 2000,
respectively, over the period of the estimated servicing income. liabilities
when extinguished.  This statement is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after March 31,
2001.  The adoption of this statement affects the disclosures in these
financial statements; however, the adoption of this statement did not have a
material impact on the Company's financial position of results of operations
for the year ended September 30, 2001.

(continued)

                                       55
<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PREMISES AND EQUIPMENT

Premises and equipment are recorded at cost.  Depreciation is computed on the
straight-line method over the following estimated useful lives:  buildings and
improvements up to forty years - thirty to forty years; furniture and
equipment - three to seven years; automobile - five years.  The cost of
maintenance and repairs is charged to expense as incurred.  Gains and losses
on dispositions are reflected in earnings.

REAL ESTATE OWNED

Real estate owned (REO) consists of properties acquired through or in lieu of
foreclosure, recorded initially at the lower of cost or fair value of the
properties less estimated costs of disposal.  Costs relating to development
and improvement of the properties are capitalized; costs relating to holding
the properties are expensed.

Valuations are periodically performed by management, and an allowance for
losses is established by a charge to earnings if the recorded value of a
property exceeds its estimated net realizable value.

INCOME TAXES

The Company files a consolidated federal income tax return with its
subsidiaryies.  Prior to fiscal year 1997, the Bank qualified under provisions
of the Internal Revenue Code which permitted, as a deduction from taxable
income, an allowance for bad debts based on a percentage of taxable income.

In 1996, the percentage-of-income bad debt deduction for federal tax purposes
was eliminated.  In addition, federal tax bad debt reserves which had been
accumulated since October 1, 1988, that exceeded the reserves which would have
been accumulated based on actual experience, are subject to recapture over a
six-year recapture period.  As of September 30, 2001, the Bank's federal tax
bad debt reserves subject to recapture approximated $900,000.

Deferred federal income taxes result from temporary differences between the
tax basis of assets and liabilities, and their reported amounts in the
consolidated financial statements.  These will result in differences between
income for tax purposes and income for financial reporting purposes in future
years.  As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.

(continued)

                                      56

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

EMPLOYEE STOCK OWNERSHIP PLAN

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

CASH EQUIVALENTS

The Company considers all amounts included in the balance sheet caption "Cash
and due from financial institutions" to be cash equivalents.

STOCK-BASED COMPENSATION

The Company accounts for stock-optionsbased awards to employees using the
intrinsic value method, in accordance with APB No. 25, Accounting for Stock
Issued to Employees.  Accordingly, no compensation expense has been recognized
in the financial statements for employee stock optionsarrangements.  However,
the required pro forma disclosures of the effects of all options granted have
been provided in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation.

EARNINGS PER SHARE

Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding.  Diluted
earnings per share reflect the potential dilution that could occur if common
shares were issued pursuant to the exercise of options under the Company's
stock option and management recognition and development plans.  In 2000 and
1999, the effect of the Company's stock options on earnings per share was
antidilutive and, thus, basic and diluted earnings per share are the same.

NOTE 2 - RESTRICTED ASSETS

Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances on hard or on deposit with the Federal Reserve Bank.
The amount of such balances for year ended September 30, 2001 was
approximately $926,000.

                                       57

<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000


NOTE 3 - INVESTMENTS AND MORTGAGE-BACKED SECURITIES

Investments and mortgage-backed securities have been classified according to
management's intent (dollars in thousands):

                                             GROSS        GROSS
                               AMORTIZED     UNREALIZED   UNREALIZED  FAIR
                               COST          GAINS        LOSSES      VALUE

AVAILABLE FOR SALE

SEPTEMBER 30, 2001
  U.S. agency securities       $        --     $   --     $  --      $    --
  Mortgage-backed securities        18,755        420       (16)      19,159
  Municipal bonds                       55          2        --           57
  Mutual funds                      10,020         40        --       10,060
  FHLB stock                         4,830         --        --        4,830
  Equity securities                    121         --       (28)          93

     TOTAL                         $28,951       $462      ($44)     $29,369

SEPTEMBER 30, 2000
  U.S. agency securities         $   6,502     $   --    ($  86)     $ 6,416
  Mortgage-backed securities        11,846          2      (279)      11,569
  Municipal bonds                       73                   (2)          71
  Mutual funds                       6,641         --      (169)       6,472
  FHLB stock                         4,150         --        --        4,150
  Equity securities                    323        116       (42)         397


     TOTAL                         $25,385       $118     ($578)     $24,925


Mortgage-backed securities pledged as collateral for public fund deposits and
federal treasury tax and loan deposits totaled $2,437,000 and $2,459,000 at
September 30, 2001 and 2000, respectively.

The contractual maturities of debt securities available for sale at September
30, 2001 are as follows (dollars in thousands).  Expected maturities may
differ from scheduled maturities due to the prepayment of principal or call
provisions.

                                                         AMORTIZED   FAIR
                                                         COST        VALUE

Due within one year                                      $    --    $    --
Due from one year to five years                               55         57
Due from five to ten years                                 6,138      6,318
Due after ten years                                       12,617     12,841

   TOTAL                                                 $18,810    $19,216

                                      58

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 4 - LOANS RECEIVABLE AND LOANS HELD FOR SALE

Loans receivable and loans held for sale consisted of the following at
September 30 (dollars in thousands):

                                                            2001       2000

Mortgage loans:
  One- to four-family                                    $112,060   $108,307
  Multi-family                                             29,412     33,604
  Commercial                                               65,731     58,632
  Construction and land development                       106,244     89,903
  Land                                                     13,632     12,561
  TOTAL MORTGAGE LOANS                                    327,079    303,007

Consumer loans:
  Home equity and second mortgage                          11,039      9,816
  Other                                                     6,825      6,081
  TOTAL CONSUMER LOANS                                     17,864     15,897

Commercial business loans                                   7,150      4,808

  TOTAL LOANS RECEIVABLE                                  352,093    323,712

Less:
  Undisbursed portion of loans in process                  39,803     32,831
  Deferred loan origination fees and other                  3,494      3,578
  Allowance for loan losses                                 3,050      2,640
                                                           46,347     39,049

  LOANS RECEIVABLE, NET                                   305,746    284,663

Loans held for sale (one- to four-family)                  18,022     28,518
Market value adjustment                                        --       (175)
  LOANS HELD FOR SALE, NET                                 18,022     28,343

  TOTAL LOANS RECEIVABLE AND LOANS HELD FOR SALE         $323,768   $313,006


(continued)

                                      59
<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 4 - LOANS RECEIVABLE AND LOANS HELD FOR SALE (continued)

The weighted average interest rate on all loans at September 30, 2001 and 2000
was 8.46% and 8.64%, respectively.

Loans serviced for the Federal Home Loan Mortgage Corporation and others at
September 30, 2001 and 2000 were $90,303,000 and $68,849,000, respectively.

Certain related parties of the Bank, principally Bank directors and officers,
were loan customers of the Bank in the ordinary course of business during 2001
and 2000.  Activity in related party loans during the years ended September 30
is as follows (dollars in thousands):

                                                             2001       2000

Balance, beginning of year                                   $807       $774
New loans                                                     374         63
Repayments                                                   (388)       (30)

     BALANCE, END OF YEAR                                    $793       $807

At September 30, 2001 and 2000, the Bank had non-accruing loans totaling
approximately $4,091,000 and $3,612,000, respectively.  At September 30, 2001
and September 30, 2000 no loans were 90 days or more past due and still
accruing interest.  No interest income was recorded on non-accrual loans for
the years ended September 30, 2001, 2000 and 1999.  The average investment in
non-accrual loans for the years ended September 30, 2001, 2000 and 1999 was
$3,778,000, $3,460,000 and $3,565,000, respectively.

An analysis of the allowance for loan losses for the years ended September 30
follows (dollars in thousands):

                                                 2001       2000       1999

Balance, beginning of year                     $2,640      $2,056     $1,728
Provision for loan losses                       1,400         885        363

Loans charged off                              (1,012)       (563)       (35)
Recoveries                                         22         262        - -

NET CHARGE-OFFS                                 (990)        (301)       (35)

  BALANCE, END OF YEAR                         $3,050      $2,640     $2,056


(continued)
                                      60

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 4 - LOANS RECEIVABLE AND LOANS HELD FOR SALE (concluded)

Following is a summary of information relating to impaired loans as of
September 30 (dollars in thousands):

                                                             2001       2000

Impaired loans without a valuation allowance                $2,300     $3,612
Impaired loans with a valuation allowance                    1,791         --

                                                            $4,091     $3,612

Valuation allowance related to impaired loans                 $270        $--


NOTE 5 - LOAN SERVICING

Loans serviced for the Federal Home Loan Mortgage Corporation and others are
not included in the consolidated balance sheets.  The principal amounts of
those loans at September 30, 2001 and 2000 were $90,303,000 and $68,849,000,
respectively.

Following is an analysis of the changes in mortgage servicing rights at
September 30 (dollars in thousands):

                                                 2001        2000       1999

Balance, at beginning of year                    $356        $358       $375
Additions                                         300          87        100
Amortization                                     (148)        (89)      (117)

  BALANCE, END OF YEAR                           $508        $356       $358

In June 2001, the Bank securitized and sold approximately $11.9 million in
first mortgage loans.  In the securitization, the Bank retained servicing
responsibilities, but has no other retained interest in the loans sold.  (see
Note 25)

                                     61

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at September 30 (dollars in
thousands):

                                                           2001       2000

Land                                                     $  2,654   $  2,303
Buildings and improvements                                  7,675      6,271
Leasehold improvements                                        416         --
Furniture and equipment                                     3,223      2,294
Automobiles                                                    19         19
Property held for future expansion                            834        596
Construction and purchases in progress                        158        536
                                                           14,563     12,019
Less accumulated depreciation                               3,903      3,405

  TOTAL PREMISES AND EQUIPMENT                            $10,660   $  8,614


NOTE 7 - REAL ESTATE OWNED

Real estate owned consisted of the following at September 30 (dollars in
thousands):

                                                            2001       2000

Real estate acquired through foreclosure                  $1,1434     $1,992
Allowance for possible losses                                (137)       (26)

  TOTAL REAL ESTATE OWNED                                  $1,006     $1,966


An analysis of the allowance for possible losses follows (dollars in
thousands):

                                                 2001        2000       1999

Balance, beginning of year                      $  26         $38        $32
Provision for additional losses                   356          51         28
Write-downs                                      (245)        (63)       (22)

  BALANCE, END OF YEAR                           $137         $26        $38

                                     62

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 8 - ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consisted of the following at September 30
(dollars in thousands):

                                                            2001       2000

Loans receivable                                           $2,064     $1,976
Less reserve for uncollected interest                         319        396
                                                            1,745      1,580
Investment securities and interest bearing deposits           135        176

  TOTAL ACCRUED INTEREST RECEIVABLE                        $1,880     $1,756


NOTE 9 - DEPOSITS

Deposits consisted of the following at September 30 (dollars in thousands):

                                                           2001        2000

Non-interest bearing                                   $   16,976  $  15,497
N.O.W. checking                                            30,626     24,467
Passbook savings                                           34,228     28,647
Money market accounts                                      27,251     20,863
Certificates of deposit                                   133,291    123,137

  TOTAL DEPOSITS                                         $242,372   $212,611

The weighted average interest rate on all deposits at September 30, 2001 and
2000 was 3.72% and 4.45%, respectively.

Time deposits of $100,000 or greater totaled $44,186,000 and $42,420,000 at
September 30, 2001 and 2000, respectively.

Scheduled maturities of certificates of deposit at September 30, 2001 are as
follows (dollars in thousands):

Within one year                                                     $113,735
Over one to two years                                                 15,577
Over two to five years                                                 3,128
After five years                                                         851

  TOTAL                                                             $133,291

(continued)
                                      63

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 9 - DEPOSITS (concluded)

Interest expense by account type is as follows for the years ended September
30 (dollars in thousands):

                                                 2001       2000       1999

Certificates of deposit                        $7,396      $6,573     $5,590
Money market accounts                             921         741        628
Passbook savings                                  728         694        695
N.O.W. checking                                   446         385        363

  TOTAL                                        $9,491      $8,393     $7,276


NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES

The Bank currently has an Advance, Security and Deposit Agreement with Federal
Home Loan Bank that is maintained at 35% of the Bank's total assets
($134,068,000 at September 30, 2001).  The Bank had advances at September 30,
2001 as follows (dollars in thousands):

                                                         WEIGHTED
                                                         AVERAGE
                                                         INTEREST
                                                         RATE        AMOUNT
Maturities in years ending September 30:
  2002 Fixed rate set maturity                           3.92%       $12,500
  2002 Fixed rate monthly amortization                   6.11            196
  2002 Variable rate set maturity                        3.51          3,300
  2004 Fixed rate set maturity                           5.58          5,000
  2005 Fixed rate set maturity                           5.49          2,000
  2006 Fixed rate set maturity putable                   5.98         10,000
  2006 Fixed rate set maturity                           6.55            982
  2008 Fixed rate set maturity putable                   6.18         15,000
  2011 Fixed rate set maturity putable                   4.77         20,000

                                                                     $68,978

Under the Advances, Security and Deposit Agreement, virtually all of the
Bank's assets, not otherwise encumbered, are pledged as collateral for
advances.

                                     64

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 11 - OTHER LIABILITIES AND ACCRUED EXPENSES

Other liabilities and accrued expenses comprise the following at September 30
(dollars in thousands):

                                                            2001       2000

Federal income taxes                                      $   425    $    --
Accrued pension and profit sharing payable                    807        768
Accrued interest payable on deposits and FHLB advances        491        557
Accounts payable and accrued expenses - other               1,423        695

     TOTAL OTHER LIABILITIES AND ACCRUED EXPENSES          $3,146     $2,020


NOTE 12 - FEDERAL INCOME TAXES

The Bank previously qualified under provisions of the Internal Revenue Code
that permitted federal income taxes to be computed after a deduction for
additions to bad debt reserves.  Accordingly, retained earnings include
approximately $2,200,000 for which no provision for federal income taxes has
been made.  If in the future this portion of retained earnings is used for any
purpose other than to absorb bad debt losses, federal income taxes at the
current applicable rates would be imposed.

The components of the provision for income taxes at September 30 are as
follows (dollars in thousands):

                                                2000        1999       1999

Current                                        $2,948      $3,156     $3,046
Deferred benefit                                 (207)       (231)      (449)

     TOTAL FEDERAL INCOME TAXES                $2,741      $2,925     $2,597

The components of the Company's deferred tax assets and liabilities at
September 30 are as follows (dollars in thousands):

                                                            2001       2000
DEFERRED TAX ASSETS
  Accrued interest on loans                                $   64     $  110
  Accrued vacation                                             59         50
  Deferred compensation                                       106        105
  Unearned ESOP shares                                        270        239
  Allowance for loan losses                                   888        573
  Loans held for sale market value adjustment                  --         63
  Unrealized securities losses                                 --       1567
  Unearned MRRDP shares                                        37         --
  Other                                                        --          2
  TOTAL DEFERRED TAX ASSETS                                 1,424     1,2969

(continued)

                                      65
<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 12 - FEDERAL INCOME TAXES (concluded)


                                                             2001      2000

DEFERRED TAX LIABILITIES
  FHLB stock dividends                                    $   576     $  501
  Real estate sale, installment basis                          30         33
  Unrealized securities gains                                 142        - -
  Other                                                       379        325
  TOTAL DEFERRED TAX LIABILITIES                              785        566

  NET DEFERRED TAX ASSETS                                 $   639     $  730

The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows (dollars in thousands):

                             2001              2000               1999
                        AMOUNT  PERCENT   AMOUNT  PERCENT    AMOUNT  PERCENT

Taxes at
  statutory rate        $2,789   34.0%    $2,999    34.0%    $2,657    34.0%
Other - net               (487)   (.6)       (74)    (.8)       (60)    (.8)

  FEDERAL INCOME TAXES  $2,741   33.4%    $2,925    33.2%    $2,597    33.2%

NOTE 13 - PROFIT SHARING PLANS

The Bank maintains a tax-qualified profit sharing plan for the benefit of all
eligible employees who are at least 21 years of age and work a minimum of 501
hours.  The Bank contributed $362,000, $300,000 and $249,000 to the plan for
the years ended September 30, 2001, 2000 and 1999, respectively.
Contributions are made on a discretionary basis.

In addition, the Bank has an employee bonus plan based on net income.  Bonuses
accrued for the years ended September 30, 2001, 2000 and 1999 totaled
$208,000, $229,000 and $195,000, respectively.


NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN

In 1998, the Bank established an Employee Stock Ownership Plan (ESOP) that
benefits all employees with at least one year of service who are 21 years of
age or older.  The ESOP is funded by Bank contributions in cash or stock.
Employee vesting occurs over six years.  The amount of the annual contribution
is discretionary, except that it must be sufficient to enable the ESOP to
service its debt.  All dividends received by the ESOP are used to pay debt
service.

(continued)

                                     66

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN (concluded)

In January 1998, the ESOP borrowed $7,930,000 from the Company to purchase
529,000 shares of common stock of the Company.  The loan will be repaid
primarily from the Company's contributions to the ESOP over 15 years.  The
interest rate on the loan is 8.5%.  As of September 30, 2001, 2,522 shares had
been distributed out of the ESOP to participants.  The balance of the loan at
September 30, 2001 was $6,743,000.

Shares held by the ESOP as of September 30 were classified as follows:

                                                  2001      2000       1999

Unallocated shares                              396,750   432,016    467,283

Shares released for allocation                  129,722    96,143     61,717

  TOTAL ESOP SHARES                             526,472   528,159    529,000

The approximate fair market value of the Bank's unallocated shares at
September 30, 2001,  and 2000 and 1999, respectively, is $5,872,000, and
$5,184,000 and $5,344,000.  Compensation expense recognized under the ESOP was
$273,000, $199,000 and $285,000 for the years ended September 30, 2001, 2000
and 1999, respectively.


NOTE 15 - STOCK OPTIONS

During the year ended September 30, 1999, the Company adopted a stock-based
option plan, which is described below.  The Company applies APB Opinion No. 25
and related interpretations in accounting for this plan.  Accordingly, no
compensation cost has been recognized for the plan.  Had compensation cost for
the Company's stock option plan been determined based on the fair value at the
grant dates for awards granted under this plan, consistent with the method of
SFAS No. 123, the Company's net income and earnings per share for the years
ended September 30 would have been reduced to these pro forma amounts (dollars
in thousands):

                                                  2001      2000       1999

Net income:
  As reported                                    $5,462    $5,897     $5,218
  Pro forma                                       5,264     5,589      4,901

Earnings per basic share:
  As reported                                     $1.30     $1.31      $1.03
  Pro forma                                        1.26      1.23        .96

Earnings per diluted share:
  As reported                                     $1.28     $1.31      $1.03
  Pro forma                                        1.25      1.23        .96

(continued)

                                         67

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 15 - STOCK OPTIONS (continued)

Under the Company's stock option plan, the Company may grant options for up to
661,250 shares of its common stock to certain key employees and directors.
The exercise price of each option equals the fair market value of the
Company's stock on the date of grant.  An option's maximum term is ten years.
Options are exercisable on a cumulative basis in annual installments of 10% on
each of the ten anniversaries from the date of grant.  Vesting will be
accelerated to 20% per year if certain criteria relating to Company
performance are met.  At September 30, 2001, options for 50,417 shares are
available for future grant under this plan.

The fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards.  The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions.

                                RISK FREE        EXPECTED      EXPECTED
                                INTEREST RATE    LIFE (YEARS)  DIVIDENDS

Fiscal 2001                         5.3%             8.0         2.80%
Fiscal 1999                         6.0             10.0         2.25

Stock option activity is summarized in the following table:

                                                             WEIGHTED
                                                             AVERAGE
                                                 NUMBER OF   EXERCISE
                                                 SHARES      PRICE


Outstanding October 1, 1998                           --     $   --
Grants                                           582,494       12.02
  OUTSTANDING SEPTEMBER 30, 1999                 582,494       12.02
Forfeited                                        (10,000)      12.38
  OUTSTANDING SEPTEMBER 30, 2000                 572,494       12.01
Grants                                            38,339       14.35
Options exercised                                 (1,600)      12.00

  OUTSTANDING SEPTEMBER 30, 2001                 609,233      $12.16


(continued)

                                      68

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 15 - STOCK OPTIONS (concluded)

Additional information regarding options outstanding as of September 30, 2001
is as follows:

                                 OPTIONS OUTSTANDING     OPTIONS EXERCISABLE
                                ---------------------   ---------------------
                 WEIGHTED
                 AVERAGE                     WEIGHTED                WEIGHTED
                 REMAINING                   AVERAGE                 AVERAGE
EXERCISE         CONTRACTUAL    NUMBER       EXERCISE   NUMBER       EXERCISE
PRICE            LIFE (YEARS)   OUTSTANDING  PRICE      EXERCISABLE  PRICE

$12.00           6.5            553,394      $12.00     237,401      $12.00
12.06 to 12.38   7.7             22,500       12.31       7,000       12.38
13.59 to 14.50   9.6             33,339       14.70          --          --

                 7.0            609,233      $12.16     244,401      $12.01


NOTE 16 - DEFERRED COMPENSATION/NON-COMPETITION AGREEMENT AND SEVERANCE
COMPENSATION AGREEMENT

The Bank has a deferred compensation/noncompetition arrangement with its chief
executive officer which will provide monthly payments of $2,000 per month upon
retirement.  Once payments have commenced, they will continue until his death,
at which time, payments will continue to his surviving spouse until her death
or for 60 months.  The present value of the payments, based on the life
expectancy of the chief executive officer, has been accrued based on a
retirement age of 65 and is included in other liabilities in the consolidated
financial statements.  As of September 30, 2001 and 2000, $239,000, has been
accrued under the agreement.

In connection with the January 1998 conversion, the Bank adopted an Employee
Severance Compensation Plan, which expires in ten years, to provide benefits
to eligible employees in the event of a change in control of the Company or
the Bank (as defined in the plan).  In general, all employees with two or more
years of service will be eligible to participate in the plan.  Under the plan,
in the event of a change in control of the Company or the Bank, eligible
employees who are terminated or who terminate employment (but only upon the
occurrence of events specified in the plan) within 12 months of the effective
date of a change in control would be entitled to a payment based on years of
service with the Bank.  The maximum payment for any eligible employee would be
equal to 24 months of their current compensation.

                                      69

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 17 - MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN

On November 10, 1998, the Board of Directors adopted a Management Recognition
and Development Plan (MRDP).  On January 25, 1999, shareholders approved the
adoption of the MRDP for the benefit of officers, employees and non-employee
directors of the Company.  The objective of the MRDP is to retain personnel of
experience and ability in key positions by providing them with a proprietary
interest in the Company.

The Plan allows for the issuance to participants of up to 264,500 shares of
the Company's common stock.  purchase, in the open market or through the
issuance of Shares issued may be purchased in the open market or may be issued
from authorized and unissued shares.  On July 26, 2001, the Company awarded
204,927 shares under the Plan to employees and directors.  Awards under the
MRDP were made in the form of restricted shares of common stock that are
subject to restrictions on the transfer of ownership.  Compensation expense in
the amount of the fair value of the common stock at the date of the grant to
the plan participants will be recognized over a five year vesting period, with
20% vesting immediately upon grant.  Compensation expense of $770,000 for the
year ended September 30, 2001 was recognized.

NOTE 18 - COMMITMENTS AND CONTINGENCIES

The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers.  These
financial instruments include commitments to extend credit.  These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheets.

The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments.  The Bank uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.  A summary of the Bank's commitments at September 30 is as
follows (dollars in thousands):

                                                       2001           2000

Commitments to extend credit                         $17,807        $17,322
Standby letters of credit                                350            100

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.  Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.  The Bank evaluates each customer's creditworthiness on a
case-by-case basis.  The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation
of the party.  Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and
income-producing commercial properties.

Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business.  In the opinion of management, liabilities arising from these
claims, if any, will not have a material effect on the financial position of
the Company.

                                     70

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 19 - REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies.  Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines of the regulatory framework for prompt
corrective action, the Bank must meet specific capital adequacy guidelines
that involve quantitative measures of the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices.  The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios as
defined in the regulations (set forth in the table below) of Tier 1 capital to
average assets, and minimum ratios of Tier 1 and total capital to
risk-weighted assets.

As of September 30, 2001, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table.  There are
no conditions or events since that notification that management believes have
changed the Bank's category.

The Company's and the Bank's actual capital amounts (dollars in thousands) and
ratios are also presented in the table.

                                                             TO BE WELL
                                                             CAPITALIZED
                                                             UNDER PROMPT
                                          CAPITAL ADEQUACY   CORRECTIVE ACTION
                        ACTUAL            PURPOSES           PROVISIONS
                        AMOUNT    RATIO   AMOUNT   RATIO     AMOUNT    RATIO

SEPTEMBER 30, 2001
 Tier 1 capital (to
  average assets):
   Consolidated        $71,482   18.8%   $15,218   4.0%        N/A       N/A
   Timberland Bank      61,930   16.5     15,038   4.0       $18,798     5.0%
 Tier 1 capital (to
  risk-weighted assets):
   Consolidated         71,482   26.2     10,915   4.0         N/A       N/A
   Timberland Bank      61,930   22.7     10,907   4.0        16,361     6.0
 Total capital (to
  risk-weighted assets):
   Consolidated         74,532   27.3     21,830   8.0         N/A       N/A
   Timberland Bank      64,980   23.8     21,814   8.0        27,678    10.0


(continued)
                                      71

<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 19 - REGULATORY MATTERS (concluded)

                                                             TO BE WELL
                                                             CAPITALIZED
                                                             UNDER PROMPT
                                          CAPITAL ADEQUACY   CORRECTIVE ACTION
                        ACTUAL            PURPOSES           PROVISIONS
                        AMOUNT    RATIO   AMOUNT   RATIO     AMOUNT    RATIO


SEPTEMBER 30, 2000
  Tier 1 capital (to
   average assets):
    Consolidated       $72,516   20.0%   $14,334   4.0%        N/A       N/A
    Timberland Bank     58,470   16.6     14,068   4.0       $17,585     5.0%
  Tier 1 capital (to
   risk-weighted assets):
    Consolidated        72,516   26.7     10,857   4.0         N/A       N/A
    Timberland Bank     58,470   21.7     10,765   4.0        16,148     6.0
  Total capital (to
   risk-weighted assets):
    Consolidated        75,156   27.7     21,714   8.0         N/A       N/A
    Timberland Bank     61,110   22.7     21,530   8.0        26,913    10.0


RESTRICTIONS ON RETAINED EARNINGS

The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval.

At the time of conversion of the Bank from a Washington-charted mutual savings
bank to a Washington-chartered stock savings bank, the Bank established a
liquidation account in an amount equal to its retained earnings of $23,866,000
as of June 30, 1997, the date of the latest statement of financial condition
used in the final conversion prospectus.  The liquidation account will be
maintained for the benefit of eligible withdrawable account holders who have
maintained their deposit accounts in the Bank after conversion.  The
liquidation account will be reduced annually to the extent that eligible
account holders have reduced their qualifying deposits as of each anniversary
date.  Subsequent increases will not restore an eligible account holder's
interest in the liquidation account.  In the event of a complete liquidation
of the Bank (and only in such an event), eligible depositors who have
continued to maintain accounts will be entitled to receive a distribution from
the liquidation account before any liquidation may be made with respect to
common stock.  The Bank may not declare or pay cash dividends if the effect
thereof would reduce its regulatory capital below the amount required for the
liquidation account.

                                        72

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

CONDENSED BALANCE SHEETS - SEPTEMBER 30
(Dollars in Thousands)

                                                         2001         2000

ASSETS
  Cash and due from financial institutions               $     24   $     14
  Interest bearing deposits                                   227      1,140
  Investments and mortgage-backed securities
    available for sale                                      3,837      5,712
  Loan receivable from Bank                                 6,743      7,089
  Investment in Bank                                       62,270     58,337
  OTHER ASSETS                                                 26         53

  TOTAL ASSETS                                           $ 73,127   $ 72,345

LIABILITIES AND SHAREHOLDERS' EQUITY
  Liabilities and accrued expenses                       $  1,318   $     33
  Shareholders' equity                                     71,809     72,312

  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             $ 73,127   $ 72,345

CONDENSED STATEMENTS OF INCOME - YEARS ENDED SEPTEMBER 30
(Dollars in Thousands)

                                                 2001       2000       1999

OPERATING INCOME
  Interest on investments and mortgage-
    backed securities                          $   107    $   199    $   287
  Interest on loan receivable from Bank            592        621        645
  Dividends on investments                         180        235        352
  Gain (loss) on sale of investment
    securities available for sale                  227        (22)        (1)
  Dividends from Timberland Bank                 1,949      1,863      1,612
  Other                                              1          2         --
  TOTAL OPERATING INCOME                         3,056      2,898      2,895

OPERATING EXPENSES                                 191        204        245


  INCOME BEFORE INCOME TAXES AND EQUITY
  IN UNDISTRIBUTED INCOME OF BANK                2,865      2,694      2,650

INCOME TAXES                                       238        220        304

  INCOME BEFORE EQUITY IN UNDISTRIBUTED
    INCOME OF BANK                               2,627      2,474      2,346

EQUITY IN UNDISTRIBUTED INCOME OF BANK           2,835      3,423      2,872

  NET INCOME                                    $5,462     $5,897     $5,218

(continued)
                                      73

<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)

CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED SEPTEMBER 30
(Dollars in Thousands)

                                                 2001       2000       1999

CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                    $5,462     $5,897    $ 5,218
  Adjustments to reconcile net income to
  net cash provided:
    Equity in undistributed income of Bank      (2,835)    (3,423)    (2,872)
    ESOP shares earned                             503        434        428
    MRDP shares earned                             776         --         --
    (Gain) loss on sale of securities
      available for sale                          (227)        22         (1)
    Other, net                                   1,331        (37)       117
  NET CASH PROVIDED BY OPERATING ACTIVITIES      5,010      2,893      2,890

CASH FLOWS FROM INVESTING ACTIVITIES
  Net (increase) decrease in interest-bearing
    deposits in banks                              913       (921)     6,685
  Investment in Bank                              (485)     1,859       (429)
  Purchases of securities available for sale    (2,500)      (269)   (12,575)
  Proceeds from maturities of securities
    available for sale                           4,122         --     17,809
  Proceeds from sale of securities available
    for sale                                       430      2,482         --
  Principal repayments on loan receivable
    from Bank                                      346        316        292
  NET CASH PROVIDED BY INVESTING ACTIVITIES      2,826      3,467     11,782

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from exercise of stock options the
    issuance of common stock, net of
    related costs                                   19         --         --
  Repurchase of common stock                    (5,920)    (4,603)   (13,150)
  Payment of dividends                          (1,925)    (1,748)    (1,520)
  NET CASH PROVIDED BY (USED IN) FINANCING
    ACTIVITIES                                  (7,826)    (6,351)   (14,670)

  NET INCREASE IN CASH                              10          9          2

CASH AND DUE FROM FINANCIAL INSTITUTIONS
  Beginning of year                                 14          5          3

  END OF YEAR                                 $     24   $     14   $      5

(continued)
                                     74

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 21 - EARNINGS PER SHARE DISCLOSURES

Basic earnings per share are computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items.  Diluted earnings
per share are computed by dividing net income applicable to common stock by
the weighted average number of common shares and common stock equivalents for
items that are dilutive, net of shares assumed to be repurchased using the
treasury stock method at the average share price for the Company's common
stock during the period.  Common stock equivalents arise from assumed
conversion of outstanding stock options and from assumed vesting of shares
awarded but not released under the Company's Management Recognition and
Development Plan.  In accordance with Statement of Position 93-6, Employers'
Accounting for Employee Stock Ownership Plans, issued by the American
Institute of Certified Public Accountants, shares owned by the Bank's Employee
Stock Ownership Plan that have not been allocated are not considered to be
outstanding for the purpose of computing earnings per share.  Information
regarding the calculation of basic and diluted earnings per share for the
years ended September 30, 2001 and 2000, respectively, is as follows (dollars
in thousands, except per share amounts).

                                          2001         2000          1999

BASIC EPS COMPUTATION

  Numerator - net income           $      5,462   $     5,897    $     5,218

  Denominator - weighted average
    common shares outstanding         4,193,314     4,508,427      5,089,414


  Basic EPS                               $1.30         $1.31          $1.03


DILUTED EPS COMPUTATION

  Numerator - net income           $      5,462   $     5,897    $     5,218

  Denominator - weighted average
    common shares outstanding         4,193,314     4,508,427      5,089,414

  Effect of dilutive stock options       79,299            --             --

  Weighted average common shares
    outstanding-assuming dilution     4,727,613     4,508,427      5,089,414


  Diluted EPS                             $1.28         $1.31          $1.03


                                      75

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 22 - COMPREHENSIVE INCOME

Net unrealized gains and losses included in comprehensive income were computed
as follows for the years ended September 30 (dollars in thousands):

                                                         TAX
                                            BEFORE-TAX   (BENEFIT)  NET-OF-TAX
                                            AMOUNT       EXPENSE    AMOUNT

2001
  Unrealized holding gains arising
    during the year                         $1,084       $369        $715
  Reclassification adjustment for gains
    included in net income                    (205)       (70)       (135)


  NET UNREALIZED GAINS                     $   879       $299        $580


2000
  Unrealized holding gains arising
    during the year                        $   111       $ 39        $ 72
  Reclassification adjustment for losses
    included in net income                      22          7          15

  NET UNREALIZED GAINS                     $   133       $ 46        $ 87


1999
  Unrealized holding losses arising
    during the year                          ($774)     ($263)      ($511)
  Reclassification adjustment for gains
    included in net income                      --         --          --

  NET UNREALIZED LOSSES                      ($774)     ($263)      ($511)

                                      76

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 23 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of estimated fair values
for financial instruments.  Such estimates are subjective in nature, and
significant judgment is required regarding the risk characteristics of various
financial instruments at a discrete point in time.  Therefore, such estimates
could vary significantly if assumptions regarding uncertain factors were to
change.  Major assumptions, methods and fair value estimates for the Company's
significant financial instruments are set forth below:

     CASH AND DUE FROM FINANCIAL INSTITUTIONS AND INTEREST BEARING DEPOSITS IN
     BANKS
     The recorded amount is a reasonable estimate of fair value.

     INVESTMENTS, MORTGAGE-BACKED SECURITIES AND LOANS HELD FOR SALE
     The fair value of investments, mortgage-backed securities and loans held
     for sale has been based on quoted market prices or dealer quotes.

     FEDERAL HOME LOAN BANK STOCK

     The carrying values of stock holdings approximate fair value.

     LOANS RECEIVABLE
     Fair values for loans are estimated for portfolios of loans with similar
     financial characteristics.  Fair value is estimated by discounting the
     future cash flows using the current rates at which similar loans would be
     made to borrowers for the same remaining maturities.  Prepayments are
     based on the historical experience of the Bank.

     DEPOSITS
     The fair value of deposits with no stated maturity date is included at
     the amount payable on demand.  The fair value of fixed maturity
     certificates of deposit is estimated by discounting future cash flows
     using the rates currently offered by the Bank for deposits of similar
     remaining maturities.

     FEDERAL HOME LOAN BANK ADVANCES
     The fair value of borrowed funds is estimated by discounting the future
     cash flows of the borrowings at a rate which approximates the current
     offering rate of the borrowings with a comparable remaining life.

     ACCRUED INTEREST
     The carrying amounts of accrued interest approximate fair value.


(continued)

                                        77

<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 23 - FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded)

The estimated fair values of financial instruments at September 30, 2001 and
2000 were as follows (dollars in thousands):

                                        2001                 2000
                                        RECORDED   FAIR      RECORDED   FAIR
                                        AMOUNT     VALUE     AMOUNT     VALUE

FINANCIAL ASSETS
 Cash and due from financial
  institutions and interest bearing
    deposits in banks                 $ 13,439   $ 13,439  $ 12,002   $ 12,002
  Investments and mortgage-backed
    securities                          29,369     29,369    24,925     24,925
  Federal Home Loan Bank stock           4,830      4,830     4,150      4,150
  Loans receivable                     323,768    327,153        --     13,006
      313,604
  Accrued interest receivable            1,880      1,880     1,756      1,756

FINANCIAL LIABILITIES
  Deposits                            $242,372   $243,368  $212,611   $213,234
  Federal Home Loan Bank advances       68,978     78,405    81,137     80,712
  Accrued interest payable                 491        491       557        557


NOTE 24 - STOCK REPURCHASE PLAN

In September 2001, the Company initiated a stock repurchase plan for the
purchase of 200,872 shares of stock which had not been completed as of
September 30, 2001.  As of September 30, 2001, 44,000 shares had been
repurchased.  The remainder is anticipated to be purchased during the year
ending September 30, 2002.

NOTE 25 - SECURITIZATION OF MORTGAGE LOANS

In June 2001, the Bank securitized and sold approximately $11.9 million in
first mortgage loans.  Upon closing the transaction, the Bank sold the
securities received, recognizing a loss of $22,000, and invested the majority
of the proceeds in other investment securities.  The Bank retained servicing
responsibilities, but has no other interest in the loans sold.  The Bank
receives servicing fees of .25% of the outstanding principal balance of the
loans sold.  A servicing asset of $92,000 was recognized in this transaction,
based on the following factors:  estimated life of loans of 84 months and cash
flow discount rate of 6.87%.  Investors have no recourse to the Bank's other
assets in the event debtors fail to pay the balance owned.


                                  78

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2001 and 2000

NOTE 26 - SUBSEQUENT EVENT

Subsequent to September 30On October 25, 2001, the Board of DirectorsCompany
approved a dividend in the amount of $.11 per share to be paid on November 16,
2001 tofor shareholders of record as of November 2, 2001.


NOTE 27 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following selected financial data are presented for the quarters ended
(dollars in thousands, except per share amounts):

                                SEPTEM-                             DECEM-
                                BER 30,     JUNE 30,    MARCH 31,   BER 31,
                                2001        2001        2001        2000


Interest and dividend income    $7,915      $7,977      $7,845      $7,955
Interest expense                (3,237)     (3,352)     (3,519)     (3,816)
  NET INTEREST INCOME            4,678       4,625       4,326       4,139

Provision for loan losses         (250)       (800)       (200)       (150)
Noninterest income                 664         857         798         608
Noninterest expense             (3,543)     (2,554)     (2,703)     (2,292)

  INCOME BEFORE INCOME TAXES     1,549       2,128       2,221       2,305

Federal income taxes               522         721         734         764

  NET INCOME                    $1,027      $1,407      $1,487      $1,541

Basic earnings per share         $0.25       $0.34       $0.35       $0.35
Diluted earnings per share       $0.24       $0.34       $0.35       $0.35

Interest and dividend income    $7,551      $7,460      $6,796      $6,555
Interest expense                (3,636)     (3,213)     (2,888)     (2,690)
  NET INTEREST INCOME            3,915       4,247       3,908       3,865


Provision for loan losses         (120)       (410)       (280)        (75)
Noninterest income                 869         647         167          55
Noninterest expense             (2,107)     (1,965)     (1,839)     (2,055)

  INCOME BEFORE INCOME TAXES     2,557       2,519       1,956       1,790


Federal income taxes               848         838         647         592

  NET INCOME                    $1,709      $1,681      $1,309      $1,198

Basic and diluted earnings
  per share                       $.39        $.38        $.29        $.26

                                  79

<PAGE>




ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
------------------------------------------------------------------------

     Not applicable.

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Definitive Proxy Statement
for the 2002 Annual Meeting of Stockholders ("Proxy Statement") and is
incorporated herein by reference.

     The following table sets forth certain information with respect to the
executive officers of the Company and the Bank.  Each of the executive
officers holds the same position with the Company and the Bank.

                  EXECUTIVE OFFICERS OF THE COMPANY AND BANK

                  Age at                      Position
                 September --------------------------------------------------
Name             30, 2001  Company                   Bank
----             --------  -------                   ----

Clarence E. Hamre  67      Chairman of the Board,    Chairman of the Board,
                           President and Chief       President and Chief
                           Executive Officer         Executive Officer
Michael R. Sand    47      Executive Vice President  Executive Vice President,
                           and Secretary             Secretary and Director
Dean J. Brydon     34      Chief Financial Officer   Chief Financial Officer

Biographical Information

     CLARENCE E. HAMRE has served as the Bank's President and Chief Executive
Officer since 1969.

     MICHAEL R. SAND has been affiliated with the Bank since 1977 and has
served as the Bank's Executive Vice President since 1986.

     DEAN J. BRYDON has been affiliated with the Bank since 1994 and has
served as the Chief Financial Officer since January 2000.

ITEM 11.    EXECUTIVE COMPENSATION
----------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Proxy Statement and is
incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------

     (a)  Security Ownership of Certain Beneficial Owners.

          The information contained under the section captioned "Security
Ownership of Certain Beneficial Owners and Management" is included in the
Company's Proxy Statement and is incorporated herein by reference.

                                     80
<PAGE>




     (b)  Security Ownership of Management.

     The information contained under the sections captioned "Security
Ownership of Certain Beneficial Owners and Management" and "Proposal I --
Election of Directors" is included in the Company's Proxy Statement and are
incorporated herein by reference.

     (c)  Changes In Control

     The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors -- Transactions with Management" is included in the
Company's Proxy Statement and is incorporated herein by reference.

                                 PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

     (a)  Exhibits

           3.1     Articles of Incorporation of the Registrant (1)
           3.2     Bylaws of the Registrant (1)
          10.1     Employee Severance Compensation Plan (2)
          10.2     Employee Stock Ownership Plan (2)
          10.3     1999 Stock Option Plan (3)
          10.4     Management Recognition and Development Plan (3)
          21       Subsidiaries of the Registrant
          23       Consent of Accountants

-------------
(1)  Filed as an exhibit to the Registrant's Registration Statement on Form
     S-1 (333-35817).
(2)  Incorporated by reference to the Registrant's Quarterly Report on Form
     10-Q for the quarter ended December 31, 1997.
(3)  Incorporated by reference to the Registrant's 1999 Annual Meeting Proxy
     Statement dated December 15, 1998.

     (b)  Reports on Form 8-K

     A Current Report Form 8-K was filed on September 7, 2001 in which the
Company announced that the accounting firm of McGladrey & Pullen, LLP, had
acquired the attest assets and practice of the Company's independent auditors,
Knight Vale & Gregory PLLC effective September 1, 2001 and that Knight Vale &
Gregory PLLC would no longer be the auditor for the Company.  In addition, the
Company indicated that on September 7, 2001, the Board of Directors, at the
recommendation of its Audit Committee, engaged McGladrey & Pullen, LLP, as the
Company's certifying accountants.

                                     81
<PAGE>



                                 SIGNATURES

     Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                TIMBERLAND BANCORP, INC.


Date:  December 21, 2001        By: /s/Clarence E. Hamre
                                    ------------------------------------
                                    Clarence E. Hamre
                                    Chairman of the Board, President and
                                    Chief Executive Officer

     Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

SIGNATURES                TITLE                                 DATE


/s/Clarence E. Hamre  Chairman of the Board, President,     December 21, 2001
--------------------  Chief Executive Officer and Director
Clarence E. Hamre     (Principal Executive Officer)


/s/Michael R. Sand    Executive Vice President, Secretary   December 21, 2001
--------------------  and Director
Michael R. Sand

/s/Dean J. Brydon     Chief Financial Officer               December 21, 2001
--------------------  (Principal Financial and Accounting
Dean J. Brydon        Officer)

/s/Andrea M. Clinton
--------------------  Director                              December 21, 2001
Andrea M. Clinton


/s/Robert Backstrom   Director                              December 21, 2001
--------------------
Robert Backstrom


--------------------  Director
Richard R. Morris

/s/David A. Smith     Director                              December 21, 2001
--------------------
David A. Smith

/s/Peter J. Majar     Director                              December 21, 2001
--------------------
Peter J. Majar

/s/Jon C. Parker      Director                              December 21, 2001
--------------------
Jon C. Parker

/s/James C. Mason     Director                              December 21, 2001
--------------------
James C. Mason

                                   82
<PAGE>



                              EXHIBIT 21

                     SUBSIDIARIES OF THE REGISTRANT





Parent
------

Timberland Bancorp, Inc.

                                        Percentage       Jurisdiction or
Subsidiaries                           of Ownership   State of Incorporation
------------                           ------------   ----------------------

Timberland Bank                            100%              Washington

Timberland Service Corporation (1)         100%              Washington

-----------
(1) This corporation is a wholly owned subsidiary of Timberland Bank.

<PAGE>



                                 EXHIBIT 23

                          CONSENT OF ACCOUNTANTS

<PAGE>




             CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the use in this Form 10-K of our report, dated October
31, 2001, on the consolidated financial statements of Timberland Bancorp and
Subsidiaries.

/s/McGladrey & Pullen, LLP

Tacoma, Washington
December 13, 2001

<PAGE>