|SECURITIES AND EXCHANGE COMMISSION                         
|-----------------------------------------------------------
|Washington, D.C.  20549                                    
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|FORM 10-K                                                  
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|[X]                                                        
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|[   ]                                                      
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|TIMBERLAND BANCORP, INC.                                   
|(Exact name of registrant as specified in its charter)     
|                                                           
|Washington                                                 
|(State or other jurisdiction of incorporation              
|or organization)                                           
|                                                           
|624 Simpson Avenue, Hoquiam, Washington                    
|(Address of principal executive offices)                   
|                                                           
|Registrant's telephone number, including area code:        
|                                                           
|Securities registered pursuant to Section 12(b) of the Act:
|                                                           
|Securities registered pursuant to Section 12(g) of the Act:
|                                                           

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    NOCheck whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):  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.

DOCUMENTS INCORPORATED BY REFERENCE

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|------------- | ----------------------------------------------------------------------------------- | ---------------------------------------------------------------------------
|**PART I**.   |                                                                                     |                                                                            
|              | **Item 1. Business**                                                                |                                                                            
|              |                                                                                     | General                                                                    
|              |                                                                                     | Market Area                                                                
|              |                                                                                     | Lending Activities                                                         
|              |                                                                                     | Investment Activities                                                      
|              |                                                                                     | Deposit Activities and Other Sources of Funds                              
|              |                                                                                     | Regulation of the Bank                                                     
|              |                                                                                     | Regulation of the Company                                                  
|              |                                                                                     | Taxation                                                                   
|              |                                                                                     | Competition                                                                
|              |                                                                                     | Subsidiary Activities                                                      
|              |                                                                                     | Personnel                                                                  
|              | **Item 2. Properties**                                                              | 34                                                                         
|              | **Item 3. Legal Proceedings**                                                       | 36                                                                         
|              | **Item 4. Submission of Matters to a Vote of Security Holders**                     | 36                                                                         
|**PART II.**  |                                                                                     |                                                                            
|              | **Item 5. Market for Registrant's Common Equity and Related Stockholder Matters**   | 36                                                                         
|              | **Item 6. Selected Financial Data**                                                 | 37                                                                         
|              | **Item 7. Management's Discussion and Analysis of Financial Condition and Results** |                                                                            
|              | **of Operations**                                                                   | 39                                                                         
|              |                                                                                     | General                                                                    
|              |                                                                                     | Operating Strategy                                                         
|              |                                                                                     | Market Risk and Asset and Liability Management                             
|              |                                                                                     | Comparison of Financial Condition at September 30, 2003 and 2002           
|              |                                                                                     | Comparison of Financial Condition at September 30, 2002 and 2001           
|              |                                                                                     | Comparison of Operating Results for Years Ended September 30, 2003 and 2002
|              |                                                                                     | Comparison of Operating Results for Years Ended September 30, 2002 and 2001
|              |                                                                                     | Nonperforming Assets                                                       
|              |                                                                                     | Average Balances, Interest and Average Yields/Cost                         
|              |                                                                                     | Rate/Volume Analysis                                                       
|              |                                                                                     | Liquidity and Capital Resources                                            
|              |                                                                                     | Effect of Inflation and Changing Prices                                    
|              | **Item 7A. Quantitative and Qualitative Disclosures About Market Risk**             | 51                                                                         
|              | **Item 8. Financial Statements and Supplementary Data**                             | 51                                                                         
|              | **Item 9. Changes in and Disagreements with Accountants on Accounting and**         |                                                                            
|              | **Financial Disclosure**                                                            | 88                                                                         
|              | **Item 9A. Controls and Procedures**                                                | 88                                                                         
|**PART III.** |                                                                                     |                                                                            
|              | **Item 10. Directors and Executive Officers of the Registrant**                     | 88                                                                         
|              | **Item 11. Executive Compensation**                                                 | 89                                                                         
|              | **Item 12. Security Ownership of Certain Beneficial Owners and Management**         | 89                                                                         
|              | **Item 13. Certain Relationships and Related Transactions**                         | 90                                                                         
|              | **Item 14. Principal Accountant Fees and Services**                                 | 90                                                                         
|**PART IV.**  |                                                                                     |                                                                            
|              | **Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K**       | 90                                                                         

<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, 2003, the Company had total assets of $449.6 million, total deposits of $307.7 million and
total shareholders' equity of $77.6 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 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, opened in 1974, Montesano, opened in 1975, and Ocean Shores, opened in 1977), 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, Tumwater opened in 2001 and Olympia, opened in 2003), and
two branch offices in Kitsap County (Poulsbo, opened in 1999 and Silverdale, opened in 2003).   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; Pierce, Thurston and Kitsap Counties with their
dependence on state and federal government; and King County with its broadly diversified economic base.  Each of
these markets present operating risks to the Bank.  The Bank's expansion into Thurston, King and Kitsap
Counties and four

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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.

Grays Harbor County has a population of 67,000 according to the U.S. Census Bureau 2000 census.  The
economic base in Grays Harbor has been historically dependent on the timber and fishing industries.  Other industries
that support the economic base in Grays Harbor are tourism, agriculture, shipping and transportation, and technology.
According to the latest data available from the Washington State Employment Security Department, the unemployment
rate in Grays Harbor County has increased to 8.5% at August 31, 2003 from 8.3% at August 31, 2002.  The Bank has
four branches (including its home office) located throughout the county.  While
economic activity was somewhat suppressed during this past year when compared to
previous years, the demand for loans to facilitate the construction of single
family homes remained strong in this market area.

Pierce County is the second most populated county in the state and has a population of 701,000 according to
the U.S. Census Bureau 2000 census.  The economy in Pierce County is diversified with the presence of military related
government employment (Fort Lewis Army Base and McChord Air Force Base), transportation and shipping
employment (Port of Tacoma), and aerospace (Boeing) related employment.  According to the latest data available from
the Washington State Employment Security Department, the unemployment rate for the Pierce County area increased
to 7.7% at August 31, 2003 from 7.2% at August 31, 2002.  The Bank has four branches in Pierce County and has plans
to open a branch in Gig Harbor in March 2004.  These branches have been responsible for a substantial portion of the
Bank's construction lending activities.  While economic activity was somewhat
suppressed during this past year when compared to previous years, the demand for
loans to facilitate the construction of single family homes remained strong in
this market area.

Thurston County has a population of 207,000 according to the U.S. Census Bureau 2000 census.  Thurston
County is home of Washington State's capital (Olympia) and its economic base is largely driven by state government
related employment.  According to the latest data available from the Washington State Employment Security
Department, the unemployment rate for the Thurston County area increased to 5.7% at August 31, 2003 from 5.2% at
August 31, 2002.  The Bank currently has four branches in the county.  The newest branch opened on September 3, 2003
and serves as the headquarters for the Bank's Business Banking Division.  This county has a stable economic base
primarily due to the state government presence.

Kitsap County has a population of 232,000 according to the U.S. Census Bureau 2000 census.   Timberland
has two branches in Kitsap County.  The economic base of Kitsap County is largely supported by military related
government employment through the United States Navy.   According to the latest data available from the Washington
State Employment Security Department, the unemployment rate for the Kitsap County area remained stable at 5.8% at
both August 31, 2003 and August 31, 2002.  Reductions in the naval personnel stationed in Kitsap County would have
a negative impact on the county's economy and would negatively impact the Bank's lending opportunities in this market.

King County is the most populated county in the state and has a population of 1.7 million according to the U.S.
Census Bureau 2000 census.  Timberland has one branch in King County in the city of Auburn.  King County's economic
base is diversified with many industries including shipping and transportation, aerospace (Boeing), and
computer technology and biotech industries.   According to the latest data available from the Washington State Employment
Security Department, the unemployment rate for the King County area increased to 6.6% at August 31, 2003 from 6.3%
at August 31, 2002.  The County's overall economic conditions have been weakened over the past couple of years due
in large part to slowing in the aerospace and computer technology industries. 
The slowdown in the economy has negatively impacted commercial loan demand and
has decreased the Bank's origination of commercial real estate and commercial
business loans in the Southern King County market.

**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. Since 1998, the Bank has emphasized its origination of construction
and land development loans and commercial real estate loans. The Bank's net
loans receivable, including loans held for sale, totaled approximately

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$322.2 million at September 30, 2003, representing
approximately 71.7% of consolidated total assets, and at that date construction
and land development loans, and loans secured by commercial properties were
$197.1 million, or 54.2%, of total loans.  Construction and land
development loans and commercial real estate loans typically have higher rates
of return then one-to-four family loans, however, they also present a higher
degree of risk.  See " -- Lending Activities -- Construction and Land
Development Lending" and "-- Lending Activities -- Commercial Real Estate
Lending."

The Bank's
internal loan policy limits the maximum amount of loans to one borrower to 25%
of its capital. At September 30, 2003, the maximum amount which the Bank could
have lent to any one borrower and the borrower's related entities was
approximately $16.5 million under its policy. At September 30, 2003, the Bank
had no loans with an aggregate outstanding balance in excess of this amount. At
that date, the Bank had 44 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 $8.3 million,
which represents loans secured by a mobile home park and a retirement facility
in Thurston County.  These two loans were performing according to their
terms at September 30, 2003.

**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.

|                             | At September 30,      
|---------------------------- | ----------------------
|                             | 2003                  
|                             | Amount                
|                             | (Dollars in thousands)
|Mortgage Loans:              |                       
|One- to- four family(1)(2)   | $ 95,371              
|Multi-family                 | 18,241                
|Commercial                   | 102,972               
|Construction and land        |                       
|development                  | 94,117                
|Land(2)                      | 15,628                
|Total mortgage loans         | 326,329               
|                             |                       
|Consumer Loans:              |                       
|Home equity and second       |                       
|mortgage                     | 19,233                
|Other                        | 8,799                 
|                             | 28,032                
|Commercial business loans    | 9,475                 
|Total loans                  | 363,836               
|                             |                       
|Less:                        |                       
|Undisbursed portion of loans |                       
|in process                   | (34,785)              
|Unearned income              | (2,924)               
|Allowance for loan losses    | (3,891)               
|Market value adjustment of   |                       
|loans held-for-sale          | --                    
|Total loans receivable, net  | $322,236              

**Residential One- to- Four Family Lending**.  At September 30, 2003, $95.4 million, or 26.2%, 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, fixed rate loans including 15,
20, 30, and five and seven year balloon reset 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

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automated underwriting program, which preliminarily qualifies a loan as conforming to FHLMC underwriting standards
when the loan is originated.  At September 30, 2003, $33.5 million, or 35.1%, 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 2.875% to 4.00%.  Loans tied to the prime rate or to LIBOR indices typically do not have periodic, or
lifetime adjustments limits.  Loans tied to these indices normally have margins ranging from 0.0% to 3.0%.  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, 2003, $61.9 million,
or 64.9%, of the Bank's one- to- four family loan portfolio consisted of ARM loans.

A 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 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.

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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 80% (90% 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
it is possible that 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, 2003, the composition of the Bank's construction and land development loan portfolio was
as follows:

|                                      | Outstanding    | Percent of
|------------------------------------- | -------------- | ----------
|                                      | Balance        | Total     
|                                      | (In thousands)
|                                     
|Speculative construction              | $26,350        | 28.00%    
|Custom and owner/builder construction | 49,876         | 52.99     
|Multi-family                          | 3,940          | 4.19      
|Land development                      | 7,126          | 7.57      
|Commercial real estate                | 6,825          | 7.25      
|Total                                 | $94,117        | 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 65 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 current rates ranging from 5.00% to 7.50%, and with a loan-to-value ratio of no more than 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, 2003 speculative construction
loans totaled $26.4 million, or 28.0%, of the total construction loan portfolio.  At September 30, 2003, the Bank had
11 borrowers each with aggregate outstanding speculative loan balances of more than $500,000. The largest

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aggregate
outstanding balance to one borrower amounted to $3.2 million, and the largest outstanding balance for a single
speculative loan was $760,000.  At September 30, 2003, one speculative construction loan with a balance of $192,000
was 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 6.0% to 7.50% 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.

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, 2003, subdivision development loans totaled $7.1 million, or 7.6% 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 fixed or variable 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, 2003, the largest land development loan
had an outstanding loan balance of $1.3 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,
2003, such construction loans amounted to $10.8 million, or 11.4% of
construction loans.  These loans are secured by motels, apartment buildings,
condominiums, office buildings and retail rental space located in the Bank's primary market area and currently range
in amount from $108,000 to $3.5 million.  At September 30, 2003, the largest outstanding multi-family construction loan
had a balance of $3.5 million (including $2.3 million of undisbursed loans in process balance), and was performing
according to terms.  At September 30, 2003, the largest outstanding commercial real estate construction loan had a
balance of $2.5 million (including $160,000 of undisbursed loans in process balance), and was performing according
to terms.  This loan represents a 55% participation interest in a construction loan secured by a commercial property
located in Clark County, Washington.  Periodically, the Bank purchases (without recourse to the seller other than for
fraud) from other lenders participation interests in multi-family and commercial construction loans.  The Bank
underwrites such participation interests according to its own standards.

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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 generally 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 inspectors 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.  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 occasionally 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, 2003, the Bank had outstanding $1.1 million of real estate contracts.

**Multi-Family Lending.**  At September 30, 2003, the Bank had $18.2 million, or 5.0% 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, 2003, approximately 34.3% of the Bank's multi-family loans represent participation interests
in loans, secured by properties generally 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 2.00% to 3.50% over
the one-year constant maturity U.S. Treasury Bill Index or a matched term FHLB
advance, with principal and interest

7

<PAGE>

payments fully amortizing over terms of up to 30 years.
Multi-family loans currently range in principal balance from $40,000 to $6.1
million. At September 30, 2003, 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, 2003, 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
times 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 $103.0 million, or 28.3% of total
loans receivable at September 30, 2003, and consisted of 266 loans. 
Commercial mortgage loans have now surpassed one-to-four family mortgage loans
as the largest category in the Bank's loan portfolio.  The Bank originated
$21.0 million of commercial mortgage loans during the year ended September 30,
2003 compared to $40.5 million originated during the year ended September 30,
2002.  The decrease in commercial mortgage loan originations is primarily
attributed to a decrease demand for this product due to slow economic
conditions.  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 balances of commercial real estate loans
currently ranges between $6,000 and $4.9 million.  At September 30, 2003, the largest commercial real estate loan
($4.9 million) was secured by a commercial property located in Olympia,
Washington.  At September 30, 2003, three commercial real estate loans totaling $538,000 were not performing
according to their 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
1.10 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
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.  The Bank
also requests annual financial information from the borrowers.

**Land Lending**. The Bank 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, 2003, land loans  totaled $15.6

8

<PAGE>

million, or 4.3% 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 $5,000 to $500,000.  The
largest land loan had an outstanding balance of $434,000 at September 30, 2003 and was performing according to its
terms.  At September 30, 2003, 11 land loans totaling $521,000 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, 2003, consumer loans amounted to $28.0
million, or 7.7%, of the total loan portfolio.

At September 30, 2003, the largest component of the consumer loan portfolio consisted of second mortgage
loans and home equity lines of credit, which totaled $19.2 million, or 5.3%, 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 or the
prime rate.

In July 1997, the Bank began issuing VISA credit cards to its existing customers.  At September 30, 2003,
credit card loans amounted to $1.6 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, 2003, there were $212,000
of consumer loans delinquent in excess of 90 days.

**Commercial Business Lending**.
Commercial business loans totaled $9.5 million, or 2.6% of total loans
receivable at September 30, 2003, and consisted of 113 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. Currently, the division is staffed by six commercial lenders. Commercial
business loans are generally secured by business equipment, accounts receivable,
inventory or other property and are made at variable rates of interest equal

9

<PAGE>

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, 2003 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   | 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            | $ 4,387  | $ 1,335        | $ 2,289 | $  9,442 | $ 77,918 | $ 95,371
|Multi-family                    | 839      | 255            | 438     | 12,951   | 3,758    | 18,241  
|Commercial                      | 8,135    | 206            | 1,133   | 66,828   | 26,670   | 102,972 
|Construction and land           |          |                |         |          |          |         
|development(1)                  | 40,055   | 3,956          | 2,088   | 8,612    | 39,406   | 94,117  
|Land                            | 1,341    | 3,374          | 8,974   | 826      | 1,113    | 15,628  
|Consumer loans:                 |          |                |         |          |          |         
|Home equity and second mortgage | 848      | 635            | 1,061   | 2,079    | 14,610   | 19,233  
|Other                           | 1,549    | 1,610          | 3,159   | 1,399    | 1,082    | 8,799   
|Commercial business loans       | 2,936    | 853            | 2,274   | 948      | 2,464    | 9,475   
|Total                           | 60,090   | 12,224         | 21,416  | 103,085  | 167,021  | 363,836 
|                                |          |                |         |          |          |         
|Less:                           |          |                |         |          |          |         
|Undisbursed portion of loans    |          |                |         |          |          |         
|in process                      |          |                |         |          |          | (34,785)
|Unearned income                 |          |                |         |          |          | (2,924) 
|Allowance for loan losses       |          |                |         |          |          | (3,891) 
|Loans receivable, net           |          |                |         |          |          | $322,236

(1)     Includes construction/permanent that convert to a permanent mortgage loan once construction is completed.

10

<PAGE>

The following table sets forth the dollar amount of all loans due after September 30, 2003, 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              | $ 33,505 | $ 61,866         | $ 95,371
|Multi-family                      | 2,655    | 15,586           | 18,241  
|Commercial                        | 10,224   | 92,748           | 102,972 
|Construction and land development | 83,058   | 11,059           | 94,117  
|Land                              | 14,692   | 936              | 15,628  
|Consumer loans:                   |          |                  |         
|Home equity and second mortgage   | 6,074    | 13,159           | 19,233  
|Other                             | 8,562    | 237              | 8,799   
|Commercial business loans         | 1,760    | 7,715            | 9,475   
|Total                             | $160,530 | $203,306         | $363,836

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 and four 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.  Commercial business loans up to and including $250,000 may
also be approved by the Bank's Business Banking Division manager.  All other loans (except commercial business
loans) up to and including $750,000 may be approved by two members of the Bank's Loan Committee.  Loans in excess
of $750,000, as well as loans of any size granted to a single borrower whose aggregate lending relationship exceeds
$750,000, must be approved by the Bank's Board of Directors or a committee consisting of at least two outside
Directors.

**Loan Originations, Purchases and Sales**.  During the years ended September 30, 2003 and 2002, the Bank's
total gross loan originations were $255.5 million and $203.6 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
generally is to retain in its portfolio all
of the ARM loans and sell fixed rate one-to-four family mortgage loans 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

11

<PAGE>

objectives. Loans sold in the secondary market are generally
sold on a servicing retained basis. At September 30, 2003, the Bank's loan
servicing portfolio totaled $161.7 million.

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

|                                            | Year Ended September 30,
|------------------------------------------- | ------------------------
|                                            | 2003                    
|                                            | (In thousands)          
|Loans originated:                           |                         
|Mortgage loans:                             |                         
|One- to- four family                        | $ 115,046               
|Multi-family                                | 718                     
|Commercial                                  | 21,012                  
|Construction and land development           | 90,480                  
|Land                                        | 7,680                   
|Consumer                                    | 18,530                  
|Commercial business loans                   | 2,060                   
|Total loans originated                      | 255,526                 
|                                            |                         
|Loans purchased:                            |                         
|Mortgage loans:                             |                         
|One- to- four family                        | 338                     
|Multi-family                                | --                      
|Commercial                                  | 800                     
|Construction                                | --                      
|Land                                        | --                      
|Commercial business loans                   | --                      
|Total loans purchased                       | 1,138                   
|Total loans originated and purchased        | 256,664                 
|                                            |                         
|Loans sold or converted to securities:      |                         
|Total whole loans sold                      | (108,812)               
|Participation loans                         | --                      
|Loans converted to securities               | --                      
|Total loans sold or converted to securities | (108,812)               
|                                            |                         
|Loan principal repayments                   | (145,716)               
|Decrease (increase) in other items, net     | (2,428)                 
|Net increase (decrease) in loans receivable | $          (292)        

The increased origination of
    one-to-four family mortgage loans was primarily the result of refinancing
    activity prompted by a decline in interest rates to historically low levels. 
    Increased fixed rate loan originations resulted in increased loans sold. 
    It is anticipated that increasing interest rates will diminish the
    refinancing activity of one-to-four family loans and, correspondingly, the
    volume of loans sold.

**Loan Origination Fees**.  The Bank
    generally 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 0.5% 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 $2.9 million at September 30, 2003.

12

<PAGE>

**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.  Attempts to contact the borrower by
telephone generally begin on or before 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.

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 in foreclosure 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. 
Loans becoming 90 days or more past due are placed on non-accrual status, with
any accrued interest reversed against interest income, unless they are well
secured and in the process of collection.

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.

13

<PAGE>

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

At September 30,2003
2002
2001
2000
1999(Dollars in thousands)Loans accounted for on a nonaccrual basis:Mortgage loans:One- to- four family
$  1,409
$  1,138
$      863
$  1,203
$     941Commercial
538
688
2,091
551
1,675Construction and land development
1,185
1,571
491
1,267
390Land
521
251
610
233
253Consumer loans
212
49
26
273
330Commercial business loans
30
44
10
85
--Total
3,895
3,741
4,091
3,612
3,589Accruing loans which are contractually past due 90 days or more:Mortgage loans:Construction and land development
--
--
--
--
449Total
--
--
--
--
449Total of nonaccrual and 90 days past due loans
3,895
3,741
4,091
3,612
4,038Real estate owned and other repossessed assets
1,258
680
1,006
1,966
867Total nonperforming assets
$  5,153
$ 4,421
$ 5,097
$ 5,578
$ 4,905Restructured loans
--
--
--
--
509Nonaccrual and 90 days or more past dueloans as a percentage of loans receivable, net
1.19%
1.15%
1.25%
1.14%
1.56%Nonaccrual and 90 days or more past dueloans as a percentage of total assets
0.87%
0.87%
1.06%
0.98%
1.31%Nonperforming assets as a percentage of total assets
1.15%
1.03%
1.32%
1.52%
1.60%Loans receivable, net(1)
$326,127
$326,158
$326,818
$315,646
$258,141Total assets
$449,633
$431,054
$386,305
$368,080
$307,116_______________
(1)     Includes loans held-for-sale and is before the allowance for loan losses.Additional interest income which would have been recorded for the year ended September 30, 2003 had
nonaccruing loans been current in accordance with their original terms amounted to approximately $338,000.  No
interest income was recorded on nonaccrual loans for the year ended September 30, 2003.

**Real
Estate Owned and Other Repossessed Items.**  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, 2003, the Bank had $1.26 million in real estate owned consisting primarily of six one- to- four family
properties totaling $892,000, six land parcels totaling $197,000, and a commercial real estate property of $157,000.

**Restructured Loans.**
Under accounting principles generally accepted in the United States of America,
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

14

<PAGE>

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, 2003.

**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.

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 30,2003
2002
2001(In thousands)Loss
$           --
$             --
$            --Doubtful
--
3
5Substandard(1)
9,112
7,965
9,528Special mention(1)
6,607
12,588
5,820Allowance for loan losses
3,891
3,630
3,050
_____________ (1)
For further information concerning the increase in classified assets, see "-- Lending Activities --
Nonperforming Assets and Delinquencies."The Bank's
classified assets decreased by $4.8 million from September 30, 2002 to September 30, 2003, primarily as
a result of a $6.0 million decrease in loans classified as special mention and a
$1.1 million increase in loans classified as substandard.

Special mention loan are defined as those credits deemed by management to have some potential weakness that
deserve management's close attention.  If left uncorrected these potential weaknesses may result in the deterioration of
the payment prospects of the loan.  Assets in this category are not adversely classified and currently do not expose the
Bank to sufficient risk to warrant a substandard classification.  Four relationships comprise 89% of the loans classified.
They include a $3.5 million loan on a 142-unit motel in Pierce County, a $1.3 land development loan in Grays Harbor
County, a $534,000 commercial business loan to a company located in King County, and a $521,000 land development
loan in Thurston County.  Each of these loans is current and paying in accordance with the required loan terms.

Substandard loans are classified as those loans that are inadequately protected by the current net worth, and
paying capacity of the obligor, or of the collateral pledged.  Assets classified as substandard have a well-defined
weakness, or weaknesses that jeopardize the repayment of the debt.  If the weakness, or weaknesses are not corrected

15

<PAGE>

there is the distinct possibility that some loss will be sustained.  The aggregate amount of loans classified as substandard
at September 30, 2003 increased by $1.1 million to $9.1 million from the amount reported at September 30, 2002.  At
September 30, 2003, 60 loans were classified as substandard compared to 58 at September 30, 2002.  The largest loan
currently classified substandard is a $2.0 million loan secured by an Alzheimer's/assisted living facility in Kitsap
County.  This loan is current and paying in accordance with terms of the loan.  The next largest loans classified as
substandard include a commercial business loan of $1.7 million (secured by accounts receivable, equipment, and real
estate equity) to a contracting company headquartered in King County; a land development loan of $872,000 secured
by a land site in Pierce County; and a $625,000 loan secured by a mobile home park located in Kitsap County.  At
September 30, 2003, the commercial business loan was current, the mobile home park loan was 30 days delinquent, and
the land development loan was past 90 days due and on non-accrual status.

**Allowance for Loan Losses.**The allowance for loan losses is maintained to cover
estimated losses 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
be 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.

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.

The Board of
Directors reviews the adequacy of the allowance for loan losses 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 to maintain the allowance.

At September 30, 2003, the Bank had an allowance for loan losses of $3.9 million.  Management believes that
the amount maintained in the allowance is adequate to absorb estimated losses 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 accounting principles generally accepted in the United States of America,
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.16

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

 Year Ended September 30,2003
2002
2001
2000
1999(Dollars in thousands)Allowance at beginning of year
$ 3,630
$ 3,050
$2,640
$2,056
$ 1,728Provision for loan losses
347
992
1,400
885
363Recoveries:Mortgage loans:Commercial real estate
--
96
20
260
--Consumer loans
12
13
2
2
--Commercial business loans
70
--
--
--
--Total recoveries
82
109
22
262
--Charge-offs:Mortgage loans:One- to- four family
71
16
21
10
--Other
97
153
324
373
35Commercial business loans
--
352
667
180
--Total charge-offs
168
521
1,012
563
35Net charge-offs
86
412
990
301
35Balance at end of year
$ 3,891
$ 3,630
$3,050
$2,640
$2,056Allowance for loan losses as a  percentage of totalloans (net)(1) outstanding at the end of the year
1.19%
1.11%
0.93%
0.84%
0.80%Net charge-offs as a percentage of average loansoutstanding during the year
0.03%
0.13%
0.31%
0.01%
--%Allowance for loan losses as a percentage ofnonperforming  loans at end of year
99.90%
97.03%
74.55%
73.09%
50.92%______________(1)     Total loans (net) includes loans held for sale and is before the allowance for loan losses.

17

<PAGE>

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

|                     | At September 30,      
|-------------------- | ----------------------
|                     | 2003                  
|                     |                       
|                     |                       
|                     |                       
|                     |                       
|                     | Amount                
|                     | (Dollars in thousands)
|                     |                       
|Mortgage loans:      |                       
|One- to- four family | $  317                
|Multi-family         | 374                   
|Commercial           | 1,041                 
|Construction         | 583                   
|Land                 | 169                   
|Non-mortgage loans:  |                       
|Consumer loans       | 458                   
|Commercial business  |                       
|loans                | 949                   
|Total allowance      |                       
|for loan losses      | $3,891                

18

<PAGE>

**Investment Activities**

At September 30, 2003, the Company's investment portfolio totaled $54.3 million,
primarily consisting of $34.4 million of mutual funds available for sale, $17.1 million of mortgage-backed securities available for sale,
$2.5 million of U.S. agency securities available for sale, and $0.3 million of
securities held to maturity.  This compares with
a total portfolio of $41.6 million at September 30, 2002, comprised of $23.7 million of
mutual funds available for sale and
$17.9 million of mortgage-backed securities available for sale.  The mutual
funds invest primarily in mortgage-backed products and U.S. agency securities.  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, mortgage-backed securities,
and mutual funds.  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,      
|------------------------------------- | ----------------------
|                                      | 2003                  
|                                      | Carrying              
|                                      | Value                 
|                                      | (Dollars in thousands)
|                                      |                       
|*Held-to-Maturity:*                   |                       
|                                      |                       
|                                      |                       
|Mortgage-based securities             | $     279             
|                                      |                       
|*Available-for-Sale (at fair value):* |                       
|                                      |                       
|                                      |                       
|U.S. Agency Securities                | 2,511                 
|Mortgage-backed securities            | 17,098                
|Municipal bonds                       | 12                    
|Mutual funds                          | 34,410                
|Equity securities                     | --                    
|                                      |                       
|Total portfolio                       | $54,310               

19

<PAGE>

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, 2003.  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   
|                      | (Dollars in thousands)
|                      |                        |            |                 |         
|*Held-to-Maturity:*   |                        |            |                 |         
|                      |                        |            |                 |         
|                      |                        |            |                 |         
|Mortgage-backed       |                        |            |                 |         
|securities            | $            --        | --%        | $            -- | --%     
|                      |                        |            |                 |         
|*Available-for-Sale:* |                        |            |                 |         
|                      |                        |            |                 |         
|                      |                        |            |                 |         
|U.S. agency           |                        |            |                 |         
|securities            | --                     | --         | 2,511           | 3.41    
|Mortgage-backed       |                        |            |                 |         
|securities            | --                     | --         | 307             | 6.23    
|Municipal bonds       | --                     | --         | 12              | 6.92    
|Mutual funds          | 34,410                 | 2.24       | --              | --      
|Equity securities     | --                     | --         | --              | --      
|                      |                        |            |                 |         
|Total portfolio       | $34,410                | 2.24       | $2,830          | 3.73    

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.  The Bank actively seeks consumer and commercial checking
accounts through a checking account acquisition marketing program that was
implemented in 2000.  At September 30, 2003 the Bank had 28.2% of total
deposits in non-interest bearing accounts and checking accounts.

At September 30, 2003 the Bank had $22.2 million of jumbo certificates of deposit of $100,000 or more.  The
Bank does not solicit brokered deposits and believes that its jumbo certificates of deposit, which represented 7.21% of
total deposits at September 30, 2003, present similar interest rate risk compared to its other deposit products.

20

<PAGE>

The following table sets forth information concerning the Bank's deposits at September 30, 2003.

|                                                | Weighted       |         | Percentage
|----------------------------------------------- | -------------- | ------- | ----------
|                                                | Average        |         | of Total  
|Category                                        | Interest Rate  | Amount  | Deposits  
|                                                | (In thousands)
|                                                |                |         |           
|Non-Interest Bearing                            | -%             | $29,133 | 9.47%     
|Negotiable order of withdrawal ("NOW") Checking | 0.79           | 57,614  | 18.73     
|Passbook Savings                                | 0.71           | 49,572  | 16.11     
|Money Market Accounts                           | 1.19           | 39,444  | 12.82     
|                                                |                |         |           
|Certificates of Deposit(1)                      |                |         |           
|                                                |                |         |           
|Maturing within 1 year                          | 2.31           | 99,241  | 32.26     
|Maturing after 1 year but within 2 years        | 2.64           | 23,640  | 7.68      
|Maturing after 2 years but within 5 years       | 3.98           | 7,014   | 2.28      
|Maturing after 5 years                          | 4.22           | 2,014   | 0.65      

The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until
maturity as of September 30, 2003.  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           | $ 5,152       
|Over three through six months  | 4,559         
|Over six through twelve months | 7,466         
|Over twelve months             | 5,012         
|Total                          | $22,189       

21

<PAGE>

****

|                                  | At September 30,      
|--------------------------------- | ----------------------
|                                  | 2003                  
|                                  |                       
|                                  |                       
|                                  | Amount                
|                                  | (Dollars in thousands)
|                                  |                       
|Non-interest-bearing              | $ 29,133              
|NOW checking                      | 57,614                
|Passbook savings accounts         | 49,572                
|Money market deposit              | 39,444                
|Certificates of deposit which     |                       
|mature in the year ending:        |                       
|Within 1 year                     | 99,241                
|After 1 year, but within 2 years  | 23,640                
|After 2 years, but within 5 years | 7,014                 
|Certificates maturing thereafter  | 2,014                 
|                                  |                       
|Total                             | $307,672              

22

<PAGE>

****

|               | At September 30,
|-------------- | ----------------
|               | 2003            
|               | (In thousands)  
|               |                 
|0.00 - 1.99%   | $  50,569       
|2.00 - 3.99%   | 68,274          
|4.00 - 4.99%   | 9,758           
|5.00 - 5.99%   | 1,999           
|6.00 - 6.99%   | 1,157           
|7.00% and over | 152             
|Total          | $131,909        

**Time Deposits by Maturities.**  The following table sets forth the amount and maturities of time deposits at
September 30, 2003.

|               | Amount Due    
|-------------- | --------------
|               |               
|               |               
|               | Less Than     
|               | One Year      
|               | (In thousands)
|               |               
|0.00 - 1.99%   | $44,781       
|2.00 - 3.99%   | 49,702        
|4.00 - 4.99%   | 3,583         
|5.00 - 5.99%   | 550           
|6.00 - 6.99%   | 605           
|7.00% and over | 20            
|Total          | $99,241       

**Deposit Activities.**  The following table sets forth the savings activities of the Bank for the periods indicated.

|                                      | Year Ended September 30,
|------------------------------------- | ------------------------
|                                      | 2003                    
|                                      | (In thousands)          
|                                      |                         
|Beginning balance                     | $292,316                
|Net deposits before interest credited | 9,786                   
|Interest credited                     | 5,570                   
|Net increase in deposits              | 15,356                  
|Ending balance                        | $307,672                

****

23

<PAGE>

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, 2003, the Bank maintained an uncommitted credit
facility with the FHLB-Seattle that provided for immediately available advances up to an aggregate amount of 35% of
the Bank's total assets, under which $61.6 million was outstanding.

The following table sets forth certain information regarding borrowings by the Bank at the end of
and during the periods indicated:

|                                    | At or For the           
|----------------------------------- | ------------------------
|                                    | Year Ended September 30,
|                                    | 2003                    
|                                    | (Dollars in thousands)  
|                                    |                         
|Average short-term FHLB             |                         
|advances outstanding                | $ 4,833                 
|                                    |                         
|Weighted average rate               |                         
|paid on short-term FHLB advances    | 4.84%                   
|                                    |                         
|Balance of short-term FHLB advances |                         
|outstanding at end of period        | 6,668                   
|                                    |                         
|Average total FHLB advances         | 61,715                  
|                                    |                         
|Weighted average rate paid on total |                         
|FHLB advances                       | 5.47%                   
|                                    |                         
|Total FHLB advances outstanding     |                         
|at end of period                    | 61,605                  



**General**

As a state-chartered savings bank, the Bank is subject to applicable provisions of Washington law and
regulations of the Division adopted thereunder.  State 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.

24

<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.  The Bank's accounts are insured by the SAIF to the maximum extent permitted by law.  As insurer of
the Bank's deposits, the FDIC has examination, supervisory and enforcement authority over the Bank.

The FDIC has established a risk-based system for setting deposit insurance assessments.  Under the risk-based
assessment system, an institution's insurance assessment varies according to the level of capital the institution holds,
the balance of insured deposits during the preceding two quarters, and the degree to which it is the subject of supervisory
concern.  In addition, regardless of the potential risk to the insurance fund, federal law requires the ratio of reserves to
insured deposits at $1.25 per $100.  Both funds currently meet this reserve ratio.  Since 1997, the assessment rate for
both SAIF and BIF deposits ranged from zero to 0.27% of covered deposits.  As a well capitalized bank, the Bank
qualified for the lowest rate on its deposits for 2003.

In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against insured
deposits to be paid to the Financing Corporation ("FICO") to service FICO debt incurred in the 1980s to help fund the
thrift industry cleanup.  The FICO assessment rate is adjusted quarterly.

Prior to 2000, the FICO assessment rate for BIF-insured deposits was one-fifth the rate applicable to deposits
insured by the SAIF.  Beginning in 2000, SAIF- and BIF-insured deposits were assessed at the same rate by FICO.  As
a result, BIF FICO assessments will be higher than in previous periods while SAIF FICO assessments will be lower.
For the fourth quarter of 2003, the annualized rate was 1.52 cents per $100 of insured deposits.

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**

The FDIC is required to take certain supervisory actions against undercapitalized savings institutions, the
severity of which depends upon the institution's degree of undercapitalization.  Generally, an institution that has a ratio
of total capital to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be undercapitalized.  An institution that has a total risk-based capital ratio less than 6%, a Tier
I capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be significantly undercapitalized
and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be critically
undercapitalized.  Subject to a narrow exception, the FDIC is required to appoint a receiver or conservator for a savings
institution that is critically undercapitalized. FDIC regulations also require that a capital restoration plan be filed with
the FDIC within 45 days of the date a savings institution receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized.  Compliance with the plan must be guaranteed by any parent holding
company in an amount of up to the lesser of 5% of the institution's assets or the amount which would bring the
institution into compliance with all capital standards.  In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by
regulators and restrictions on growth, capital distributions and expansion.  The FDIC also could take any one of a
number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior
executive officers and directors.

25

<PAGE>

At September 30, 2003, 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, guidelines for all insured depository
institutions relating to: internal controls, information systems and internal audit systems;  loan documentation; credit
underwriting;  interest rate risk exposure; asset growth; asset quality;  earnings and compensation, fees and benefits.
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.  FDIC regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.

**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.  At September
30, 2003, the Bank had a Tier 1 leverage capital ratio of 14.8%.  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%.  At September 30,
2003, the Bank's ratio of total capital to risk-weighted assets as 21.4% and the
ratio of Tier 1 capital to risk weighted assets was 20.2%.  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, 2003, the Bank had a net
worth of 14.9% 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 may determine that the minimum adequate amount of capital for that bank is greater than the minimum standards
established in the regulation.

26

<PAGE>

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, 2003.  The definitions of the terms used in the table are those provided in the capital regulations issued by the FDIC.

|                                         | At September 30, 2003 
|---------------------------------------- | ----------------------
|                                         |                       
|                                         | Amount                
|                                         | (Dollars in thousands)
|                                         |                       
|Tier 1 (leverage) capital                | $65,790               
|Tier 1 (leverage) capital requirement    | 17,764                
|Excess                                   | $48,026               
|                                         |                       
|Tier 1 risk adjusted capital             | $65,790               
|Tier 1 risk adjusted capital requirement | 13,003                
|Excess                                   | $52,787               
|                                         |                       
|Total risk-based capital                 | $69,681               
|Total risk-based capital requirement     | 26,007                
|Excess                                   | $43,674               

|(1) | For the Tier 1 (leverage) capital and Washington regulatory capital calculations, percent of total average
assets of $444.1 million.  For the Tier 1 risk-based capital and total risk-based capital calculations, percent
of total risk-weighted assets of $325.1 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-Financial
Institutions**

Washington State recently enacted a new law regarding financial institution
parity. Primarily, the law affords Washington-chartered commercial banks the
same powers as Washington-chartered savings banks. In order for a bank

27

<PAGE>

to exercise these powers, it must provide 30
days notice to the Director of Washington Division of Financial Institutions and
the Director must authorize the requested activity. In addition, the law
provides that Washington-chartered commercial banks may exercise any of the
powers that the Federal Reserve has determined to be closely related to the
business of banking and the powers of national banks, subject to the approval of
the Director in certain situations. The law also provides that
Washington-chartered savings banks may exercise any of the powers of
Washington-chartered commercial banks, national banks and federally-chartered
savings banks, subject to the approval of the Director in certain situations.
Finally, the law provides additional flexibility for Washington-chartered
commercial and savings banks with respect to interest rates on loans and other
extensions of credit. Specifically, they may charge the maximum interest rate
allowable for loans and other extensions of credit by federally-chartered
financial institutions to Washington residents.

**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.  Negotiable order of withdrawal 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 non-personal time deposits at a savings bank.
Under Regulation D, a bank must maintain reserves against net transaction accounts in the amount of 3% on amounts
of $37.3 million or less, plus 10% on amounts in excess of $37.3 million.  In addition, a bank may designate and exempt
$5.0 million of certain reservable liabilities from these reserve requirements.  These amounts and percentages are subject
to adjustment by the Federal Reserve.  The reserve requirement on non-personal time deposits with original maturities
of less than 1.5 years is 0%.  As of September 30, 2003, the Bank's  deposit with the Federal Reserve Bank was $1.0
million.

28

<PAGE>

******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.

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,

29

<PAGE>

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.

**Gramm-Leach-Bliley Financial Services Modernization Act of 1999**

On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLB Act")
was signed into law.  The purpose of this legislation is 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 GLB Act:

| | (1) | repealed 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) | broadened the activities that may be conducted by national banks, banking subsidiaries of bank
holding companies and their financial subsidiaries;                                               
| |    
| | (3) | provided an enhanced framework for protecting the privacy of consumer information; and                                                                                                           
| |    
| | (4) | addressed a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of financial institutions.                                                     

The GLB Act also
imposed certain obligations on financial institutions to develop privacy policies, restrict the sharing
of nonpublic customer data with nonaffiliated parties at the customer's request, and establish procedures and practices
to protect and secure customer data.  These privacy provisions were implemented by regulations that were effective on
November 12, 2000.  Compliance with the privacy provisions was required by July 1, 2001.

**The USA Patriot Act**

In response to the events of September 11th, President George W. Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies.
Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions.

Among other requirements, Title III of the USAPATRIOT Act imposes the following requirements:

-    All financial institutions must establish anti-money laundering programs.

-     Financial institutions that establish, maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United States persons or their representatives (including foreign
individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money laundering.

-     Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent
accounts for foreign banks that do not have a physical presence in any country, and will be subject to certain record-
keeping obligations with respect to correspondent accounts of foreign banks.

-     Bank regulators are directed to consider a holding company's effectiveness in combating money laundering
when ruling on Federal Reserve Act and Bank Merger Act applications.

30

<PAGE>

To date, it has not been possible to predict the impact the USA PATRIOT Act and its implementing regulations
may have on the Company and the Bank.

**Sarbanes-Oxley Act of 2002**

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") was signed into law by President Bush on July 30,
2002 in response to public concerns regarding corporate accountability in connection with recent accounting scandals.
The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties
for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the
accuracy and reliability of corporate disclosures pursuant to the securities laws.

The Sarbanes-Oxley Act is the most far-reaching U.S. securities legislation enacted in some time. The
Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the Securities and Exchange Commission ("SEC"), under the Securities Exchange Act of 1934 ("Exchange
Act").

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate
governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller
General. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of directors and its committees.

**Acquisitions**

The BHCA 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
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.

31

<PAGE>

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
earning 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.

**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 February 14, 2003,, the Company announced a plan to repurchase 360,028 shares of the Company's stock.
This marked the Company's 11th stock repurchase plan.  As of September 30, 2003, the Company had repurchased
112,108 shares at an average price of $21.54.  As of September 30, 2003, the Company has cumulatively repurchased
2,710,671 (41.0%) 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, 2003, the Company's total risk based capital was 24.8% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was 23.6% of risk-weighted assets.

**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,
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.

32

<PAGE>

**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 previous 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 is 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
allowed an institution to suspend bad debt reserve recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years was 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 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 35% 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 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.

33

<PAGE>

**Audits**.
The Bank's federal income tax returns have been audited through September 30,
1997.

**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 deposits (its primary source
of lendable funds) and in the origination of loans.  Historically, its most direct competition for deposits has come
from large commercial banks, thrift institutions and credit unions in its primary market area. 
In times of
high interest rates, the Bank experiences 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 and offer non-deposit
investment services.

**Personnel**

As of September 30, 2003, the Bank had 177 full-time employees and 21 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 15 full-service facilities.	 The following table sets forth certain information regarding the
Bank's offices at September 30, 2003, all of which are owned, except for the Tacoma office, and the Data Center office
at 504 8th Street, which are leased.

|                                                  |             | Approximate    |               
|------------------------------------------------- | ----------- | -------------- | --------------
|Location                                          | Year Opened | Square Footage | Deposits      
|                                                  |             |                | (In thousands)
|*Main Office:*                                    |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|624 Simpson Avenue                                | 1966        | 7,700          | $64,720       
|Hoquiam, Washington 98550                         |             |                |               
|                                                 
|**                                                |             |                |               
|*Branch Offices:*                                 |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|300 N. Boone Street                               | 1974        | 3,400          | 29,624        
|Aberdeen, Washington 98520                        |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|314 Main South                                    | 1975        | 2,800          | 22,084        
|Montesano, Washington 98563                       |             |                |               
|                                                  |             |                |               
|361 Damon Road                                    | 1977        | 2,100          | 24,598        
|Ocean Shores, Washington 98569                   
|                                                 
|                                                  |             |                |               
|                                                  |             |                |               
|                                                 
|(table continued on following page)
  34
  <PAGE>
|                                                  |             | Approximate    |               
|Location                                          | Year Opened | Square Footage | Deposits      
|                                                  |             |                | (In thousands)
|                                                  |             |                |               
|2418 Meridian East                                | 1980        | 2,400          | $45,394       
|Edgewood, Washington 98371                       
|                                                 
|202 Auburn Way South                              | 1994        | 4,200          | 19,450        
|Auburn, Washington 98002                         
|                                                 
|12814 Meridian East (South Hill)                  | 1996        | 4,200          | 21,480        
|Puyallup, Washington 98373                       
|                                                 
|1201 Marvin Road, N.E.                            | 1997        | 4,400          | 10,167        
|Lacey, Washington 98516                          
|                                                 
|101 Yelm Avenue W.                                | 1999        | 1,800          | 10,979        
|Yelm, Washington 98597                           
|                                                 
|20464 Viking Way NW                               | 1999        | 3,380          | 8,155         
|Poulsbo, Washington  98370                       
|                                                 
|2419 224th Street E.                              | 1999        | 3,865          | 13,562        
|Spanaway, Washington  98387                      
|                                                 
|801 Trosper Road SW                               | 2001        | 3,300          | 14,037        
|Tumwater, Washington 98512                        |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|7805 South Hosmer Street                          | 2001        | 5,000          | 10,951        
|Tacoma, Washington 98408                          |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|2401 NW Bucklin Hill Road                         | 2005        | 4,000          | 5,942         
|Silverdale, Washington 98383                      |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|423 Washington Street SE                          | 2003        | 3,000          | 6,529         
|Olympia, Washington 98501                         |             |                |               
|                                                  |             |                |               
|**                                                |             |                |               
|*Data Center:*                                    |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|422 6th Street                                    | 1990        | 2,700          | --            
|Hoquiam, Washington 98550                        
|                                                 
|504 8th Street                                    | 2003        | 5,400          | --            
|Hoquiam, Washington 98550                         |             |                |               
|                                                  |             |                |               
|**                                                |             |                |               
|*Loan Center:*                                    |             |                |               
|                                                  |             |                |               
|                                                  |             |                |               
|120 Lincoln Street                                | 2003        | 5,000          | --            
|Hoquiam, Washington 98550                         |             |                |               

The Bank is scheduled to open a
full-service office in Gig Harbor, Washington in March 2004.  The branch
facility will be leased.

35

<PAGE>

The Bank operates 16 proprietary ATMs that are part of a nationwide cash exchange network.  The Bank also
began remodeling a commercial building in Hoquiam, Washington, during the fiscal year ended September 30, 2003,
that will become the future location of the Bank's loan servicing department and escrow department.

**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, 2003.

**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, 2003, there were 4,251,680 shares of common stock issued and approximately 735 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, 2003, 2002 and 2001.  This information was provided by the Nasdaq Stock Market.

|               | High   | Low     | Dividends
|-------------- | ------ | ------- | ---------
|              
|Fiscal 2003    |       
|First Quarter  | $18.32 | $16.43  | $0.12    
|Second Quarter | 19.35  | 18.00   | 0.12     
|Third Quarter  | 24.39  | 19.08   | 0.12     
|Fourth Quarter | 24.24  | 22.21   | 0.14     
|              
|Fiscal 2002   
|First Quarter  | $15.65 | $13.55  | $0.11    
|Second Quarter | 15.80  | 15.01   | 0.11     
|Third Quarter  | 17.45  | 14.56   | 0.11     
|Fourth Quarter | 17.40  | 14.80   | 0.12     
|              
|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     

36

<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.   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.

|                                              | At September 30,                     
|--------------------------------------------- | -------------------------------------
|                                              | 2003                                 
|                                              | (In thousands)                       
|SELECTED FINANCIAL CONDITION DATA:            |                                      
|                                              |                                      
|Total assets                                  | $449,633                             
|Loans receivable and loans held for sale, net | 322,236                              
|Investment securities available-for-sale      | 36,933                               
|Mortgage-backed securities held to maturity   | 279                                  
|Mortgage-backed securities available-for-sale | 17,098                               
|FHLB Stock                                    | 5,454                                
|Cash and due from financial institutions and  |                                      
|interest-bearing deposits in banks            | 38,098                               
|Deposits                                      | 307,672                              
|FHLB advances                                 | 61,605                               
|Shareholders' equity                          | 77,611                               
|                                              |                                      
|                                              |                                      
|                                              | Year Ended September 30,             
|                                              | 2003                                 
|                                              | (In thousands, except per share data)
|SELECTED OPERATING DATA:                      |                                      
|                                              |                                      
|Interest and dividend income                  | $27,723                              
|Interest expense                              | 8,946                                
|Net interest income                           | 18,777                               
|Provision for loan losses                     | 347                                  
|Net interest income after                     |                                      
|provision for loan losses                     | 18,430                               
|Noninterest income                            | 6,007                                
|Noninterest expense                           | 14,832                               
|Income before income taxes                    | 9,605                                
|Provision for income taxes                    | 2,966                                
|Net income                                    | $ 6,639                              
|                                              |                                      
|Earnings per common share:                    |                                      
|Basic                                         | $  1.74                              
|Diluted                                       | $  1.66                              
|Dividends per share                           | $  0.50                              
|Dividend payout ratio                         | 28.74%                               

|                                        | At September 30,
|--------------------------------------- | ----------------
|                                        | 2003            
|OTHER DATA:                             |                 
|                                       
|Number of real estate loans outstanding | 3,522           
|Deposit accounts                        | 45,671          
|Full-service offices                    | 15              

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|                                                | At or For the Year Ended September 30,
|----------------------------------------------- | --------------------------------------
|                                                | 2003                                  
|                                                |                                       
|KEY FINANCIAL RATIOS:                           |                                       
|                                                |                                       
|Performance Ratios:                             |                                       
|Return on average assets (1)                    | 1.52%                                 
|Return on average equity (2)                    | 8.67                                  
|Interest rate spread (3)                        | 4.11                                  
|Net interest margin (4)                         | 4.61                                  
|Average interest-earning assets to average      |                                       
|interest-bearing liabilities                    | 122.74                                
|Noninterest expense as a  percent of            |                                       
|average total assets                            | 3.39                                  
|Efficiency ratio (5)                            | 59.85                                 
|Book value per share (6)                        | $18.25                                
|Book value per share (7)                        | 19.77                                 
|                                                |                                       
|Asset Quality Ratios:                           |                                       
|Nonaccrual and 90 days or more past due loans   |                                       
|as a percent of loans receivable, net (8)       | 1.19%                                 
|Nonperforming assets as a                       |                                       
|percent of total assets                         | 1.15                                  
|Allowance for loan losses as a percent of total |                                       
|loans receivable, net (8)                       | 1.19                                  
|Allowance for losses as a percent               |                                       
|of nonperforming loans                          | 99.90                                 
|Net charge-offs to average outstanding loans    | 0.03                                  
|Capital Ratios:                                 |                                       
|Total equity-to-assets ratio                    | 17.26                                 
|Average equity to average assets (9)            | 17.49                                 

|(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.                                                                  

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<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

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 included in Item 8 of this report.

Certain matters in this report constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.  These forward-looking statements relate to, among others, expectations of
the business environment in which the Company operates, projections of future performance, perceived opportunities
in the market, potential future credit experience, and statements regarding the Company's mission and vision.  These
forward-looking statements are based upon current management expectations, and may, therefore, involve risks and
uncertainties.  The Company's actual results, performance, or achievements may differ materially from those suggested,
expressed, or implied by forward-looking statements due to a wide range of factors including, but not limited to, the
general business environment, the direction of future interest rates, competitive conditions between banks and non-bank
financial services providers, regulatory changes, labor market competitiveness, and other risks detailed in the Company's
reports filed with the Securities and Exchange Commission.

**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 historically
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 has also been an active participant in the secondary market, originating residential loans
for sale to the FHLMC on a servicing retained basis.

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 technology 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 term 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.

Emphasize the Origination of Commercial Real Estate and Commercial Business Loans.
The Bank established a business banking division in 1998 for the purpose of
increasing the Bank's origination of commercial real estate and

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<PAGE>

commercial business loans. Originally, three lenders were
hired to staff the division. Currently, six lenders are active in the
origination of commercial loans.

Increase the Consumer Loan Portfolio.  In 2001 the Bank hired a consumer loan specialist to increase the
origination of consumer loans.  The consumer loans generated since that time have been secured primarily by real estate.
The Bank expects to continue expanding its portfolio of consumer loans.

Pursue Low Cost Core Deposits
and Deposit Related Fee Income.  The Bank has placed an emphasis on
attracting commercial and personal checking accounts.  These transactional
accounts typically provide a lower cost of funding than certificates of deposit
accounts and generate non-interest fee income.  The Bank implemented a
checking account acquisition program in 2000 in increase these transactional
accounts.

**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, 2003, adjustable rate mortgage loans
and adjustable rate mortgage-backed securities constituted $208.9 million or
60.50%, 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

40

<PAGE>

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, 2003, the construction and land development, and consumer loan portfolios amounted to $94.1 million
and $28.0 million, or 25.9% and 7.7% 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
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, 2003.

|Projected     | Net Interest Income    | Current Market Value
|------------- | ---------------------- | --------------------
|Interest Rate | Estimated              | $ Change            
|Scenario      | Value                  | from Base           
|              | (Dollars in thousands)
|             
|+300          | $18,769                | $ 1,804             
|+200          | 18,349                 | 1,384               
|+100          | 17,791                 | 827                 
|BASE          | 16,965                 | --                  
|-100          | 15,949                 | (1,016)             
|-200          | 14,483                 | (2,482)             
|-300          | 12,817                 | (4,147)             

In the event of a 200 basis point decrease in interest rates, the Bank would be expected to experience a 5.4%
decrease in NPV and a 14.6% decrease in net interest income.  In the event of a 200 basis point increase in interest rates,
a 4.8% increase in NPV and an 8.2% 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.

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<PAGE>

******Comparison of Financial Condition at September 30, 2003 and 2002**

**Total Assets:**Total assets increased $18.5 million to $449.6 million at September 30, 2003 from $431.1 million
at September 30, 2002.  This change is reflected primarily in a $16.7 million increase in investments and interest bearing
deposits in banks and a $1.8 million increase in premises and equipment.

Premises and Equipment: 
Premises and equipment increased $1.8 million to $13.4 million at September 30,
2003 from $11.7 million at September 30, 2002.  The increase is primarily
related to the opening of two new branches (Silverdale and Olympia), the opening
of a new facility to house the Bank's loan servicing department and escrow
department, and the purchase of equipment in conjunction with the Bank's
technology improvement initiatives.

**Cash and Due from Financial Institutions:**  Cash and due from financial institutions and interest-bearing
deposit balances in banks increased to $38.1 million at September 30, 2003 from $36.1 million at September 30, 2002.
The increase is primarily due to investing the proceeds from increased customer deposits.

**Investments, Mortgage-backed Securities and FHLB Stock:**  Investments, mortgage-backed securities and
FHLB Stock increased $13.0 million to $59.8 million at September 30, 2003 from $46.7 million at September 30, 2002
as proceeds from increased customer deposits were invested.  For additional details on investments and mortgage-backed
securities, see Note 3 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, decreased slightly to $322.2 million at September 30, 2003 from $322.5 at September 30,
2002.  The composition of the portfolio continued to migrate away from the Bank's historical dependence on one-to-four
family mortgage loans as the percentage of one-to-four family mortgage loans decreased to 26.2% at September 30, 2003
from 31.3% at September 30, 2002.  The lower levels of one-to-four family mortgage loans were partially offset by
increased levels of construction loans, commercial real estate loans, and consumer loans.  During the year one-to-four
family mortgage loans decreased by $17.8 million and multi-family mortgage loans decreased by $5.9 million.  However,
net construction loans increased by $11.5 million, commercial mortgage loans increased by $5.3 million, and consumer
loans increased by $6.2 million.  Loan volume was very strong during the year ended September 30, 2003 as the Bank
originated loans of $255.5 million and sold $108.8 million in fixed rate one-to-four family mortgage loans.  Management
elected to sell a majority of the fixed rate residential loans originated rather than adding them to the Bank's portfolio
due to the low interest-rate environment.

**Real Estate Owned:** Real
estate owned ("REO") and other repossessed assets increased $578,000 to $1.3
million at September 30, 2003 from $680,000 at September 30, 2002.  The balance increased as nine properties totaling
$1.0 million were added to REO status and seven properties totaling $422,000 were sold during the year.  For additional
information, see "Item 1, Business - Lending Activities - Nonperforming Assets" and Note 7 to the Notes to
Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplemental Data."

**Deposits:** Deposits increased by $15.4 million to $307.7 million at September 30, 2003 from $292.3 million
at September 30, 2002, primarily due to a $15.4 million increase in the Bank's N.O.W. checking accounts, a $9.2 million
increase in passbook savings accounts, and a $5.5 million increase in non-interest bearing accounts.  These increases
were partially offset by an $8.4 million decrease in money market accounts and a $6.4 million decrease in certificate
of deposit accounts. The Bank chose not to compete for high-rate time deposits, electing instead to focus on attracting
transaction accounts that typically provide more of a core deposit relationship with customers.

**Borrowings:** Borrowings decreased $154,000 to $61.6 million at September 30, 2003 from $61.8 million at
September 30, 2002 due to scheduled amortization payments on FHLB advances.

**Shareholders' Equity:** Total shareholders' equity increased by $3.2 million to $77.6 million at September 30,
2003 from $74.4 million at September 30, 2002.  The components of shareholders' equity were primarily affected by
net income of $6.64 million, the repurchase of 188,367 shares of the Company's stock for $3.85 million and the payment

42

<PAGE>

of $2.15 million in dividends to shareholders.  Also affecting shareholders' equity was a $1.50 million increase to
additional paid in capital from the exercise of stock options, a $364,000 decrease in accumulated other comprehensive
income, and decreases of $644,000 and $528,000 in the equity components related to unearned shares issued to the
Management Recognition and Development Plan and Employee Stock Ownership Plans, respectively, as more shares
vested under the MRDP and were released under the ESOP.

On February 14, 2003 the Company announced a plan to repurchase 380,028 shares of the Company's stock.
This marked the Company's eleventh stock repurchase plan.  As of September 30, 2003, the Company had purchased
112,108 of these shares and cumulatively had repurchased 2,710,671 (41.0%) of the 6,612,500 shares that were issued
when the Company went public in January 1998.

**Comparison of Financial Condition at September 30, 2002 and 2001**

**Total Assets:**  Total assets increased by $44.7 million to $431.1 million at September 30, 2002 from $386.3
million at September 30, 2001 primarily due to increased deposit levels.

**Cash and Due from Financial Institutions:**Cash and due from financial institutions and interest-bearing
deposit balances in banks increased to $36.1 million at September 30, 2002 from $13.4 million at September 30, 2001.
This increase is primarily due to investing proceeds from increased customer deposits.

**Investments, Mortgage-backed Securities and FHLB Stock:**Investments, mortgage-backed securities and
FHLB stock increased to $46.7 million at September 30, 2002 from $34.2 million at September 30, 2001 primarily due
to the conversion of $12.2 million in fixed rate loans held for sale to mortgage-backed securities.  For additional details
on investments and mortgage-backed securities, see Note 3 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, decreased $1.2 million to $322.5 million at September 30, 2002 from $323.8 at September
30, 2001, primarily due to an $18.6 million decrease in the Bank's net construction loan portfolio and a $16.9 million
decrease in the Bank's one-to-four family mortgage loan portfolio. The construction loan decrease resulted primarily
from the pay down of loans secured by condominium projects pursuant to unit sales and the conversion of construction
loans to permanent status.  The decrease of one-to-four family mortgages held in the portfolio was primarily due to the
conversion of $12.2 million of loans held for sale to mortgage-backed securities and the sale of $70.2 million in fixed
rate one-to-four family mortgage loans during the twelve-month period.  The decreases in construction and one-to-four
family mortgages were partially offset by a $34.1 million increase in commercial real estate and business loans, which
were originated primarily by the Bank's Business Banking Division.  ****

**Bank owned life insurance ("BOLI"):**  The Bank purchased $10.0 million of BOLI during the September
30, 2002 quarter to cover certain officers of the Bank and the Company.  The annual increases in the cash surrender value of the insurance policies are reported as tax-exempt
non-interest income under the current provisions of the IRS code.  The Bank anticipates that the tax-equivalent yield
on this asset will be greater than alternative investments and will help the Bank offset the cost of
its employee benefit plans.

**Real Estate Owned, Net:**Real Estate Owned, net, decreased to $680,000 from $1.0 million at September 30,
2001.  This balance decreased due to $459,000 in one-to-four family REO's and $260,000 in land REO's being sold
and was offset by the addition of $430,000 in one-to-four family REO's.  For additional information, see "Item 1,
Business -- Lending Activities -- Nonperforming Assets" and Note 7 to the Notes to Consolidated Financial Statements
contained in "Item 8, Financial Statements and Supplementary Data."

**Deposits:**  Deposits increased by 20.6% to $292.3 million at September 30, 2002 from $242.4 million at
September 30, 2001, primarily due to a $20.6 million increase in the Bank's money market accounts, an $11.6 million
increase in N.O.W. checking accounts, a $6.1 million increase in passbook
savings accounts and a $6.6 million increase

43

<PAGE>

in non-interest bearing accounts.
Management attributes the deposit growth to its targeted marketing program and
to consumer uncertainty regarding alternative investment options.

**Borrowings:**Borrowings decreased $7.2 million to $61.8 million at September 30, 2002 from $69.0 million
at September 30, 2001, as funds from increased deposits were used to pay down the level of FHLB advances.

**Shareholders' Equity:**  Total shareholders' equity increased by $2.6 million to $74.4 million at September
30, 2002 from $71.8 million at September 30, 2001.  The components of shareholder's equity were affected by net
income of $6.9 million, the repurchase of 274,272 shares of the Company's stock for $4.4 million, the payment of $2.0
million in dividends to shareholders, and a $255,000 increase in accumulated other comprehensive income.  Also
affecting shareholders equity were decreases of $645,000 in the equity component  related to unearned shares issued
to the Management Recognition and Development Plan and $529,000 in the equity component related to the unearned
shares issued to the Employee Stock Ownership Plan, and a $588,000 increase to additional paid in capital from the
exercise of stock options.

On May 10, 2002 the Company announced a plan to repurchase 193,659 shares of the Company's stock.  This
marked the Company's tenth 5% stock repurchase plan.  As of September 30, 2002, the Company had purchased
117,400 of these shares and cumulatively had repurchased 2,522,304 (38.1%) of the 6,612,500 shares that were issued
when the Company went public in January 1998.

**Comparison of Operating Results for Years Ended September 30, 2003 and 2002**

******Net Income:**Net income for the year ended September 30, 2003 was $6.64 million, or $1.66 per diluted share
($1.74 per basic share) compared to $6.89 million, or $1.71 per diluted share ($1.76 per basic share) for the year ended
September 30, 2002.  The lower earnings for the current year were primarily a result of increased non-interest expenses
related to technology improvements, higher employee costs resulting from a larger employee base, and higher premises
and equipment expenses due to additional branches and remodeling costs.  The increased expenses were, however,
partially offset by higher non-interest income, largely related to mortgage loan sales and earnings on bank owned life
insurance.

During the year a number of technology enhancements were implemented to provide additional opportunities
to serve and expand the Bank's customer base.  The Bank converted to the Kirchman Bankway core processing system
from its in-house supported system, and changed its Internet banking system, its loan platform system and its ATM
service provider.   The technology related conversion expenses totaled $586,000 ($387,000 net of income tax) and
reduced earnings by $0.10 per diluted share.  The majority of the Company's
planned technology related conversion expenses occurred during the year ended
September 30, 2003.  However, the Company does anticipate additional
conversion expenses related to employee overtime, additional equipment upgrades,
and continued training to occur during the quarters ended December 31, 2003 and
March 31, 2004 as additional aspects
of the technology upgrades are fully implemented.  While the technology upgrades reduced profitability in the short term,
the Company believes the investment will be beneficial to its customers and ultimately to its long-term investors.

**Net Interest Income:**
Net interest income decreased $596,000 to $18.78 million for the year ended
September 30, 2003 from $19.37 million for the year ended September 30, 2002.
Total interest income decreased $2.54 million to $27.72 million for the year
ended September 30, 2003 from $30.26 million for the year ended September 30,
2002, primarily due to a reduction in average yields on earning assets. The
yield on earning assets was 6.80% for the year ended September 30, 2003 compared
to 7.93% for the year ended September 30, 2002. In addition to overall lower
market rates, the yield on earning assets was also reduced by a change in the
composition of total earning assets. In 2002, loans, the Company's highest
yielding class of assets, comprised 84.9% of average earning assets. In 2003,
loans comprised 78.4% of average earning assets. This change was largely
influenced by the decision to sell many of the loans originated during this low
interest rate cycle. That had the effect of increasing the gain on loans sold,
at the expense of interest income. The impact of lower average yields was,
however, partially offset by increased levels of average earning assets. Total
interest expense decreased $1.94 million to $8.95 million for the year ended
September 30, 2003 from $10.89 million for the year ended September 30, 2002.
The average cost of funds for each of the Bank's deposit account

44

<PAGE>

types for the current period was lower than a year ago. The
overall cost of funds decreased to 2.69% for the year ended September 30, 2003
from 3.59% for the year ended September 30, 2002. As a result of these changes,
the net interest margin decreased to 4.61% for the year ended September 30, 2003
from 5.08% for the year ended September 30, 2002.

**Provision for Loan Losses:**  The provision for loan losses decreased $645,000 to $347,000 for the year ended
September 30, 2003 from $992,000 for the year ended September 30, 2002.   The provision for loan losses was lower
in 2002 primarily because the Bank experienced a lower level of net charge-offs in 2003.  For the years ended
September 30, 2003 and 2002, net charge-offs were $86,000 and $412,000, respectively.

The Bank has established a systematic methodology for determining the provision for loan losses.  On a
quarterly basis the Bank performs an analysis taking into consideration historic loss experience for various loan
segments, changes in economic conditions, delinquency rates, and other factors to determine the level of allowance for
loan losses needed.  The allowance for loan losses had a net increase of $261,000 to $3.89 million at September 30, 2003 from
$3.63 million at September 30, 2002.  The increased level of allowance for loan losses was primarily due to an increased
level of loans classified as substandard and changes in the composition of the loan portfolio.  The level of loans
classified as substandard increased the level of allowance for loan losses deemed necessary by the analysis as the
aggregate amount of substandard loans increased $1.1 million to $9.1 million at September 30, 2003 from $8.0 million
at September 30, 2002.  Also contributing to the higher allowance for loan loss level were changes in the composition
of the loan portfolio.  The combined percentage of construction and commercial real estate loans in the portfolio
increased to 54.2% at September 30, 2003 from 49.2% at September 30, 2002, while the percentage of one-to-four
family mortgage loans declined to 26.2% at September 30, 2003 from 31.3% at September 30, 2002.  Construction
lending and commercial real estate lending typically involve a greater degree of risk than one-to-four family residential
mortgage lending and therefore construction loans and commercial real estate loans have been assigned a loss factor
that is greater than the loss factor assigned to one-to-four family residential mortgage loans.

Estimated loss factors used in the allowance for loan loss analysis are established based in part on historic
charge-off data by loan category and economic conditions.  Based on the trends in historical charge-off analysis, the
loss factors used in the allowance for loan loss analysis for credit cards were increased during the year ended September
30, 2003 and the loss factors for commercial business loans were decreased.

Based on the systematic methodology, management deemed the allowance for loan losses of $3.89 million at
September 30, 2003 (1.19% of loans receivable and 99.9% 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.  For additional information,
see "Item 1, Business - Lending Activities - Allowance for Loan Losses" included herein.

**Non-interest Income:**  For the year ended September 30, 2003 non-interest income increased $1.35 million
to $6.01 million from $4.66 million for the year ended September 30, 2002.  This increase is primarily due to a $494,000
increase in BOLI income, a $475,000 increase in gain on sale of loans, a $150,000 increase in security sale gains, and
a $147,000 increase in service charges on deposits.   The increased BOLI income is a result of having a full year's
earnings on the BOLI investment that was made in September 2002.  The increased loan sale gains are primarily the
result of a larger volume of mortgage banking activity due to the strong refinance demand,
which was prompted by a decline in interest rates to historically low levels.  The Bank sold $108.8
million in fixed rate one-to-four family mortgages during the year ended September 30, 2003 compared to $70.2 million
for the previous year.

**Non-interest Expense:** For the year ended September 30, 2003 non-interest expense increased by $2.12
million to $14.83 million from $12.72 million for the year ended September 30, 2002.  The increase is primarily a result
of increased employee expenses, increased premises, and equipment expenses and technology enhancement expenses.

During the year, the Company converted to the Kirchman Bankway
core processing system from its in-house supported system, and changed its
Internet banking system, its loan platform system and its ATM service provider.
The technology enhancements were undertaken to provide additional opportunities
to serve and expand the Bank's customer base. The technology-related conversion
expenses totaled $586,000 for the year ended September 30, 2003 and are
reflected in the income statement under other non-interest expenses ($290,000),
premises and equipment expenses

45

<PAGE>

($210,000) and salaries and employee benefit expenses
($86,000). While the technology upgrades reduced profitability in the short
term, the Company believes the investment will be beneficial to its customers
and ultimately to its long-term investors.

Salary and benefit expenses increased primarily due to a larger employee base as the Bank opened two new
branches during the year and increased staffing levels in several other departments.  The number of full time equivalent
employees increased during the year to 186 at September 30, 2003 from 159 at September 30, 2002.     Premises and
equipment expense increased during the year primarily due to the additional branches opened, expenses associated with
remodeling the Bank's loan center, and the technology related expenses previously discussed.

As a result of the increased
non-interest expenses, the Company's efficiency ratio increased to 59.85% for
the year ended September 30, 2003 from 52.91% for the year ended September 30,
2002.

**Provision for Income Taxes:** The provision for income taxes decreased to $3.0 million for the year ended
September 30, 2003 from $3.4 million for the year ended September 30, 2002 primarily as a result of lower income
before taxes and an increased level of tax-exempt income.  The effective tax rate was 30.9% for the year ended
September 30, 2003 and 33.2% for September 30, 2002.  The lower effective rate was primarily a result of the increased
level of tax-exempt income from the bank owned life insurance program that was implemented in September 2002.

**Comparison of Operating Results for Years Ended September 30, 2002 and 2001**

**Net Income:**Net income for the year ended September 30, 2002 was $6.89 million or $1.71 per diluted share
($1.76 per basic share) compared to net income of $5.46 million or $1.28 per diluted share ($1.30 per basic share) for
the year ended September 30, 2001.  The primary factors affecting the improved performance for the current year were
increased net interest income, increased deposit fee income, increased income from loan sales, and a decreased provision
for loan losses.  These items were partially offset by higher non-interest expenses.

**Net Interest Income:**Net interest income increased 9.03 % to $19.37 million for the year ended September
30, 2002 from $17.77 million for the year ended September 30, 2001, primarily due to decreased funding costs.  Interest
expense decreased by $3.03 million as the Company's overall cost of funds decreased to 3.59% for the year ended
September 30, 2002 from 4.95% for the year ended September 30, 2001.  Total interest income decreased $1.43 million
to $30.26 million for the year ended September 30, 2002 from $31.69 million for the year ended September 30, 2001
primarily due to lower average yields on interest earning assets, from 8.90% in 2001 to 7.93% in 2002.  The Company's
net interest margin was 5.08% for the year ended September 30, 2002 compared to a net interest margin of 4.99% for
the year ended September 30, 2001, primarily due to interest-bearing liabilities repricing more quickly than interest
earning assets in the declining rate environment.

**Provision for Loan Losses:**  The provision for loan losses decreased to $992,000 for the year ended
September 30, 2002 from $1.4 million for the year ended September 30, 2001.  The provision for loan losses was lower
in 2002 primarily because the Bank experienced a lower level of net charge-offs in 2002.  For the years ended
September 30, 2002 and 2001, net charge-offs were $412,000 and $990,000, respectively.  During the year ended
September 30, 2001 the Bank made a special $600,000 provision for loan losses when it determined that the credit
quality of a large commercial business loan had deteriorated.  The loan was subsequently charged off in the year ended
September 30, 2001.

The Bank has established a systematic methodology for the determination of provisions for loan losses. On a
quarterly basis the Bank performs an analysis taking into consideration historic loss experience for various loan
segments, changes in economic conditions, delinquency rates, and other factors to determine the level of allowance for
loan losses needed.  The allowance for loan losses increased  $580,000 to $3.63 million at September 30, 2002 from
$3.05 million at September 30, 2001.  The increased level of allowance for loan losses was primarily due to changes
in the composition of the loan portfolio and increased loss factors utilized in the allowance for loan loss analysis.

46

<PAGE>

Changes in the composition of the loan portfolio were responsible for a portion of the increased allowance for
loan losses.  The percentage of commercial real estate loans in the Bank's loan portfolio increased to 27.0% of total
loans receivable at September 30, 2002 from 17.8% at September 30, 2001, while the percentage of one- to- four family
residential mortgage loans decreased to 31.3% of total loans receivable at September 30, 2002 from 35.1% at September
30, 2001.  Commercial real estate lending typically involves a greater degree of risk than one- to- four family residential
mortgage lending and therefore commercial real estate loans have been assigned a loss factor that is greater than the loss
factor assigned to one- to- four family residential mortgage loans.

Estimated loss factors used in the allowance for loan loss analysis are established based in part on historic
charge-off data by loan category and economic conditions.  Based on the trends in historical charge-offs analysis, the
loss factors used in the allowance for loan loss analysis for commercial business loans and credit cards were increased
during the year ended September 30, 2002.  The loss estimate factors for one- to- four family mortgage loans, multi
family loans, commercial real estate loans, construction loans and land loans were also increased to a lesser extent due
to weaknesses and uncertainties in the regional economy.

Based on the systematic methodology management deemed the allowance for loan losses of $3.63 million at
September 30, 2002 (1.11% of loans receivable and 97.0 % 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.  For additional information,
see "Item 1, Business -- Lending Activities - Allowance for Loan Losses" included herein.

**Non-interest Income:**  For the year ended September 30, 2002 non-interest income increased $1.73 million
to $4.66 million from $2.93 million for the year ended September 30, 2001.  This increase is primarily due to an
$822,000 increase in service charges on deposits, and a $609,000 increase in gain on sale of loans. The increased
deposit-related service charge income is primarily a result of the Bank's checking account acquisition program.  The
increased loan sale gains are a result of the Company selling $70.2 million in fixed-rate one-to-four family loans during
the year compared to $27.6 million in 2001.

**Non-interest Expense:**Total non-interest expense increased $1.62 million for the year ended September 30,
2002 compared to 2001. This increase is primarily reflected in a $945,000 increase in salary and benefit expense due
primarily to increased numbers of employees, a $239,000 increase in ATM operating expenses, a $172,000 increase in
expenses related to premises and equipment resulting from new branches, and a $102,000 increase in profitability
improvement consulting fees. Also affecting the year-to-year comparison was the recovery in 2001 of a prior NSF kiting
related expense.  This recovery reduced the non-interest expense for the 2001 year by $150,000.

**Provision for Income Taxes:**The provision for income taxes increased to $3.4 million for the year ended
September 30, 2002 from $2.7 million for the year ended September 30, 2001 primarily as a result of higher income
before income taxes.  The effective rate was 33.2% for the year ended September 30, 2002 and 33.4% for the year ended
September 30, 2001.

**Nonperforming Assets**

Information with respect to the Bank's nonperforming assets at September 30, 2003 and September 30, 2002
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.

47

<PAGE>

|                                      | Year Ended September 30,
|------------------------------------- | ------------------------
|                                      | 2003                    
|                                      |                         
|                                      | Average                 
|                                      | Balance                 
|                                      |                         
|                                      |                         
|Interest-earning assets:              |                         
|Loans receivable (1)(2)               | $319,583                
|Mortgage-backed and                   |                         
|investment securities                 | 16,282                  
|FHLB stock and equity securities      | 36,489                  
|Interest-bearing deposits             | 35,102                  
|Total interest-earning assets         | 407,456                 
|Non-interest-earning assets           | 30,353                  
|                                      |                         
|Total assets                          | $437,809                
|                                      |                         
|Interest-bearing liabilities:         |                         
|Passbook accounts                     | $47,411                 
|Money market accounts                 | 43,637                  
|NOW accounts                          | 45,999                  
|Certificates of deposit               | 133,218                 
|FHLB advances-other                   |                         
|borrowed money                        | 61,715                  
|Total interest bearing liabilities    | 331,980                 
|Non-interest bearing liabilities      | 29,272                  
|Total liabilities                     | 361,252                 
|                                      |                         
|Shareholders' equity                  | 76,557                  
|Total liabilities and                 |                         
|shareholders' equity                  | $437,809                
|                                      |                         
|Net interest income                   |                         
|Interest rate spread.                 |                         
|Net interest margin (3)               |                         
|Ratio of interest-earning assets to   |                         
|average  interest-bearing liabilities |                         

|(1) | Does not include interest on loans 90 days or more past due.  Includes loans originated for sale.  Amortized net deferred loan fees
(2003, $2,140; 2002, $1,930; and 2001, $1,956) are included with interest
and dividends.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average balance includes nonaccrual loans.                                                                                                                                                                                  
|(3) | Net interest income divided by total interest earning assets.                                                                                                                                                               

48

<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,
|--------------------------------- | ------------------------ | ------------------------
|                                  | 2003 Compared to Year    | 2002 Compared to Year   
|                                  | Ended September 30, 2002 | Ended September 30, 2001
|                                  | Increase (Decrease)      | Increase (Decrease)     
|                                  | Due to                   | Due to                  
|                                  |                          |                         
|                                  | Rate                     | Volume                  
|                                  |                          |                         
|                                  |                          |                         
|Interest-earning assets:          |                          |                         
|Loans receivable (1)              | $(2,014)                 | $(359)                  
|Investments and mortgage-         |                         
|backed securities                 | (200)                    | (343)                   
|FHLB stock and equity securities  | (307)                    | 523                     
|Interest-bearing deposits         | (99)                     | 259                     
|Total net change in income        |                          |                         
|on interest-earning assets        | (2,620)                  | 80                      
|                                  |                          |                         
|Interest-bearing liabilities:     |                          |                         
|Passbook accounts                 | (324)                    | 167                     
|NOW accounts                      | (185)                    | 110                     
|Money market accounts             | (542)                    | 145                     
|Certificate accounts              | (1,440)                  | 123                     
|FHLB advances and other           |                          |                         
|borrowed money                    | 41                       | (39)                    
|Total net change in expense       |                          |                         
|on interest-bearing liabilities   | (2,450)                  | 506                     
|Net change in net interest income | $  (170)                 | $(426)                  

******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, 2003, 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 32.03%.  At September 30, 2003, the Bank also maintained

49

<PAGE>

an uncommitted credit facility with the FHLB of Seattle that provided for immediately available advances up to an
aggregate equal to 35% of total assets, under which $61.6 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, 2003, 2002, and 2001, the Bank originated $115.0
million, $83.1 million and $47.5 million of one- to- four family mortgage loans and $90.5 million, $52.6 million and
$80.1 million of construction and land development loans, respectively.  At September 30, 2003, the Bank had mortgage
loan commitments totaling $37.4 million, standby letters of credit totaling $75,000, and undisbursed loans in process
totaling $34.8 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, 2003 totaled
$99.2 million.  Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

The Bank's liquidity is also impacted by the volume of loans sold and loan principal payments.  During the
years ended September 30, 2003, 2002, and 2001, the Bank sold $108.8 million, $70.2 million and $27.6 million in fixed
rate one- to- four family mortgage loans.  The increased loans sales were due in large part to the refinancing cycle
brought on by decreasing interest rates.  During the years ended September 30, 2003, 2002, and 2001, the Bank received
$145.7 million, $136.7 million and $96.1 million in principal repayments.

The Bank's liquidity has been impacted by increases in deposit levels.  During the years ended September 30,
2003, 2002, and 2001, deposits increased by $15.4 million, $49.9 million, and $29.8 million.

Investment securities and interest bearing deposits increased to $83.8 million at September 30,
2003 from $67.1 million at September 30, 2002.

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, 2003, 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.

50

<PAGE>

**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.

**Item 8.	Financial Statements and Supplementary Data**

|                                                              | Page
|------------------------------------------------------------- | ----
|                                                             
|Independent Auditors' Report                                  | 52  
|Consolidated Balance Sheets as of September 30, 2003 and 2002 | 53  
|Consolidated Statements of Income For the Years Ended        
|September 30, 2003, 2002, and 2001                            | 54  
|Consolidated Statements of Shareholders' Equity For the      
|Years Ended September 30, 2003, 2002 and 2001                 | 55  
|Consolidated Statements of Cash Flows For the Years Ended    
|September 30, 2003, 2002 and 2001                             | 56  
|Consolidated Statements of Comprehensive Income For the      
|Years Ended September 30, 2003, 2002 and 2001                 | 58  
|Notes to Consolidated Financial Statements                    | 59  

51

<PAGE>

52

<PAGE>

---

---

|                                                                                                                                                                                                                                                                                               |                |              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------
|                                                                                                                                                                                                                                                                                               | 2003           | 2002         
|Assets                                                                                                                                                                                                                                                                                         |                |              
|Cash and due from financial institutions                                                                                                                                                                                                                                                       | $        8,587 | $      10,580
|Interest bearing deposits in banks                                                                                                                                                                                                                                                             | 29,511         | 25,493       
|Investments and mortgage-backed securities - held to maturity (market value $279)                                                                                                                                                                                                              | 279            | - -          
|Investments and mortgage-backed securities - available for sale                                                                                                                                                                                                                                | 54,031         | 41,582       
|Federal Home Loan Bank stock (at cost)                                                                                                                                                                                                                                                         | 5,454          | 5,139        
|                                                                                                                                                                                                                                                                                               |                |              
|Loans receivable, net of allowance for loan losses of $3,891 and $3,630, respectively                                                                                                                                                                                                          | 321,235        | 319,367      
|Loans held for sale                                                                                                                                                                                                                                                                            | 1,001          | 3,161        
|                                                                                                                                                                                                                                                                                               | 322,236        | 322,528      
|Premises and equipment                                                                                                                                                                                                                                                                         | 13,429         | 11,664       
|Real estate owned and other repossessed items                                                                                                                                                                                                                                                  | 1,258          | 680          
|Accrued interest receivable                                                                                                                                                                                                                                                                    | 1,687          | 1,604        
|Bank owned life insurance (BOLI)                                                                                                                                                                                                                                                               | 10,566         | 10,036       
|Other assets                                                                                                                                                                                                                                                                                   | 2,595          | 1,748        
|                                                                                                                                                                                                                                                                                               |                |              
|Total assets                                                                                                                                                                                                                                                                                   | $    449,633   | $    431,054 
|                                                                                                                                                                                                                                                                                               |                |              
|Liabilities and Shareholders' Equity                                                                                                                                                                                                                                                           |                |              
|                                                                                                                                                                                                                                                                                               |                |              
|Liabilities                                                                                                                                                                                                                                                                                    |                |              
|Deposits:                                                                                                                                                                                                                                                                                      |                |              
|Demand, noninterest bearing                                                                                                                                                                                                                                                                    | $      29,133  | $      23,585
|Interest bearing                                                                                                                                                                                                                                                                               | 278,539        | 268,731      
|Total deposits                                                                                                                                                                                                                                                                                 | 307,672        | 292,316      
|                                                                                                                                                                                                                                                                                               |                |              
|Federal Home Loan Bank advances                                                                                                                                                                                                                                                                | 61,605         | 61,759       
|Other liabilities and accrued expenses                                                                                                                                                                                                                                                         | 2,745          | 2,583        
|                                                                                                                                                                                                                                                                                               |                |              
|Total liabilities                                                                                                                                                                                                                                                                              | 372,022        | 356,658      
|                                                                                                                                                                                                                                                                                               |                |              
|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;      2003 - 4,251,680 shares issued, 3,843,493 shares outstanding;      2002 - 4,340,976 shares issued, 3,856,536 shares outstanding;      (unallocated ESOP shares and unvested MRDP shares are      not considered outstanding) | 43             | 43           
|Additional paid-in capital                                                                                                                                                                                                                                                                     | 33,775         | 35,857       
|Unearned shares issued to employee stock ownership trust                                                                                                                                                                                                                                       | (4,891)        | (5,419)      
|Unearned shares issued to management recognition and    development plan                                                                                                                                                                                                                       | (1,182)        | (1,826)      
|Retained earnings                                                                                                                                                                                                                                                                              | 49,699         | 45,210       
|Accumulated other comprehensive income                                                                                                                                                                                                                                                         | 167            | 531          
|Total shareholders' equity                                                                                                                                                                                                                                                                     | 77,611         | 74,396       
|                                                                                                                                                                                                                                                                                               |                |              
|Total liabilities and shareholders' equity                                                                                                                                                                                                                                                     | $    449,633   | $    431,054 

53

<PAGE>

---

---

|                                                          |                |                |               
|--------------------------------------------------------- | -------------- | -------------- | --------------
|                                                          | 2003           | 2002           | 2001          
|Interest and Dividend Income                              |                |                |               
|Loans receivable                                          | $      25,391  | $      27,764  | $      29,777 
|Investments and mortgage-backed securities                | 873            | 1,416          | 962           
|Dividends from investments                                | 1,064          | 848            | 791           
|Interest bearing deposits in banks                        | 395            | 235            | 162           
|Total interest and dividend income                        | 27,723         | 30,263         | 31,692        
|                                                          |                |                |               
|Interest Expense                                          |                |                |               
|Deposits                                                  | 5,570          | 7,516          | 9,491         
|Federal Home Loan Bank advances                           | 3,376          | 3,374          | 4,433         
|Total interest expense                                    | 8,946          | 10,890         | 13,924        
|                                                          |                |                |               
|Net interest income                                       | 18,777         | 19,373         | 17,768        
|                                                          |                |                |               
|Provision for Loan Losses                                 | 347            | 992            | 1,400         
|                                                          |                |                |               
|Net interest income after provision for loan losses       | 18,430         | 18,381         | 16,368        
|                                                          |                |                |               
|Non-Interest Income                                       |                |                |               
|Service charges on deposits                               | 2,009          | 1,862          | 1,040         
|Gain on sale of loans, net                                | 1,451          | 976            | 367           
|Market value adjustment on loans held for sale            | - -            | - -            | 175           
|Gain (loss) on sale of securities available for sale, net | 135            | (15)           | 205           
|BOLI net earnings                                         | 530            | 36             | - -           
|Escrow fees                                               | 267            | 261            | 205           
|Servicing income on loans sold                            | 183            | 326            | 152           
|ATM transaction fees                                      | 723            | 632            | 379           
|Other                                                     | 709            | 580            | 404           
|Total non-interest income                                 | 6,007          | 4,658          | 2,927         
|                                                          |                |                |               
|Non-Interest Expense                                      |                |                |               
|Salaries and employee benefits                            | 8,301          | 6,987          | 6,042         
|Premises and equipment                                    | 1,799          | 1,380          | 1,208         
|Advertising                                               | 730            | 777            | 950           
|Real estate owned                                         | 164            | 114            | 481           
|ATM expenses                                              | 564            | 510            | 271           
|Postage                                                   | 354            | 294            | 296           
|Other                                                     | 2,920          | 2,654          | 1,844         
|Total non-interest expense                                | 14,832         | 12,716         | 11,092        
|                                                          |                |                |               
|Income before federal income taxes                        | 9,605          | 10,323         | 8,203         
|                                                          |                |                |               
|Federal Income Taxes                                      | 2,966          | 3,432          | 2,741         
|                                                          |                |                |               
|Net income                                                | $        6,639 | $        6,891 | $        5,462
|                                                          |                |                |               
|Earnings Per Common Share                                 |                |                |               
|Basic                                                     | $1.74          | $1.76          | $1.30         
|Diluted                                                   | 1.66           | 1.71           | 1.28          

54

<PAGE>

---

---

|                                                                        |              |             |                          |                                                    |                                                                  |                  |                                            |        
|----------------------------------------------------------------------- | ------------ | ----------- | ------------------------ | -------------------------------------------------- | ---------------------------------------------------------------- | ---------------- | ------------------------------------------ | -------
|                                                                        | CommonShares | StockAmount | AdditionalPaid-inCapital | UnearnedSharesIssued toEmployeeStockOwnershipTrust | UnearnedSharesIssued toManagementRecognitionand Develop-mentPlan | RetainedEarnings | AccumulatedOtherCompre-hensiveIncome(Loss) | Total  
|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    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 
|                                                                        |              |             |                          |                                                    |                                                                  |                  |                                            |        
|Net income                                                              | - -          | - -         | - -                      | - -                                                | - -                                                              | 6,891            | - -                                        | 6,891  
|Repurchase of common    stock                                           | (274,272)    | (3)         | (4,411)                  | - -                                                | - -                                                              | - -              | - -                                        | (4,414)
|Exercise of stock options                                               | 44,253       | - -         | 588                      | - -                                                | - -                                                              | - -              | - -                                        | 588    
|Cash dividends ($.45 per    share)                                      | - -          | - -         | - -                      | - -                                                | - -                                                              | (2,013)          | - -                                        | (2,013)
|Earned ESOP shares                                                      | 35,267       | - -         | 27                       | 529                                                | - -                                                              | - -              | - -                                        | 556    
|Earned MRDP shares                                                      | 40,985       | - -         | 79                       | - -                                                | 645                                                              | - -              | - -                                        | 724    
|Change in fair value of    securities available for sale,    net of tax | - -          | - -         | - -                      | - -                                                | - -                                                              | - -              | 255                                        | 255    
|                                                                        |              |             |                          |                                                    |                                                                  |                  |                                            |        
|Balance,   September 30, 2002                                           | 3,856,536    | 43          | 35,857                   | (5,419)                                            | (1,826)                                                          | 45,210           | 531                                        | 74,396 
|                                                                        |              |             |                          |                                                    |                                                                  |                  |                                            |        
|Net income                                                              | - -          | - -         | - -                      | - -                                                | - -                                                              | 6,639            | - -                                        | 6,639  
|Repurchase of common    stock                                           | (188,367)    | (1)         | (3,851)                  | - -                                                | - -                                                              | - -              | - -                                        | (3,852)
|Exercise of stock options                                               | 99,071       | 1           | 1,490                    | - -                                                | - -                                                              | - -              | - -                                        | 1,491  
|Cash dividends ($.50 per    share)                                      | - -          | - -         | - -                      | - -                                                | - -                                                              | (2,150)          | - -                                        | (2,150)
|Earned ESOP shares                                                      | 35,267       | - -         | 120                      | 528                                                | - -                                                              | - -              | - -                                        | 648    
|Earned MRDP shares                                                      | 40,986       | - -         | 159                      | - -                                                | 644                                                              | - -              | - -                                        | 803    
|Change in fair value of    securities available for sale,    net of tax | - -          | - -         | - -                      | - -                                                | - -                                                              | - -              | (364)                                      | (364)  
|                                                                        |              |             |                          |                                                    |                                                                  |                  |                                            |        
|Balance,    September 30, 2003                                          | 3,843,493    | $43         | $33,775                  | ($4,891)                                           | ($1,182)                                                         | $49,699          | $167                                       | $77,611

55

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|                                                                                                           |                |                |               
|---------------------------------------------------------------------------------------------------------- | -------------- | -------------- | --------------
|                                                                                                           | 2003           | 2002           | 2001          
|Cash Flows from Operating Activities                                                                       |                |                |               
|Net income                                                                                                 | $        6,639 | $        6,891 | $        5,462
|Noncash revenues, expenses, gains and losses     included in net income:                                   |                |                |               
|Depreciation                                                                                               | 697            | 633            | 527           
|Deferred federal income taxes                                                                              | 42             | (171)          | (207)         
|Earned ESOP shares                                                                                         | 648            | 556            | 503           
|Earned MRDP Shares                                                                                         | 693            | 713            | 770           
|Federal Home Loan Bank stock dividends                                                                     | (315)          | (309)          | (310)         
|Market value adjustment on loans held for sale                                                             | - -            | - -            | (175)         
|(Gain) loss on sale of real estate owned, net                                                              | (1)            | 61             | 21            
|(Gain) loss on sale of securities available for sale                                                       | (135)          | 15             | (205)         
|Gain on sale of loans                                                                                      | (1,451)        | (976)          | (367)         
|Provision for loan and real estate owned losses                                                            | 431            | 1,114          | 1,756         
|Loans originated for sale                                                                                  | (106,652)      | (67,531)       | (29,027)      
|Proceeds from loans held for sale                                                                          | 110,263        | 71,141         | 27,964        
|BOLI net earnings                                                                                          | (530)          | (36)           | - -           
|Net change in accrued interest receivable and other assets,     and other liabilities and accrued expenses | (583)          | (986)          | 1,173         
|Net cash provided by operating activities                                                                  | 9,746          | 11,115         | 7,885         
|                                                                                                           |                |                |               
|Cash Flows from Investing Activities                                                                       |                |                |               
|Net increase in interest-bearing deposits in banks                                                         | (4,018)        | (22,071)       | (313)         
|Activity in securities held to maturity:                                                                   |                |                |               
|Maturities and prepayments                                                                                 | 234            | - -            | - -           
|Purchases                                                                                                  | (519)          | - -            | - -           
|Activity in securities available for sale:                                                                 |                |                |               
|Sales                                                                                                      | 2,064          | 12,293         | 12,334        
|Maturities and prepayments                                                                                 | 8,595          | 5,326          | 10,549        
|Purchases                                                                                                  | (23,560)       | (17,200)       | (14,720)      
|Increase in loans receivable, net                                                                          | (3,160)        | (14,879)       | (23,653)      
|Additions to premises and equipment                                                                        | (2,462)        | (1,641)        | (2,573)       
|Additions to real estate owned                                                                             | (29)           | (63)           | (198)         
|Proceeds from sale of real estate owned                                                                    | 425            | 797            | 2,035         
|Purchase of BOLI                                                                                           | - -            | (10,000)       | - -           
|Net cash used in investing activities                                                                      | (22,430)       | (47,438)       | (16,539)      

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|                                                                           |                |                |               
|-------------------------------------------------------------------------- | -------------- | -------------- | --------------
|                                                                           | 2003           | 2002           | 2001          
|Cash Flows from Financing Activities                                       |                |                |               
|Increase in deposits                                                       | $      15,356  | $      49,944  | $      29,761 
|Repayment of Federal Home Loan Bank advances                               | (154)          | (16,119)       | (227,859)     
|Proceeds from Federal Home Loan Bank advances                              | - -            | 8,900          | 215,700       
|Proceeds from exercise of stock options                                    | 1,491          | 588            | 19            
|Repurchase of common stock                                                 | (3,852)        | (4,414)        | (5,918)       
|Payment of dividends                                                       | (2,150)        | (2,013)        | (1,925)       
|Net cash provided by financing activities                                  | 10,691         | 36,886         | 9,778         
|                                                                           |                |                |               
|Net increase (decrease) in cash                                            | (1,993)        | 563            | 1,124         
|                                                                           |                |                |               
|Cash and Due from Financial Institutions                                   |                |                |               
|Beginning of year                                                          | 10,580         | 10,017         | 8,893         
|                                                                           |                |                |               
|End of year                                                                | $        8,587 | $      10,580  | $      10,017 
|                                                                           |                |                |               
|Supplemental Disclosures of Cash Flow Information                          |                |                |               
|Income taxes paid                                                          | $        2,790 | $        3,700 | $        2,260
|Interest paid                                                              | 9,011          | 11,073         | 14,024        
|                                                                           |                |                |               
|Supplemental Disclosures of Non-Cash Investing    and Financing Activities |                |                |               
|Market value adjustment of securities held for sale, 
      net of tax     | $        (364) | $        255   | $        580  
|Loans transferred to real estate owned                                     | 1,157          | 689            | 1,254         
|Shares issued to management recognition      and development plan          | - -            | - -            | 3,224         
|Investment securities acquired in loan securitization                      | - -            | 12,227         | 11,926        
|Financed sale of real estate owned                                         | - -            | 256            | - -           

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|                                                                        |           |           |          
|----------------------------------------------------------------------- | --------- | --------- | ---------
|                                                                        | 2003      | 2002      | 2001     
|Comprehensive Income                                                    |           |           |          
|Net income                                                              | $   6,639 | $   6,891 | $   5,462
|Change in fair value of       securities available for sale, net of tax | (364)     | 255       | 580      
|                                                                        |           |           |          
|Total comprehensive income                                              | $   6,275 | $   7,146 | $   6,042

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Notes to Consolidated Financial Statements

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59

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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|                                                                                                            |          |          |         
|----------------------------------------------------------------------------------------------------------- | -------- | -------- | --------
|                                                                                                            | 2003     | 2002     | 2001    
|Net income, as reported                                                                                     | $  6,639 | $  6,891 | $  5,462
|Less total stock-based compensation expense determined    under fair value method for all qualifying awards | 224      | 259      | 301     
|                                                                                                            |          |          |         
|Pro forma net income                                                                                        | $  6,415 | $  6,632 | $  5,161
|                                                                                                            |          |          |         
|Earnings Per Share                                                                                          |          |          |         
|Basic:                                                                                                      |          |          |         
|As reported                                                                                                 | $1.74    | $1.76    | $1.30   
|Pro forma                                                                                                   | 1.68     | 1.70     | 1.23    
|Diluted:                                                                                                    |          |          |         
|As reported                                                                                                 | 1.66     | 1.71     | 1.28    
|Pro forma                                                                                                   | 1.61     | 1.66     | 1.23    

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Notes to Consolidated Financial Statements

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|                           |               |                      |                       |          
|-------------------------- | ------------- | -------------------- | --------------------- | ---------
|                           | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | FairValue
|September 30, 2003         |               |                      |                       |          
|                           |               |                      |                       |          
|Held to Maturity           |               |                      |                       |          
|Mortgage-backed securities | $279          | $- -                 | $- -                  | $279     
|                           |               |                      |                       |          
|Available for Sale         |               |                      |                       |          
|Mortgage-backed securities | $16,722       | $402                 | ($  26)               | $17,098  
|Municipal bonds            | 11            | 1                    | - -                   | 12       
|Mutual funds               | 34,546        | 12                   | (148)                 | 34,410   
|U.S. Agency Securities     | 2,500         | 11                   | - -                   | 2,511    
|                           |               |                      |                       |          
|Total                      | $53,779       | $426                 | ($174)                | $54,031  

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|                           |               |                      |                       |          
|-------------------------- | ------------- | -------------------- | --------------------- | ---------
|                           | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | FairValue
|September 30, 2002         |               |                      |                       |          
|                           |               |                      |                       |          
|Available for Sale         |               |                      |                       |          
|Mortgage-backed securities | $17,196       | $698                 | ($  6)                | $17,888  
|Municipal bonds            | 37            | 3                    | - -                   | 40       
|Mutual funds               | 23,545        | 109                  | - -                   | 23,654   
|                           |               |                      |                       |          
|Total                      | $40,778       | $810                 | ($  6)                | $41,582  

Mortgage-backed securities pledged as collateral for public fund deposits and federal treasury tax and loan deposits totaled $1,564,000 and $2,402,000 at September 30, 2003 and 2002, respectively.

The contractual maturities of debt securities at September 30, 2003 are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

|                                |                  |                    |               |          
|------------------------------- | ---------------- | ------------------ | ------------- | ---------
|                                | Held to Maturity | Available for Sale
|                                | AmortizedCost    | FairValue          | AmortizedCost | FairValue
|Due within one year             | $ - -            | $ - -              | $ - -         | $ - -    
|Due from one year to five years | - -              | - -                | 2,803         | 2,830    
|Due from five to ten years      | - -              | - -                | 2,263         | 2,360    
|Due after ten years             | 279              | 279                | 14,168        | 14,431   
|Mutual funds                    | - -              | - -                | 34,545        | 34,410   
|                                |                  |                    |               |          
|Total                           | $279             | $279               | $53,779       | $54,031  

Gross realized gains on sales of securities available for sale were $135,000, $8,000 and $227,000 for the years ended September 30, 2003, 2002 and 2001, respectively.  There were no gross realized losses on sales of securities available for sale for the year ended September 30, 2003.  Gross realized losses on sales of securities available for sale were $23,000 and $22,000, for the years ended September 30, 2002 and 2001, respectively.

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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):

|                                               |             |           
|---------------------------------------------- | ----------- | ----------
|                                               | 2003        | 2002      
|Mortgage loans:                                |             |           
|One- to four-family                            | $    94,370 | $  109,983
|Multi-family                                   | 18,241      | 24,135    
|Commercial                                     | 102,972     | 97,644    
|Construction and land development              | 94,117      | 80,144    
|Land                                           | 15,628      | 15,453    
|Total mortgage loans                           | 325,328     | 327,359   
|                                               |             |           
|Consumer loans:                                |             |           
|Home equity and second mortgage                | 19,233      | 13,718    
|Other                                          | 8,799       | 8,097     
|Total consumer loans                           | 28,032      | 21,815    
|                                               |             |           
|Commercial business loans                      | 9,475       | 9,365     
|                                               |             |           
|Total loans receivable                         | 362,835     | 358,539   
|                                               |             |           
|Less:                                          |             |           
|Undisbursed portion of loans in process        | 34,785      | 32,324    
|Deferred loan origination fees                 | 2,924       | 3,218     
|Allowance for loan losses                      | 3,891       | 3,630     
|                                               | 41,600      | 39,172    
|                                               |             |           
|Loans receivable, net                          | 321,235     | 319,367   
|                                               |             |           
|Loans held for sale (one- to four-family)      | 1,001       | 3,161     
|                                               |             |           
|Total loans receivable and loans held for sale | $322,236    | $322,528  

Certain related parties of the Bank, principally Bank directors and officers, were loan customers of the Bank in the ordinary course of business during 2003 and 2002.  Activity in related party loans during the years ended September 30 is as follows (dollars in thousands):

|                           |            |           
|-------------------------- | ---------- | ----------
|                           | 2003       | 2002      
|Balance, beginning of year | $    1,348 | $      793
|New loans                  | 1,640      | 1,246     
|Repayments                 | (1,947)    | (691)     
|                           |            |           
|Balance, end of year       | $    1,041 | $    1,348

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Note 4 - Loans Receivable and Loans Held for Sale (concluded)
At September 30, 2003 and 2002, the Bank had non-accruing loans totaling approximately $3,895,000 and $3,741,000, respectively.  At September 30, 2003 and 2002, 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, 2003, 2002 and 2001.  The average investment in non-accrual loans for the years ended September 30, 2003, 2002 and 2001 was $3,478,000, $4,095,000 and $3,778,000, respectively.
An analysis of the allowance for loan losses for the years ended September 30 follows (dollars in thousands):

|                           |        |        |        
|-------------------------- | ------ | ------ | -------
|                           | 2003   | 2002   | 2001   
|Balance, beginning of year | $3,630 | $3,050 | $2,640 
|Provision for loan losses  | 347    | 992    | 1,400  
|Loans charged off          | (168)  | (521)  | (1,012)
|Recoveries                 | 82     | 109    | 22     
|Net charge-offs            | (86)   | (412)  | (990)  
|Balance, end of year       | $3,891 | $3,630 | $3,050 

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

|                                              |  |        |       
|--------------------------------------------- |  | ------ | ------
|                                              |  | 2003   | 2002  
|Impaired loans without a valuation allowance  |  | $3,560 | $3,599
|Impaired loans with a valuation allowance     |  | 335    | 142   
|                                              |  |        |       
|                                              |  | $3,895 | $3,741
|                                              |  |        |       
|Valuation allowance related to impaired loans |  | $61    | $57   

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, 2003 and 2002 were $161,702,000 and $140,387,000, respectively.

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

|                              |            |            |           
|----------------------------- | ---------- | ---------- | ----------
|                              | 2003       | 2002       | 2001      
|Balance, at beginning of year | $      834 | $      508 | $      356
|Additions                     | 837        | 620        | 300       
|Amortization                  | (654)      | (294)      | (148)     
|                              |            |            |           
|Balance, end of year          | $    1,017 | $      834 | $      508

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Note 5 - Loan Servicing(concluded)
In October and June 2001, the Bank securitized and sold approximately $12.2 million and $11.9 million, respectively, in first mortgage loans.  In the securitization, the Bank retained servicing responsibilities, but has no other retained interest in the loans sold (see Note 24).

At September 30, 2003, the servicing rights fair value totaled $1,700,000, which was estimated using discount rate of 9.7% and a prepayment speed factor of 309.

There was no valuation allowance at September 30, 2003 and 2002.Note 6 - Premises and Equipment

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

|                                       |  |              |             
|-------------------------------------- |  | ------------ | ------------
|                                       |  | 2003         | 2002        
|Land                                   |  | $      3,241 | $      2,654
|Buildings and improvements             |  | 9,388        | 7,798       
|Furniture and equipment                |  | 3,956        | 3,282       
|Property held for future expansion     |  | 253          | 759         
|Construction and purchases in progress |  | 1,546        | 1,428       
|                                       |  | 18,384       | 15,921      
|Less accumulated depreciation          |  | 4,955        | 4,257       
|                                       |  |              |             
|Total premises and equipment           |  | $    13,429  | $    11,664 

Note 7 - Real Estate Owned

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

|                                         |  |              |             
|---------------------------------------- |  | ------------ | ------------
|                                         |  | 2003         | 2002        
|Real estate acquired through foreclosure |  | $      1,462 | $        900
|Allowance for possible losses            |  | (204)        | (220)       
|                                         |  |              |             
|Total real estate owned                  |  | $      1,258 | $        680

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

|                                |       |       |      
|------------------------------- | ----- | ----- | -----
|                                | 2003  | 2002  | 2001 
|Balance, beginning of year      | $ 220 | $ 137 | $  26
|Provision for additional losses | 84    | 241   | 356  
|Write-downs                     | (100) | (158) | (245)
|                                |       |       |      
|Balance, end of year            | $ 204 | $ 220 | $ 137

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Note 8 - Deposits

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

|                        |  |             |            
|----------------------- |  | ----------- | -----------
|                        |  | 2003        | 2002       
|Non-interest bearing    |  | $    29,133 | $    23,585
|NOW checking            |  | 57,614      | 42,222     
|Passbook savings        |  | 49,572      | 40,328     
|Money market accounts   |  | 39,444      | 47,888     
|Certificates of deposit |  | 131,909     | 138,293    
|                        |  |             |            
|Total deposits          |  | $ 307,672   | $ 292,316  

Time deposits of $100,000 or greater totaled $22,189,000 and $36,241,000 at September 30, 2003 and 2002, respectively.

Scheduled maturities of certificates of deposit for future years ending September 30 are as follows (dollars in thousands):

|           |  |  |             
|---------- |  |  | ------------
|2004       |  |  | $    99,241 
|2005       |  |  | 23,640      
|2006       |  |  | 1,650       
|2007       |  |  | 2,925       
|2008       |  |  | 2,439       
|Thereafter |  |  | 2,014       
|           |  |  |             
|Total      |  |  | $    131,909

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

|                        |          |          |         
|----------------------- | -------- | -------- | --------
|                        | 2003     | 2002     | 2001    
|NOW checking            | $    335 | $    410 | $    446
|Passbook savings        | 570      | 727      | 728     
|Money market accounts   | 704      | 1,101    | 921     
|Certificates of deposit | 3,961    | 5,278    | 7,396   
|                        |          |          |         
|Total                   | $  5,570 | $  7,516 | $  9,491

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Note 9 - Federal Home Loan Bank Advances

The Bank has long-term borrowing lines with the Federal Home Loan Bank of Seattle; maximum total credit on the lines is 35% of the Bank's total assets.  Total borrowings under these lines were $61,605,000 and $61,759,000 at September 30, 2003 and 2002, respectively.
The long-term borrowings mature at various dates through January 2011, bear interest at rates ranging from 3.2% to 6.6%, and are due in monthly payments aggregating $13,000 plus interest.  Under the Advances, Security and Deposit Agreement, virtually all of the Bank's assets, not otherwise encumbered, are pledged as collateral for advances.  Principal reductions due for future years ending September 30 are as follows (dollars in thousands):

|           |  |  |           
|---------- |  |  | ----------
|2004       |  |  | $    6,668
|2005       |  |  | 4,583     
|2006       |  |  | 10,591    
|2007       |  |  | 65        
|2008       |  |  | 15,070    
|Thereafter |  |  | 24,628    
|           |  |  |           
|           |  |  | $  61,605 

Note 10 - Other Liabilities and Accrued Expenses

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

|                                                       |  |            |        
|------------------------------------------------------ |  | ---------- | -------
|                                                       |  | 2003       | 2002   
|Federal income taxes                                   |  | $      - - | $  318 
|Accrued pension and profit sharing payable             |  | 998        | 900    
|Accrued interest payable on deposits and FHLB advances |  | 243        | 308    
|Accounts payable and accrued expenses - other          |  | 1,504      | 1,057  
|                                                       |  |            |        
|Total other liabilities and accrued expenses           |  | $ 2,745    | $ 2,583

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Note 11 - 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 were 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):

|                           |         |         |        
|-------------------------- | ------- | ------- | -------
|                           | 2003    | 2002    | 2001   
|Current                    | $ 3,008 | $ 3,603 | $ 2,948
|Deferred benefit           | (42)    | (171)   | (207)  
|                           |         |         |        
|Total federal income taxes | $ 2,966 | $ 3,432 | $ 2,741

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

|                               |  |           |          
|------------------------------ |  | --------- | ---------
|                               |  | 2003      | 2002     
|Deferred Tax Assets            |  |           |          
|Accrued interest on loans      |  | $      96 | $      80
|Accrued vacation               |  | 100       | 73       
|Deferred compensation          |  | 92        | 115      
|Unearned ESOP shares           |  | 363       | 323      
|Allowance for possible losses  |  | 1,255     | 1,075    
|Unearned MRDP shares           |  | 36        | 37       
|Total deferred tax assets      |  | 1,942     | 1,703    
|                               |  |           |          
|Deferred Tax Liabilities       |  |           |          
|FHLB stock dividends           |  | 794       | 687      
|Depreciation                   |  | 168       | 90       
|Unrealized securities gains    |  | 86        | 274      
|Mortgage servicing rights      |  | 242       | 146      
|Total deferred tax liabilities |  | 1,290     | 1,197    
|                               |  |           |          
|Net deferred tax assets        |  | $    652  | $    506 

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Note 11 - Federal Income Taxes(concluded)

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

|                        |            |         |            |         |            |        
|----------------------- | ---------- | ------- | ---------- | ------- | ---------- | -------
|                        | 2003Amount | Percent | 2002Amount | Percent | 2001Amount | Percent
|                        |            |         |            |         |            |        
|Taxes at statutory rate | $3,362     | 35.0%   | $3,613     | 35.0%   | $2,871     | 35.0%  
|BOLI income             | (185)      | (1.9)   | (13)       | (.1)    | - -        | - -    
|Other - net             | (211)      | (2.2)   | (168)      | (1.7)   | (130)      | (1.6)  
|                        |            |         |            |         |            |        
|Federal income taxes    | $2,966     | 30.9%   | $3,432     | 33.2%   | $2,741     | 33.4%  

Note 12 - Profit Sharing Plans
The Bank has established a 401(k) profit sharing plan for those employees who meet the eligibility requirements set forth in the plan.  Eligible employees may contribute a maximum of 15% of their compensation.  Contributions by the Bank are at the discretion of the Board of Directors.  Bank contributions totaled $497,000, $385,000 and $362,000 for the years ended September 30, 2003, 2002 and 2001, respectively.
In addition, the Bank has an employee bonus plan based on net income.  Bonuses accrued for the years ended September 30, 2003, 2002 and 2001 totaled $261,000, $275,000 and $208,000, respectively.Note 13 - 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 may be 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.  As of September 30, 2003, 16,958 ESOP shares had been distributed to participants.  
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%.  The balance of the loan at September 30, 2003 was $5,959,000.

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Note 13 - Employee Stock Ownership Plan(concluded)
Shares held by the ESOP as of September 30 were classified as follows:

|                               |         |         |        
|------------------------------ | ------- | ------- | -------
|                               | 2003    | 2002    | 2001   
|Unallocated shares             | 326,216 | 361,483 | 396,750
|Shares released for allocation | 185,826 | 162,918 | 129,722
|                               |         |         |        
|Total ESOP shares              | 512,042 | 524,401 | 526,472

The approximate fair market value of the Bank's unallocated shares at September 30, 2003, 2002 and 2001, is $7,797,000, $6,051,000 and $5,872,000, respectively.  Compensation expense recognized under the ESOP was $454,000, $320,000 and $273,000 for the years ended September 30, 2003, 2002 and 2001, respectively.Note 14 - Stock Options
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.  If certain Company performance criteria are met vesting will be accelerated to 20% per year.  These criteria were met in 2003, 2002 and 2001.  At September 30, 2003, options for 16,207 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 FreeInterest Rate | Expected  Life (Years) | Expected  Dividends | ExpectedVolatility
|Fiscal 2003                                                                                                | 3.4%                   | 8                      | 2.5%                | 24.1%             
|Fiscal 2002                                                                                                | 4.7                    | 8                      | 2.9                 | 19.3              
|Fiscal 2001                                                                                                | 5.3                    | 8                      | 2.8                 | 36.2              
|                                                                                                           |                        |                        |                     |                   
|The average fair value of options granted in 2003, 2002 and 2001 was $4.62, $4.05 and $3.57, respectively.

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Note 14 - Stock Options(concluded)

Stock option activity is summarized in the following table:

|                               |  |                 |                             
|------------------------------ |  | --------------- | ----------------------------
|                               |  | Number ofShares | WeightedAverageExercisePrice
|Outstanding September 30, 2000 |  | 572,494         | $12.02                      
|Grants                         |  | 38,339          | 14.35                       
|Options exercised              |  | (1,600)         | 12.00                       
|Outstanding September 30, 2001 |  | 609,233         | 12.16                       
|Grants                         |  | 15,000          | 15.62                       
|Options exercised              |  | (44,253)        | 12.00                       
|Forfeited                      |  | (11,630)        | 12.00                       
|Outstanding September 30, 2002 |  | 568,350         | 12.27                       
|Grants                         |  | 30,840          | 19.37                       
|Options exercised              |  | (99,071)        | 12.02                       
|Outstanding September 30, 2003 |  | 500,119         | 12.75                       

Additional information regarding options outstanding as of September 30, 2003 is as follows:

|               |                                                     |                        |                              |                        |                             
|-------------- | --------------------------------------------------- | ---------------------- | ---------------------------- | ---------------------- | ----------------------------
|               | Options Outstanding                                 | Options Exercisable   
|ExercisePrice  | Weighted  Average   RemainingContractualLife(Years) | Number     Outstanding | WeightedAverageExercisePrice | Number     Exercisable | WeightedAverageExercisePrice
|$12.00 - 12.38 | 4.8                                                 | 420,940                | $12.01                       | 312,984                | $12.00                      
|13.59 - 14.90  | 7.7                                                 | 33,339                 | 14.70                        | 13,336                 | 14.70                       
|15.20 - 15.96  | 8.5                                                 | 15,000                 | 15.62                        | 3,000                  | 15.62                       
|19.05          | 9.4                                                 | 28,340                 | 19.05                        | - -                    | - -                         
|23.10          | 9.9                                                 | 2,500                  | 23.10                        | - -                    | - -                         
|               |                                                     |                        |                              |                        |                             
|               | 5.4                                                 | 500,119                | $12.75                       | 329,320                | $12.15                      

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Note 15 - 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, 2003 and 2002, $239,000 has been accrued under the agreement.  Payment under this agreement is expected to begin in February 2004.
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.Note 16 - 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.  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.  No shares were awarded during the years ended September 30, 2002 and 2003.  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.  At September 30, 2003, participants were vested in 122,955 of the shares initially awarded.  Compensation expense was $693,000, $713,000 and $770,000 for the years ended September 30, 2003, 2002 and 2001, respectively.

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Note 17 - Commitments and ContingenciesThe 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 not 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):

|                             |  |         |        
|---------------------------- |  | ------- | -------
|                             |  | 2003    | 2002   
|Commitments to extend credit |  | $37,448 | $19,599

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.Note 18 - 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.

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Note 18 - Regulatory Matters(continued)
As of September 30, 2003, 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.

|                                          |              |       |                  |                                                     |                  |      
|----------------------------------------- | ------------ | ----- | ---------------- | --------------------------------------------------- | ---------------- | -----
|                                          |              |       | Capital Adequacy | To be Well CapitalizedUnder PromptCorrective Action
|                                          | ActualAmount | Ratio | PurposesAmount   | Ratio                                               | ProvisionsAmount | Ratio
|September 30, 2003                        |              |       |                  |                                                     |                  |      
|Tier 1 capital (to average assets):       |              |       |                  |                                                     |                  |      
|Consolidated                              | $77,000      | 17.2% | $17,946          | 4.0%                                                | N/A              | N/A  
|Timberland Bank                           | 65,790       | 14.8  | 17,764           | 4.0                                                 | $22,205          | 5.0% 
|Tier 1 capital (to risk-weighted assets): |              |       |                  |                                                     |                  |      
|Consolidated                              | 77,000       | 23.6  | 13,039           | 4.0                                                 | N/A              | N/A  
|Timberland Bank                           | 65,790       | 20.2  | 13,003           | 4.0                                                 | 19,505           | 6.0  
|Total capital (to risk-weighted assets):  |              |       |                  |                                                     |                  |      
|Consolidated                              | 80,891       | 24.8  | 26,078           | 8.0                                                 | N/A              | N/A  
|Timberland Bank                           | 69,681       | 21.4  | 26,007           | 8.0                                                 | 32,509           | 10.0 
|                                          |              |       |                  |                                                     |                  |      
|September 30, 2002                        |              |       |                  |                                                     |                  |      
|Tier 1 capital (to average assets):       |              |       |                  |                                                     |                  |      
|Consolidated                              | $73,782      | 17.6% | $16,732          | 4.0%                                                | N/A              | N/A  
|Timberland Bank                           | 64,679       | 15.6  | 16,571           | 4.0                                                 | $20,714          | 5.0% 
|Tier 1 capital (to risk-weighted assets): |              |       |                  |                                                     |                  |      
|Consolidated                              | 73,782       | 23.2  | 12,706           | 4.0                                                 | N/A              | N/A  
|Timberland Bank                           | 64,679       | 20.5  | 12,611           | 4.0                                                 | 18,916           | 6.0  
|Total capital (to risk-weighted assets):  |              |       |                  |                                                     |                  |      
|Consolidated                              | 77,412       | 24.4  | 25,413           | 8.0                                                 | N/A              | N/A  
|Timberland Bank                           | 68,309       | 21.7  | 25,221           | 8.0                                                 | 31,526           | 10.0 

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Note 18 - Regulatory Matters(concluded)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-chartered 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.Note 19 - Condensed Financial Information - Parent Company OnlyCondensed Balance Sheets - September 30
(Dollars in Thousands)

|                                                                |  |             |            
|--------------------------------------------------------------- |  | ----------- | -----------
|                                                                |  | 2003        | 2002       
|Assets                                                          |  |             |            
|Cash and due from financial institutions                        |  | $      143  | $        51
|Interest bearing deposits in banks                              |  | 1,352       | 259        
|Investments and mortgage-backed securities (available for sale) |  | 3,723       | 3,748      
|Loan receivable from Bank                                       |  | 5,959       | 6,367      
|Investment in Bank                                              |  | 66,159      | 65,285     
|Other assets                                                    |  | 329         | 16         
|                                                                |  |             |            
|Total assets                                                    |  | $  77,665   | $  75,726  
|                                                                |  |             |            
|Liabilities and Shareholders' Equity                            |  |             |            
|Note payable to Bank                                            |  | $        35 | $    1,325 
|Accrued expenses                                                |  | 19          | 5          
|Shareholders' equity                                            |  | 77,611      | 74,396     
|                                                                |  |             |            
|Total liabilities and shareholders' equity                      |  | $  77,665   | $  75,726  

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Note 19 - Condensed Financial Information - Parent Company Only(continued)
Condensed Statements of Income - Years Ended September 30
(Dollars in Thousands)

|                                                                                  |            |            |           
|--------------------------------------------------------------------------------- | ---------- | ---------- | ----------
|                                                                                  | 2003       | 2002       | 2001      
|Operating Income                                                                  |            |            |           
|Interest bearing deposits in banks                                                | $      12  | $        4 | $      40 
|Interest on investments and mortgage-backed securities                            | - -        | - -        | 67        
|Interest on loan receivable from Bank                                             | 528        | 561        | 592       
|Dividends on investments                                                          | 88         | 130        | 180       
|Gain on sale of investment securities available for sale                          | - -        | 5          | 227       
|Dividends from Bank                                                               | 6,650      | 5,010      | 1,949     
|Other                                                                             | - -        | - -        | 1         
|Total operating income                                                            | 7,278      | 5,710      | 3,056     
|                                                                                  |            |            |           
|Operating Expenses                                                                | 329        | 237        | 191       
|                                                                                  |            |            |           
|Income before income taxes and equity
    in undistributed income of Bank         | 6,949      | 5,473      | 2,865     
|                                                                                  |            |            |           
|Income Taxes                                                                      | 16         | 83         | 238       
|                                                                                  |            |            |           
|Income before equity in undistributed income of Bank                              | 6,933      | 5,390      | 2,627     
|                                                                                  |            |            |           
|Equity in Undistributed Income of Bank (Dividends in Excess    of Income of Bank) | (294)      | 1,501      | 2,835     
|                                                                                  |            |            |           
|Net income                                                                        | $    6,639 | $    6,891 | $    5,462

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Note 19 - Condensed Financial Information - Parent Company Only(concluded)Condensed Statements of Cash Flows - Years Ended September 30
(Dollars in Thousands)

|                                                                                      |          |           |          
|------------------------------------------------------------------------------------- | -------- | --------- | ---------
|                                                                                      | 2003     | 2002      | 2001     
|Cash Flows from Operating Activities                                                  |          |           |          
|Net income                                                                            | $ 6,639  | $ 6,891   | $ 5,462  
|Adjustments to reconcile net income to net cash provided:                             |          |           |          
|Equity in undistributed income of Bank (dividends in excess        of income of Bank) | 294      | (1,501)   | (2,835)  
|ESOP shares earned                                                                    | 648      | 556       | 503      
|MRDP shares earned                                                                    | 803      | 724       | 776      
|Gain on sale of securities available for sale                                         | - -      | (5)       | (227)    
|Other, net                                                                            | (291)    | (739)     | 754      
|Net cash provided by operating activities                                             | 8,093    | 5,926     | 4,433    
|                                                                                      |          |           |          
|Cash Flows from Investing Activities                                                  |          |           |          
|Net (increase) decrease in interest-bearing deposits in banks                         | (1,093)  | (32)      | 913      
|Investment in Bank                                                                    | (1,515)  | (1,280)   | (485)    
|Purchases of securities available for sale                                            | - -      | - -       | (2,500)  
|Proceeds from maturities of securities available for sale                             | - -      | - -       | 4,122    
|Proceeds from sales of securities available for sale                                  | - -      | 126       | 430      
|Principal repayments on loan receivable from Bank                                     | 408      | 376       | 346      
|Net cash provided by (used in) investing activities                                   | (2,200)  | (810)     | 2,826    
|                                                                                      |          |           |          
|Cash Flows from Financing Activities                                                  |          |           |          
|Increase (decrease) in note payable                                                   | (1,290)  | 750       | 575      
|Proceeds from exercise of stock options                                               | 1,491    | 588       | 19       
|Repurchase of common stock                                                            | (3,852)  | (4,414)   | (5,918)  
|Payment of dividends                                                                  | (2,150)  | (2,013)   | (1,925)  
|Net cash used in financing activities                                                 | (5,801)  | (5,089)   | (7,249)  
|                                                                                      |          |           |          
|Net increase in cash                                                                  | 92       | 27        | 10       
|                                                                                      |          |           |          
|Cash and Due from Financial Institutions                                              |          |           |          
|Beginning of year                                                                     | 51       | 24        | 14       
|                                                                                      |          |           |          
|End of year                                                                           | $    143 | $      51 | $      24

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Note 20 - 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 is as follows (dollars in thousands, except per share amounts):

|                                                             |           |           |          
|------------------------------------------------------------ | --------- | --------- | ---------
|                                                             | 2003      | 2002      | 2001     
|Basic EPS Computation                                        |           |           |          
|Numerator - net income                                       | $ 6,639   | $ 6,891   | $ 5,462  
|                                                             |           |           |          
|Denominator - weighted average common shares outstanding     | 3,814,344 | 3,905,544 | 4,193,314
|                                                             |           |           |          
|Basic EPS                                                    | $1.74     | $1.76     | $1.30    
|                                                             |           |           |          
|                                                             |           |           |          
|Diluted EPS Computation                                      |           |           |          
|Numerator - net income                                       | $ 6,639   | $ 6,891   | $ 5,462  
|                                                             |           |           |          
|Denominator - weighted average common shares outstanding     | 3,814,344 | 3,905,544 | 4,193,314
|Effect of dilutive stock options                             | 158,238   | 108,563   | 79,299   
|Effect of dilutive MRDP shares                               | 31,619    | 19,078    | - -      
|Weighted average common shares outstanding-assuming dilution | 4,004,201 | 4,033,185 | 4,272,613
|                                                             |           |           |          
|Diluted EPS                                                  | $1.66     | $1.71     | $1.28    

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Note 21 - Comprehensive Income
Net unrealized gains and losses included in comprehensive income were computed as follows for the years ended September 30 (dollars in thousands):

|                                                                   |                  |                     |                 
|------------------------------------------------------------------ | ---------------- | ------------------- | ----------------
|                                                                   | Before-TaxAmount | Tax(Benefit)Expense | Net-of-TaxAmount
|2003                                                               |                  |                     |                 
|Unrealized holding losses arising during the year                  | ($417)           | ($142)              | ($275)          
|Reclassification adjustment for gains      included in net income  | (135)            | (46)                | (89)            
|                                                                   |                  |                     |                 
|Net unrealized losses                                              | ($552)           | ($188)              | ($364)          
|                                                                   |                  |                     |                 
|                                                                   |                  |                     |                 
|2002                                                               |                  |                     |                 
|Unrealized holding gains arising during the year                   | $372             | $127                | $245            
|Reclassification adjustment for losses      included in net income | 15               | 5                   | 10              
|                                                                   |                  |                     |                 
|Net unrealized gains                                               | $387             | $132                | $255            
|                                                                   |                  |                     |                 
|                                                                   |                  |                     |                 
|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            

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Note 22 - 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 and Mortgage-Backed SecuritiesThe fair value of investments and mortgage-backed securities has been based on quoted market prices or dealer quotes.Federal Home Loan Bank StockThe recorded values of stock holdings approximate fair value.Loans Receivable and Loans Held for SaleFair 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.  Loans held for sale has been based on quoted market prices. DepositsThe 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 AdvancesThe 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 InterestThe recorded amounts of accrued interest approximate fair value.Off-Balance Sheet Instruments
The fair value of commitments to extend credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the customers.  Since the majority of the Bank's off-balance sheet instruments consist of non-fee producing, variable-rate commitments, the Bank has determined they do not have a distinguishable fair value. (continued)

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Note 22 - Fair Values of Financial Instruments(concluded)
The estimated fair values of financial instruments at September 30 were as follows (dollars in thousands):

|                                                                                     |                       |              |                       |             
|------------------------------------------------------------------------------------ | --------------------- | ------------ | --------------------- | ------------
|                                                                                     | 2003   RecordedAmount | Fair   Value | 2002   RecordedAmount | Fair   Value
|Financial Assets                                                                     |                       |              |                       |             
|Cash and due from financial institutions      and interest bearing deposits in banks | $    38,098           | $    38,098  | $    36,073           | $    36,073 
|Investments and mortgage-backed securities                                           | 54,310                | 54,310       | 41,582                | 41,582      
|Federal Home Loan Bank stock                                                         | 5,454                 | 5,454        | 5,139                 | 5,139       
|Loans receivable                                                                     | 322,236               | 324,374      | 322,528               | 324,927     
|Accrued interest receivable                                                          | 1,687                 | 1,687        | 1,604                 | 1,604       
|                                                                                     |                       |              |                       |             
|                                                                                     |                       |              |                       |             
|Financial Liabilities                                                                |                       |              |                       |             
|Deposits                                                                             | $ 307,672             | $ 309,087    | $ 292,316             | $ 293,411   
|Federal Home Loan Bank advances                                                      | 61,605                | 67,274       | 61,759                | 68,695      
|Accrued interest payable                                                             | 243                   | 243          | 308                   | 308         

The Bank assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the fair values of the Bank's financial instruments will change when interest rate levels change and that change may either be favorable or unfavorable to the Bank.  Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk.  However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment.  Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.  Management monitors rates and maturities of assets and liabilities, and attempts to minimize interest rate risk by adjusting terms of new loans, and deposits and by investing in securities with terms that mitigate the Bank's overall interest rate risk.Note 23 - Stock Repurchase Plan
In February 2003, the Company initiated a stock repurchase plan for the purchase of 380,028 shares of stock, which had not been completed as of September 30, 2003.  As of September 30, 2003, 112,108 shares had been repurchased.  The remainder is anticipated to be purchased during the year ending September 30, 2004.

85

<PAGE>

---

---

Note 24 - Securitization of Mortgage LoansIn October 2001, the Bank securitized approximately $12.2 million in first mortgage loans.  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 $95,700 was recognized in this transaction, based on the following factors:  estimated life of loans of 84 months and cash flow discount rate of 6.7%.  Investors have no recourse to the Bank's other assets in the event debtors fail to pay the balance owned.
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.Note 25 - Subsequent Event
On October 28, 2003, the Board of Directors approved a dividend in the amount of $.14 per share to be paid on November 24, 2003 to shareholders of record as of November 10, 2003.Note 26 - Selected Quarterly Financial Data (Unaudited)
The following selected financial data are presented for the quarters ended (dollars in thousands, except per share amounts):

|                             |                   |              |               |                 
|---------------------------- | ----------------- | ------------ | ------------- | ----------------
|                             | September 30,2003 | June 30,2003 | March 31,2003 | December 31,2002
|Interest and dividend income | $ 6,748           | $ 6,774      | $ 6,994       | $ 7,207         
|Interest expense             | (2,064)           | (2,178)      | (2,243)       | (2,461)         
|Net interest income          | 4,684             | 4,596        | 4,751         | 4,746           
|                             |                   |              |               |                 
|Provision for loan losses    | - -               | (66)         | (108)         | (173)           
|Noninterest income           | 1,214             | 1,648        | 1,499         | 1,646           
|Noninterest expense          | (3,864)           | (3,943)      | (3,534)       | (3,491)         
|                             |                   |              |               |                 
|Income before income taxes   | 2,034             | 2,235        | 2,608         | 2,728           
|                             |                   |              |               |                 
|Federal income taxes         | 594               | 694          | 818           | 860             
|                             |                   |              |               |                 
|Net income                   | $ 1,440           | $ 1,541      | $ 1,790       | $ 1,868         
|                             |                   |              |               |                 
|Basic earnings per share     | $.38              | $.41         | $.47          | $.48            
|Diluted earnings per share   | .36               | .39          | .45           | .46             
|(continued)                  |                   |              |               |                 

86

<PAGE>

---

---

Note 26 - Selected Quarterly Financial Data (Unaudited) (concluded)

|                             |                   |              |               |                 
|---------------------------- | ----------------- | ------------ | ------------- | ----------------
|                             | September 30,2002 | June 30,2002 | March 31,2002 | December 31,2001
|Interest and dividend income | $ 7,400           | $ 7,406      | $ 7,516       | $ 7,941         
|Interest expense             | (2,600)           | (2,635)      | (2,693)       | (2,962)         
|Net interest income          | 4,800             | 4,771        | 4,823         | 4,979           
|                             |                   |              |               |                 
|Provision for loan losses    | (200)             | (200)        | (200)         | (392)           
|Noninterest income           | 1,261             | 1,190        | 1,046         | 1,161           
|Noninterest expense          | (3,326)           | (3,138)      | (3,146)       | (3,106)         
|                             |                   |              |               |                 
|Income before income taxes   | 2,535             | 2,623        | 2,523         | 2,642           
|                             |                   |              |               |                 
|Federal income taxes         | 777               | 825          | 894           | 936             
|                             |                   |              |               |                 
|Net income                   | $ 1,758           | $ 1,798      | $ 1,629       | $ 1,706         
|                             |                   |              |               |                 
|Basic earnings per share     | $.45              | $.46         | $.42          | $.43            
|Diluted earnings per share   | .44               | .45          | .41           | .42             
|                             |                   |              |               |                 

87

<PAGE>

---



**Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure**

Not applicable.

******Item 9A.  Controls and Procedures**

(a)    	Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure
controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was
carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial
Officer and several other members of the Company's senior management within the 90-day period preceding the filing
date of this annual report.  The Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in
a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's
rules and forms.

(b)    	Changes in Internal Controls:  In the year ended September 30, 2003, the Company did not make any
significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could
significantly affect these controls.  A number of internal control procedures were, however, modified during the year
in conjuction with the Bank's conversion to a new core processing system.  The Company also continued to implement
suggestions from its internal auditor and independent auditors on ways to strengthen existing controls.



The information contained under the section captioned "Proposal I -- Election of Directors" is included in the
Company's Definitive Proxy Statement for the 2004 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.

|                  |                 |                              
|----------------- | --------------- | -----------------------------
|                  | Age atSeptember | Position                     
|Name              | 30, 2003        | Company                      
|                  |                 |                              
|Clarence E. Hamre | 69              | Chairman of the Board        
|Michael R. Sand   | 49              | President and Chief Executive
|                  |                 | Officer                      
|Dean J. Brydon    | 36              | Chief Financial Officer      
|Marci A. Basich   | 35              | Treasurer                    

**Biographical Information**

**Clarence E. Hamre**is Chairman of the Board of the Company and the Bank.  He has been affiliated with the
Bank since 1969 and served as President and Chief Executive Officer of the Bank since 1969 and as President and Chief
Executive Officer of the Company since 1997.  In January 2003, Mr. Hamre retired as President of the Bank and the
Company and on September 30, 2003, he retired as Chief Executive Officer of the Bank and the Company.

88

<PAGE>

**Michael R. Sand** has been affiliated with the Bank since 1977 and has served as President of the Bank and
the Company since January 23, 2003.  On September 30, 2003, he was appointed as Chief Executive Officer of the Bank
and Company.  Prior to appointment as President and Chief Executive Officer, Mr. Sand had served as Executive Vice
President and Secretary of the Bank since 1993 and as Executive Vice President and Secretary of the Company since
its formation in 1997.

**Dean J. Brydon** has been affiliated with the Bank since 1994 and has served as the Chief Financial Officer
of the Company and the Bank since January 2000.  Mr. Brydon is a Certified Public Accountant.

**Marci A. Basich** has been affiliated with the Bank since 1999 and has served as Treasurer of the Company
and the Bank since January 2002.  Ms. Basich is a Certified Public Accountant. 
From 1998 to 1999, Ms. Basich was the Senior Accountant of 4th Dimension
Computers, Inc., a computer software and service company.

**Audit Committee Financial Expert**

The Audit Committee of the Company is composed of Directors Backstrom, Warren, Robbel and Smith.
Each member of the Audit Committee is "independent" as defined in the Nasdaq Stock Market listing standards.  The
Company's Board of Directors has designated Directors Warren and Robbel as the Audit Committee financial experts,
as defined in the SEC's Regulation S-K.  Directors Warren and Robbel are independent as that term is used in Item
7(d)(3)(iv) of Schedule 14A promulgated under the Exchange Act.

**Code of Ethics**

The Board of Directors adopted a Code of Ethics for the Company's officers (including its senior financial
officers), directors and employees.  The Code of Ethics requires the Company's officers, directors and employees to
maintain the highest standards of professional conduct.  A copy of the Code of Ethics is attached hereto as Exhibit 14.

**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**

**Equity Compensation Plan Information.**	The information contained under the section captioned "Executive
Compensation -- Equity Compensation Plan Information" is included in the Company's Proxy Statement and is
incorporated herein by reference.

(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.

(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.

89

<PAGE>

(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.

**Item 14.  Principal Accountant Fees and Services**

The information contained under the section captioned "Independent Auditors" is included in the Company's
Proxy Statement and is incorporated herein by reference.



(a)    	Exhibits

| | 3.1  | Articles of Incorporation of the Registrant (1)                                           
| | ---- | ------------------------------------------------------------------------------------------
| | 3.2  | Bylaws of the Registrant (1)                                                              
| | 3.3  | Amendment to Bylaws(2)                                                                    
| | 10.1 | Employee Severance Compensation Plan (3)                                                  
| | 10.2 | Employee Stock Ownership Plan (3)                                                         
| | 10.3 | 1999 Stock Option Plan (4)                                                                
| | 10.4 | Management Recognition and Development Plan (4)                                           
| | 14   | Code of Ethics                                                                            
| | 21   | Subsidiaries of the Registrant                                                            
| | 23   | Consent of Accountants                                                                    
| | 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
| | 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
| | 32   | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act                           

____________

|(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 Annual Report on Form 10-K for the year ended September 30,
2002.     
|(3) | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December
31, 1997.
|(4) | 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 on Form 8-K was filed on July 22, 2003 to report the Registrant's earnings for the quarter
ended June 30, 2003.

90

<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 15, 2003 | By:/s/Michael R. Sand
|------------------------ | ---------------------
|                         |                      
|                         |                      

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/Michael R. Sand     | President, Chief Executive Officer and       | December 15, 2003
|Michael R. Sand        | Director                                    
|                       |                                              |                  
|                       | (Principal Executive Officer)                |                  
|                      
|                      
|/s/Clarence E. Hamre   | Chairman of the Board                        | December 15, 2003
|Clarence E. Hamre      |                                             
|                       |                                              |                  
|                       |                                              |                  
|                       |                                              |                  
|/s/Dean J. Brydon      | Chief Financial Officer                      | December 15, 2003
|Dean J. Brydon         | (Principal Financial and Accounting Officer)
|                      
|                      
|                       | Director                                     |                  
|Andrea M. Clinton     
|                      
|                      
|/s/Robert Backstrom    | Director                                     | December 15, 2003
|Robert Backstrom      
|                      
|                      
|                       | Director                                     |                  
|Richard R. Morris, Jr.
|                      
|                      
|/s/ David A. Smith     | Director                                     | December 15, 2003
|David A. Smith        
|                      
|                      
|/s/Harold L. Warren    | Director                                     | December 15, 2003
|Harold L. Warren      
|                      
|                      
|/s/ Jon C. Parker      | Director                                     | December 15, 2003
|Jon C. Parker         
|                      
|                      
|                       | Director                                     |                  
|James A. Mason         |                                              |                  
|                       |                                              |                  
|                       |                                              |                  
|                       |                                              |                  
|/s/Ronald A. Robbel    | Director                                     | December 15, 2003
|Ronald A. Robbel      

91

<PAGE>

**Exhibit 14
Code of Ethics**



**<PAGE>**



September 23, 2003

**TIMBERLAND BANCORP, INC.
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS**

**Introduction**

The business of Timberland Bancorp, Inc. ("Timberland") is built on trust.  Our stockholders, customers and
employees depend upon our honesty and integrity.  Accordingly, the Board of Directors of Timberland has adopted this
Code of Ethics ("Code") to express a code of conduct applicable to our Chief Executive Officer, President, Chief
Financial Officer, and Treasurer  (collectively, the "Senior Financial Officers").  This Code does not constitute a new
set of requirements to which the Senior Financial Officers must adhere, but simply reduces to writing the behavior that
has always been required of the Senior Financial Officers.

The Code sets forth certain standards for the guidance of the Senior Financial Officers.  The Code should be
considered as illustrative, but not regarded as all-inclusive.  The Senior Financial Officers are also subject to
Timberland's Code of Ethics applicable to all officers and employees.

**Honest and Ethical Conduct**

Each Senior Financial Officer must act honestly and ethically.  Senior Financial Officers should also promote
honest and ethical behavior within Timberland.

Acting honestly and ethically includes the duty to avoid actual or apparent conflicts of interest, as well as
situations which could result in an actual or apparent conflict of interest.  A conflict of interest may arise when personal
or financial interest is adverse to, or appears adverse to, the interests of Timberland.  Each Senior Financial Officer
should report to the Audit Committee of the Board of Directors any material transaction or relationship that reasonably
could be expected to result in a conflict of interest.

In addition to the duty to avoid conflicts of interest, Senior Financial Officers must treat confidential
information properly.  All information obtained by virtue of employment with Timberland should be held in strictest
confidence.  Confidential information must not be disclosed to anyone except as required for business transactions or
as required by law.  When confidential information is disclosed, it must be done in a manner that does not risk violating
confidentiality.

**Preparation of Public Documents**

Each Senior Financial Officer must ensure that all public documents and documents filed with the Securities
and Exchange Commission which he or she is involved in preparing or reviewing contain full, fair, accurate, timely and
understandable disclosure.  In order to ensure this, the Senior Financial Officers must maintain the skills relevant to
Timberland's needs.  The Senior Financial Officers are also responsible for establishing and maintaining appropriate
disclosure controls and procedures and internal controls.

**Compliance with Laws, Rules and Regulations**

Each Senior Financial Officer must comply with all local, state and federal laws, rules and regulations.  Any
Senior Financial Officer engaged in activities found to be in conflict with and against these laws, rules and regulations
will be subject to termination of employment.  The Senior Financial Officers should also cause other officers and
employees to comply with all local, state and federal laws, rules and regulations.

<PAGE>

**Administration of the Code**

Any violation or suspected violation of this Code of Ethics must be promptly reported to the Audit Committee
of the Board of Directors.  Violators of the Code may be subject to disciplinary action, up to and including termination
of employment.  Questions regarding the Code and requests for a waiver from the Code should be brought to the Audit
Committee.  The Audit Committee will administer the Code and will make periodic reports to the Board of Directors,
as necessary.

This Code of Ethics shall be publicly available.  Changes to, and waivers from, the Code shall also be disclosed
to the public.

<PAGE>

**Exhibit 21**

|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>**

INDEPENDENT AUDITOR'S CONSENT

We consent to the incorporation by reference in Registration
Statement No. 333-32386 of Timberland Bancorp, Inc. on Form S-8 of our report
dated November 12, 2003, appearing in the Annual Report on Form 10-K of
Timberland Bancorp, Inc. for the year ended September 30, 2003.

/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Tacoma, Washington
December 24, 2003

<PAGE>



**Exhibit 31.1**

**Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934**

|(1)                       | I have reviewed this annual report on Form 10-K of Timberland Bancorp, Inc.;                                                                                                                                                                                                                              
|------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                          |                                                                                                                                                                                                                                                                                                           
|(2)                       | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
|                          |                                                                                                                                                                                                                                                                                                           
|(3)                       | Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;                   
|                          |                                                                                                                                                                                                                                                                                                           
|(4)                       | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:                                                                            
|                          |                                                                                                                                                                                                                                                                                                           
|                          | a)                                                                                                                                                                                                                                                                                                        
|                         
|                          | b)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|                          | c)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|(5)                       | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):        
|                          |                                                                                                                                                                                                                                                                                                           
|                          | a)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|                          | b)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|Date: December
  15, 2003

/s/ Michael R. Sand                                                                                                           
Michael R. Sand
                                                                                                           
Chief Executive Officer

<PAGE>

**Exhibit 31.2**

**Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934**

I, Dean J. Brydon, certify that:

|(1)                       | I have reviewed this annual report on Form 10-K of Timberland Bancorp, Inc.;                                                                                                                                                                                                                              
|------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                          |                                                                                                                                                                                                                                                                                                           
|(2)                       | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
|                          |                                                                                                                                                                                                                                                                                                           
|(3)                       | Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;                   
|                          |                                                                                                                                                                                                                                                                                                           
|(4)                       | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:                                                                            
|                          |                                                                                                                                                                                                                                                                                                           
|                          | a)                                                                                                                                                                                                                                                                                                        
|                         
|                          | b)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|                          | c)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|(5)                       | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):        
|                          |                                                                                                                                                                                                                                                                                                           
|                          | a)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|                          | b)                                                                                                                                                                                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                           
|Date: December
  15, 2003

/s/ Dean J. Brydon                                                                                                           
Dean J. Brydon
                                                                                                           
Chief Financial Officer

<PAGE>

**Exhibit 32**

| | (1) | the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended, and            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) | the information contained in the report fairly presents, in all material respects, the Company's
financial condition and results of operations.

/s/Michael R. Sand                                          
/s/ Dean J. Brydon
Michael R. Sand                                                                          Dean J. Brydon
Chief Executive Officer                                                               Chief Financial Officer

Dated: December 15, 2003

<PAGE>