|SECURITIES AND EXCHANGE COMMISSION                         
|-----------------------------------------------------------
|Washington, D.C.  20549                                    
|                                                           
|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    NO

Check 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.  X

As of December 4, 2002, there were outstanding 4,340,976 shares of the Registrant's Common Stock, which
are listed on the Nasdaq National Market System under the symbol "TSBK."  Based on the average of the bid and asked
prices for the Common Stock on December 4, 2002, the aggregate value of the Common Stock outstanding held by
nonaffiliates of the Registrant was $78,311,207 (4,340,976 shares at $18.04 per share).  For purposes of this calculation,
Common Stock held by officers and directors of the Registrant and the Timberland Bank Employee Stock Ownership
Plan and Trust are considered nonaffiliates.

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|              |                                                                                       | Page                                                                       
|------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------
|**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**                                                                | 33                                                                         
|              | **Item 3. Legal Proceedings**                                                         | 34                                                                         
|              | **Item 4. Submission of Matters to a Vote of Security Holders**                       | 35                                                                         
|**PART II.**  |                                                                                       |                                                                            
|              | **Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters** | 35                                                                         
|              | **Item 6. Selected Financial Data**                                                   | 36                                                                         
|              | **Item 7. Management's Discussion and Analysis of Financial Condition and Results**   |                                                                            
|              | **of Operations**                                                                     | 38                                                                         
|              |                                                                                       | General                                                                    
|              |                                                                                       | Operating Strategy                                                         
|              |                                                                                       | Market Risk and Asset and Liability Management                             
|              |                                                                                       | Comparison of Financial Condition at September 30, 2002 and 2001           
|              |                                                                                       | Comparison of Financial Condition at September 30, 2001 and 2000           
|              |                                                                                       | Comparison of Operating Results for Years Ended September 30, 2002 and 2001
|              |                                                                                       | Comparison of Operating Results for Years Ended September 30, 2001 and 2000
|              |                                                                                       | 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**               | 50                                                                         
|              | **Item 8. Financial Statements and Supplementary Data**                               | 50                                                                         
|              | **Item 9. Changes in and Disagreements with Accountants on Accounting and**           |                                                                            
|              | **Financial Disclosure**                                                              | 50                                                                         
|**PART III.** |                                                                                       |                                                                            
|              | **Item 10. Directors and Executive Officers of the Registrant**                       | 50                                                                         
|              | **Item 11. Executive Compensation**                                                   | 50                                                                         
|              | **Item 12. Security Ownership of Certain Beneficial Owners and Management**           | 87                                                                         
|              | **Item 13. Certain Relationships and Related Transactions**                           | 87                                                                         
|              | **Item 14. Control and Procedures**                                                   | 87                                                                         
|**PART IV.**  |                                                                                       |                                                                            
|              | **Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K**         | 88                                                                         

<PAGE>



**PART I**

**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, 2002, the Company had total assets of $431.1 million, total deposits of $292.3 million and
total shareholders' equity of $74.4 million.  The Company's business activities generally are limited to passive
investment activities and oversight of its investment in the Bank.  Accordingly, the information set forth in this report,
including consolidated financial statements and related data, relates primarily to the Bank and its subsidiary.

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

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

**Market Area**

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

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

The Bank considers its primary market area to include three submarkets:   primarily rural Grays Harbor County
with its historical dependence on the timber and fishing industries; 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 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.

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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 decreased to 8.0% at August 31, 2002 from 8.7% at August 31, 2001. 
The Bank has four branches (including its home office) located throughout the
county.  Slowdowns in the Grays Harbor County economy would negatively
impact the Bank's profitability 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 7.1% at August 31, 2002 from 6.1% at August 31, 2001.   The Bank has four branches in Pierce County and
these branches have been responsible for a substantial portion of the Bank's construction lending activities.
Slowdowns in the county's economic base would negatively impact the Bank's ability to generate construction loans
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 slightly to 5.2% at August 31, 2002 from 5.1% at August 31, 2001. 
The Bank currently has three branches in the county and has plans to open a
branch in Olympia in 2003 that will become 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 one branch in the county in the city of Poulsbo and is in the process of building a branch in the city of Silverdale.  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 increased slightly to 5.7% at August 31, 2002 from 5.6% at August
31, 2001.  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 the county in the city of Auburn.  King County's economic
base is diversified with many industries including shipping and transportation, aerospace (Boeing), and high-tech
computer 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 6.2% at August 31, 2002 from 5.2% at
August 31, 2001.  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. 
Slowdowns in the
economy would negatively impact construction and commercial loan demand in this 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.  In recent years, the Bank has increased its origination of loans secured by multi-family
properties, construction and land development loans, land loans and commercial real estate loans.  The Bank's net loans
receivable, including loans held for sale, totaled approximately $322.5 million at September 30, 2002, representing
approximately 74.8% of consolidated total assets, and at that date construction and land development loans, land loans
and loans secured by commercial and multi-family properties were $217.4 million, or 60.1%, of total loans.

2

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The Bank's internal loan policy limits the maximum amount of loans to one borrower to 25% of its capital.
At September 30, 2002, the maximum amount which the Bank could have lent to any one borrower and the borrower's
related entities was approximately $16.3 million under its policy.  At September 30, 2002, the Bank had no loans with
an aggregate outstanding balance in excess of this amount.  At that date, the Bank had 53 borrowers or related borrowers
with total loans outstanding in excess of $1.0 million.  The largest amount outstanding to any one borrower and the
borrower's related entities was approximately $8.4 million.

**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,      
|---------------------------- | ----------------------
|                             | 2002                  
|                             | Amount                
|                             | (Dollars in thousands)
|Mortgage Loans:              |                       
|One- to- four family(1)(2)   | $113,144              
|Multi-family                 | 24,135                
|Commercial                   | 97,644                
|Construction and land        |                       
|development                  | 80,144                
|Land(2)                      | 15,453                
|Total mortgage loans         | 330,520               
|                             |                       
|Consumer Loans:              |                       
|Home equity and second       |                       
|mortgage                     | 13,718                
|Other                        | 8,097                 
|                             | 21,815                
|Commercial business loans    | 9,365                 
|Total loans                  | 361,700               
|                             |                       
|Less:                       
|Undisbursed portion of loans |                       
|in process                   | (32,324)              
|Unearned income              | (3,218)               
|Allowance for loan losses    | (3,630)               
|Market value adjustment of   |                       
|loans held-for-sale          | --                    
|Total loans receivable, net  | $322,528              

**Residential One- to- Four Family Lending**.  At September 30, 2002, $113.1 million, or 31.3%, of the Bank's
loan portfolio consisted of loans secured by one- to- four family residences.

The Bank originates both fixed-rate loans and adjustable-rate loans.  Generally, 15- and 30-year fixed-rate loans
are originated to meet the requirements for sale in the secondary market to the FHLMC, however, from time to time,
a portion of these fixed-rate loans originated by the Bank may be retained in the Bank's loan portfolio to meet the Bank's
asset/liability management objectives.  The Bank uses an automated underwriting program, which preliminarily qualifies
a loan as conforming to FHLMC underwriting standards when the loan is originated.  At September 30, 2002, $33.6
million, or 29.7%, 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.

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<PAGE>

The Bank offers several ARM products which adjust annually after an initial period ranging from one to five
years subject to a limitation on the annual increase of 2% and an overall limitation of 6%.  These ARM products have
utilized the weekly average yield on one year U.S. Treasury securities adjusted to a constant maturity of one year plus
a margin of 3.00% to 4.00%.****  ARM loans held in the Bank's portfolio do not permit negative amortization of principal
and carry no prepayment restrictions.  Borrower demand for ARM loans versus fixed-rate mortgage loans is a function
of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the
initial interest rates and fees charged for each type of loan.  The relative amount of fixed-rate mortgage loans and ARM
loans that can be originated at any time is largely determined by the demand for each in a competitive environment.  At
September 30, 2002, $79.5 million, or 70.3%, 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.

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).

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<PAGE>

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

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

At September 30, 2002, the composition of the Bank's construction and land development loan portfolio was
as follows:

|                                      | Outstanding    | Percent of
|------------------------------------- | -------------- | ----------
|                                      | Balance        | Total     
|                                      | (In thousands) |           
|                                     
|Speculative construction              | $27,257        | 34.01%    
|Custom and owner/builder construction | 31,004         | 38.69     
|Multi-family                          | 4,890          | 6.10      
|Land development                      | 10,717         | 13.37     
|Commercial real estate                | 6,276          | 7.83      
|Total                                 | $80,144        | 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 55 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 rates ranging from 6.25

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 7.9%
to 9.0% and with loan-to-value ratios of 80% of the appraised

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estimated value of the completed property or
sales price, whichever is less. During this 12 month period, the borrower is
required to make monthly payments of accrued interest on the outstanding loan
balance.

Owner/builder construction loans are originated to the home owner rather than the home builder as a single
loan that automatically converts to a permanent loan at the completion of construction.  The construction phase of a
owner/builder construction loan generally lasts six to nine months with fixed  interest rates ranging from 8.25% to 9.5%,
and with loan-to-value ratios of 80% (or up to 95% with PMI) of the appraised estimated value of the completed
property or cost, whichever is less.  During this 12 month period, the borrower is required to make monthly payments
of accrued interest on the outstanding loan balance.  At the completion of construction, the loan converts automatically
to either a fixed-rate mortgage loan, which conforms to secondary market standards, or an ARM loan for retention in
the Bank's portfolio.  At September 30, 2002, custom and owner/builder construction loans totaled $31.0 million, or
38.7%, of the total construction loan portfolio.  At September 30, 2002, the largest outstanding custom construction loan
had an outstanding balance of $650,000 and was performing according to its terms.

The Bank originates loans to local real estate developers with whom it has established relationships for the
purpose of developing residential subdivisions (*i.e.*, installing roads, sewers, water and other utilities) (generally with
ten to 50 lots).  At September 30, 2002, subdivision development loans totaled $10.7 million, or 13.4% 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, 2002, the largest land development loan
had an outstanding loan balance of $1.8 million (including $882,000 of undisbursed loans in process balance), and was
not performing according to its terms.  See "--Lending Activities -- Nonperforming Assets and Delinquencies."

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,
2002, such construction loans amounted to $11.2 million.  These loans are secured by motels, apartment buildings,
condominiums, office buildings and retail rental space located in the Bank's primary market area and
currently range
in amount from $250,000 to $4.2 million.  At September 30, 2002, the largest outstanding commercial real estate
construction loan had a balance of $3.5 million (including $2.5 million of undisbursed loans in process balance), and
was performing according to terms.  At September 30, 2002, the largest outstanding multi-family construction loan had
a balance of $4.2 million (including $217,000 of undisbursed loans in process balance), and was performing according
to terms.  Periodically, the Bank purchases (without recourse to the seller other than for fraud) from other lenders
participation interests in multi-family and commercial construction loans.   The Bank underwrites such participation interests according to its own standards.  At September
30, 2002, the largest construction participation interest had an outstanding balance of $2.9 million, which represented
a 67% interest in a construction loan secured by a multi-family property located in Clark County, Washington.  At
September 30, 2002, this loan was performing according to its terms.

All construction loans must be approved by the Bank's Loan Committee or the
Bank's Board of Directors. See "-- Lending Activities -- Loan Solicitation and
Processing." Prior to preliminary approval of any construction loan application,
an independent fee appraiser inspects the site and the Bank reviews the existing
or proposed improvements, identifies the market for the proposed project and
analyzes the pro forma data and assumptions on the project. In the case of a
speculative or custom construction loan, the Bank reviews the experience and
expertise of the builder. After preliminary approval has been given, the
application is processed, which includes obtaining credit reports, financial

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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.  Property
inspections are performed by qualified inspectors.  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, 2002, the Bank had outstanding $1.0 million of real estate contracts.

**Multi-Family Lending.**  At September 30, 2002, the Bank had $24.1 million, or 6.7% 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, 2002, approximately 42.7% 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 3.00% to 3.50% over
the one-year constant maturity U.S. Treasury Bill Index or a matched term FHLB advance, with principal and interest
payments fully amortizing over terms of up to 30 years.  Multi-family loans
currently range in principal balance from
$40,000 to $6.1 million.  At September 30, 2002, 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,
2002, this loan was performing according to its terms.

7

<PAGE>

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

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

**Commercial Real Estate Lending**.  Commercial real estate loans totaled $97.6 million, or 27.0% of total loans
receivable at September 30, 2002, and consisted of 259 loans.  The Bank originates commercial real estate loans
generally at variable interest rates and secured by properties, such as restaurants, motels, office buildings and
retail/wholesale facilities, located in its primary market area.  The principal balance of a commercial real estate loan
currently ranges between $16,000 and $5.0 million.  At September 30, 2002, the largest commercial real estate loan
had an outstanding principal balance of $5.0 million, and was secured by a commercial property located in Olympia,
Washington.  At September 30, 2002, four commercial real estate loans totaling $688,000 were not performing
according to terms.  See "-- Lending Activities -- Nonperforming Assets and Delinquencies."

The Bank requires appraisals of all properties securing commercial real estate loans.  Appraisals are performed
by an independent appraiser designated by the Bank, all of which are reviewed by management.  The Bank considers
the quality and location of the real estate, the credit of the borrower, the cash flow of the project and the quality of
management involved with the property.  The Bank generally imposes a minimum debt coverage ratio of approximately
1.10 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.

**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, 2002, land loans  totaled $15.5
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 currently range in principal amount from $5,000 to $600,000.  The
largest land loan had an outstanding balance of $600,000 at September 30, 2002 and was performing according to its
terms.  At September 30, 2002, seven land loans totaling $251,000 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

8

<PAGE>

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, 2002, consumer loans amounted to $21.8
million, or 6.0% of the total loan portfolio.

At September 30, 2002, the largest component of the consumer loan portfolio consisted of second mortgage
loans and home equity lines of credit, which totaled $13.7 million, or 3.8%, 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, 2002,
credit card loans amounted to $1.8 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, 2002, there were $49,000 of
consumer loans delinquent in excess of 90 days.

**Commercial Business Lending**.  Commercial business loans totaled $9.4 million, or 2.6% of total loans
receivable at September 30, 2002, and consisted of 85 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 seven commercial lenders.  Commercial business loans are generally secured
by business equipment or other property and are made at variable rates of interest equal to a negotiated margin above
the prime rate.  The Bank also generally obtains personal guarantees from financially capable parties based on a review
of personal financial statements.

Commercial business lending generally involves greater risk than residential
mortgage lending and involves risks that are different from those associated
with residential and commercial real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values and liquidation of the underlying real
estate collateral is viewed as the primary source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often an
insufficient

9

<PAGE>

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, 2002 regarding the dollar
amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments.  Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.

|                                |           |                | After   | After    |          |         
|------------------------------- | --------- | -------------- | ------- | -------- | -------- | --------
|                                |           | One Year       | 3 Years | 5 Years  |          |         
|                                | Within    | Through        | Through | Through  | After    |         
|                                | One Year  | 3 Years        | 5 Years | 10 Years | 10 Years | Total   
|                                |           | (In thousands)
|                                |           |                |         |          |          |         
|Mortgage loans:                 |           |                |         |          |          |         
|One- to- four family            | $     677 | $ 1,090        | $ 1,200 | $  6,131 | $104,046 | $113,144
|Multi-family                    | --        | 1,398          | 1,574   | 17,309   | 3,854    | 24,135  
|Commercial                      | 1,643     | 6,359          | 2,797   | 53,451   | 33,394   | 97,644  
|Construction and land           |           |                |         |          |          |         
|development(1)                  | 38,824    | 6,573          | 77      | 689      | 33,981   | 80,144  
|Land                            | 1,903     | 4,421          | 8,596   | 331      | 202      | 15,453  
|Consumer loans:                 |           |                |         |          |          |         
|Home equity and second mortgage | 3,139     | 442            | 1,149   | 2,005    | 6,983    | 13,718  
|Other                           | 1,772     | 1,423          | 2,357   | 800      | 1,745    | 8,097   
|Commercial business loans       | 5,019     | 356            | 1,999   | 1,448    | 543      | 9,365   
|Total                           | $52,977   | $22,062        | $19,749 | $82,164  | $184,748 | $361,700
|                                |           |                |         |          |          |         
|Less:                           |           |                |         |          |          |         
|Undisbursed portion of loans    |           |                |         |          |          |         
|in process                      |           |                |         |          |          | (32,324)
|Unearned income                 |           |                |         |          |          | (3,218) 
|Allowance for loan losses       |           |                |         |          |          | (3,630) 
|Loans receivable, net           |           |                |         |          |          | $322,528

10

<PAGE>

The following table sets forth the dollar amount of all loans due after September 30, 2002, 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- for family               | $ 33,617 | $  79,527        | $113,144
|Multi-family                      | 4,765    | 19,370           | 24,135  
|Commercial                        | 15,643   | 82,001           | 97,644  
|Construction and land development | 68,281   | 11,863           | 80,144  
|Land                              | 15,453   | --               | 15,453  
|Consumer loans:                   |          |                  |         
|Home equity and second mortgage   | 10,357   | 3,361            | 13,718  
|Other                             | 7,992    | 105              | 8,097   
|Commercial business loans         | 2,070    | 7,295            | 9,365   
|Total                             | $158,178 | $203,522         | $361,700

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

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

Mortgage loan applications are initiated by loan officers and are required to be approved by the Bank's Loan
Committee, which consists of the Bank's President, Executive Vice President and two other senior management officers.
Certain consumer loans up to and including $25,000 may be approved by individual loan officers and the Bank's
consumer lending department manager may approve loans up to and including $50,000.  All other loans (except
commercial business loans) up to and including $500,000 may be approved by any two members of the Bank's Loan
Committee.  Commercial business loans up to and including $250,000 may also be approved by the Bank's Business
Banking Division manager.  Loans in excess of $500,000, as well as loans of any size granted to a single borrower
whose aggregate lending relationship exceeds $500,000, and commercial business loans in excess of $250,000, must
be approved by the Bank's Board of Directors.

**Loan Originations, Purchases and Sales**.  During the years ended September 30, 2002 and 2001, the Bank's
total gross loan originations were $203.6 million and $156.0 million, respectively.  Periodically, the Bank purchases
participation interests in construction and land development loans and multi-family loans, secured by properties located
in the Bank's primary market area, from other lenders.  Such purchases are underwritten to the Bank's underwriting
guidelines and are without recourse to the seller other than for fraud.  See "-- Lending Activities -- Construction and
Land Development Lending" and "-- Lending Activities -- Multi-Family Lending."

Consistent with its asset/liability management strategy, the Bank's policy has been to retain in its portfolio all
of the ARM loans and generally originates fixed rate loans with a view toward sale in the secondary market to the
FHLMC; however, from time to time, a portion of fixed-rate loans may be retained
in the Bank's portfolio to meet its

11

<PAGE>

asset-liability objectives. Loans sold in
the secondary market are generally sold on a servicing retained basis. At
September 30, 2002, the Bank's loan servicing portfolio totaled $140.4 million.



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

|                                                 | Year Ended September 30,
|------------------------------------------------ | ------------------------
|                                                 | 2002                    
|                                                 |                         
|Loans originated:                                |                         
|Mortgage loans:                                  |                         
|One- to- four family                             | $    83,121             
|Multi-family                                     | 177                     
|Commercial                                       | 40,478                  
|Construction and land development                | 52,596                  
|Land                                             | 7,224                   
|Consumer                                         | 13,582                  
|Commercial business loans                        | 6,418                   
|Total loans originated                           | 203,596                 
|                                                 |                         
|Loans purchased:                                 |                         
|Mortgage loans:                                  |                         
|One- to- four family                             | 106                     
|Multi-family                                     | --                      
|Commercial                                       | --                      
|Construction                                     | 6,360                   
|Land                                             | 600                     
|Commercial business loans                        | 31                      
|Total loans purchased                            | 7,097                   
|Total loans originated and purchased             | 210,693                 
|                                                 |                         
|Loans sold or converted to securities:           |                         
|Total whole loans sold                           | (70,167)                
|Participation loans                              | --                      
|Loans converted to securities                    | (12,227)                
|Total loans sold or converted to securities      | (82,394)                
|                                                 |                         
|Loan principal repayments                        | (136,714)               
|Decrease (increase) in other items, net          | 7,175                   
|Net increase (decrease) in loans receivable, net | $  (1,240)              

**Loan Origination Fees**.  The Bank, in some instances, receives loan origination fees.  Loan fees are a
percentage of the principal amount of the loan which are charged to the borrower for funding the loan.  The amount of
fees charged by the Bank is generally 1.0% to 2.0%.  Current accounting standards require fees received and certain
loan origination costs for originating loans to be deferred and amortized into interest income over the contractual life
of the loan.  Net deferred fees or costs associated with loans that are prepaid are recognized as income at the time of
prepayment.  Deferred origination loan fees totaled $3.2 million at September 30, 2002.

**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

12

<PAGE>

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 is reduced by the full amount of accrued and uncollected interest.

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

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

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

At September 30,2002
2001
2000
1999
1998(Dollars in thousands)Loans accounted for on a nonaccrual basis:Mortgage loans:One- to- four family
$1,138
$   863
$1,203
$  941
$  996Commercial
688
2,091
551
1,675
2,919Construction and land development
1,571
491
1,267
390
--Land
251
610
233
253
397Consumer loans
49
26
273
330
17Commercial business loans
44
10
85
--
81Total
3,741
4,091
3,612
3,589
4,410Accruing loans which are contractually past due 90 days or more:Mortgage loans:Construction and land development
--
--
--
449
396Total
--
--
--
449
396Total of nonaccrual and 90 days past due loans
3,741
4,091
3,612
4,038
4,806Real estate owned and other repossessed assets
680
1,006
1,966
867
1,724Total nonperforming assets
4,421
5,097
5,578
4,905
6,530Restructured loans
--
--
--
509
236Nonaccrual and 90 days or more past dueloans as a percentage of loans receivable, net
1.15%
1.25%
1.14%
1.56%
2.39%Nonaccrual and 90 days or more past dueloans as a percentage of total assets
0.87%
1.06%
0.98%
1.31%
1.81%Nonperforming assets as a percentage of total assets
1.03%
1.32%
1.52%
1.60%
2.46%Loans receivable, net(1)
$326,158
$326,818
$315,646
$258,141
$200,949Total assets
$431,054
$386,305
$368,080
$307,116
$265,709
_______________(1)     Includes loans held-for-sale and is before the allowance for loan losses.13

<PAGE>

Additional interest income which would have been recorded for the year ended September 30, 2002 had
nonaccruing loans been current in accordance with their original terms amounted to approximately $253,000.  No
interest income was recorded on nonaccrual loans for the year ended September 30, 2002.
**Real Estate Owned.**  Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until sold.  When property is acquired it is recorded at the lower of its cost,
which is the unpaid principal balance of the related loan plus foreclosure costs, or fair market value.  Subsequent to
foreclosure, the property is carried at the lower of the foreclosed amount or fair value, less estimated selling costs.  At
September 30, 2002, the Bank had $680,000 in real estate owned consisting primarily of six one- to- four family
properties, and five land parcels.

**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 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, 2002.

**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 30,2002
2001
2000(In thousands)Loss
$              --
$              --
$              --Doubtful
3
5
206Substandard(1)
7,965
9,528
7,016Special mention(1)
12,588
5,820
1,764Allowance for loan losses
3,630
3,050
2,640
_____________(1)
For further information concerning the increase in classified assets, see "-- Lending Activities --
Nonperforming Assets and Delinquencies."14

<PAGE>

The Bank's classified assets increased by $5.2 million at September 30, 2002, primarily as a result of a $6.8
million increase in loans classified as special mention and a $1.6 million decrease 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.  Five relationships encompass more than 88% of the loans
classified as special mention.  They include a $3.5 million loan on a 142-unit motel in Pierce County, a $2.5 million loan
secured by a mobile home development in Portland, Oregon, a $2.0 million loan secured by an Alzheimer's/assisted
living facility in Kitsap County, and three loans to an established contractor in King County totaling $1.8 million.  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
there is the distinct possibility that some loss will be sustained.  The aggregate amount of loans classified as substandard
at September 30, 2002 decreased by $1.56 million to $7.97 million from the amount reported at September 30, 2001.
At September 30, 2002, 58 loans were classified as substandard compared to 64 at September 30, 2001.  The largest
loan currently classified substandard is a $1.8 million land development loan (including $882,000 of undisbursed loans
in process balance) that was delayed due to an encroachment on the land securing the Bank's loan.  The encroachment
has been removed and the Bank's borrower is expecting an award from the party that caused the encroachment.  The
loan is currently not performing in accordance with the required loan terms.

**Allowance for Loan Losses.**The allowance for loan losses is maintained to cover losses inherent in the loan
portfolio.  The Bank has established a systematic methodology for the determination of provisions for loan losses that
takes into consideration the need for an overall general valuation allowance.  The Bank's methodology for assessing
the adequacy of its allowance for loan losses is based on its historic loss experience for various loan segments; adjusted
for changes in economic conditions, delinquency rates, and other factors.  Using these loss estimate factors, management
develops a range of probable loss for each loan category.  Certain individual loans for which full collectibility may not
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.

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

At September 30, 2002, the Bank had an allowance for loan losses of $3.6 million.  Management believes that
the amount maintained in the allowance is adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such determinations, future adjustments to the allowance for
loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.

While the Bank believes it has established its existing allowance for loan
losses in accordance with 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,

15

<PAGE>

because future events affecting borrowers
and collateral cannot be predicted with certainty, there can be no assurance
that the existing allowance for loan losses is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in the allowance
for loan losses may adversely affect the Bank's financial condition and results
of operations.

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

Year Ended September 30,2002
2001
2000
1999
1998(Dollars in thousands)Allowance at beginning of year
$ 3,050
$2,640
$2,056
$ 1,728
$ 1,716Provision for loan losses
992
1,400
885
363
200Recoveries:Mortgage loans:Commercial real estate
96
20
260
--
--Consumer loans
13
2
2
--
--Total recoveries
109
22
262
--
--Charge-offs:Mortgage loans:One- to- four family
16
21
10
--
75Other
153
324
373
35
113Commercial business loans
352
667
180
--
--Total charge-offs
521
1,012
563
35
188Net charge-offs
412
990
301
35
188Balance at end of year
$ 3,630
$3,050
$2,640
$2,056
$1,728Allowance for loan losses as a  percentage of totalloans (net)(1) outstanding at the end of the year
1.11%
0.93%
0.84%
0.80%
0.86%Net charge-offs as a percentage of average loansoutstanding during the year
0.13%
0.31%
0.01%
--%
--%Allowance for loan losses as a percentage ofnonperforming  loans at end of year
97.03%
74.55%
73.09%
50.92%
35.96%
______________(1)    	Total loans (net) includes loans held for sale and is before the allowance for loan losses.


 16

<PAGE>

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

At September 30,2002
2001
2000
1999
1998Percent

Percent

Percent

Percent

Percentof Loans

of Loans

of Loans

of Loans

of Loansin Category

in Category

in Category

in Category

in Categoryto Total

to Total

to Total

to Total

to TotalAmount
Loans
Amount
Loans
Amount
Loans
Amount
Loans
Amount
Loans(Dollars in thousands)Mortgage loans:One- to- four family
$   322
31.28%
$ 271
35.14%
$  374
38.85%
$  288
38.42%
$  311
43.48%Multi-family
214
6.67
195
7.95
171
9.54
82
5.32
70
5.36Commercial
1,072
27.00
793
17.76
662
16.65
674
17.37
706
14.18Construction
536
22.16
845
28.71
968
25.52
633
30.24
368
27.65Land
152
4.27
96
3.68
220
3.56
170
3.02
180
3.34Non-mortgage loans:Consumer loans
512
6.03
217
4.83
121
4.51
126
4.09
65
5.51Commercial businessloans
822
2.59
633
1.93
124
1.37
83
1.54
28
0.48Total allowancefor loan losses
$3,630
100.00%
$3,050
100.00%
$2,640
100.00%
$2,056
100.00%
$1,728
100.00%
 17

<PAGE>

**Investment Activities**
At September 30, 2002, the Company's investment portfolio totaled $41.6 million, consisting of $23.7 million
of securities available for sale and $17.9 million of mortgage-backed securities available for sale.  This compares with
a total portfolio of $29.4 million at September 30, 2001, comprised of $10.2 million of securities available for sale and
$19.2 million of mortgage-backed securities available for sale.  The composition of the portfolios by type of security,
at each respective date is presented in the table, which follows.

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

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

At September 30,2002
2001
2000Carrying
Percent of
Carrying
Percent of
Carrying
Percent ofValue
Total
Value
Total
Value
Total(Dollars in thousands)*Available-for-Sale (at fair value):*U.S. Agency Securities
$               --
--  %
$               --
--  %
$   6,416
25.74%Mortgage-backed securities
17,888
43.02
19,159
65.24
11,569
46.42Municipal bonds
40
0.10
57
0.19
71
0.28Mutual funds
23,654
56.88
10,060
34.25
6,472
25.97Equity securities
--
--
93
0.32
397
1.59Total portfolio
$41,582
100.00%
$29,369
100.00%
$24,925
100.00%The following table sets forth the maturities and weighted average yields of the investment and mortgage-backed securities in the Company's investment securities portfolio at September 30, 2002.  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)
|*Available-for-Sale:* |                        |            |           |         
|                      |                        |            |           |         
|Mortgage-backed       |                        |            |           |         
|securities            | $               --     | --%        | $ --      | -- %    
|Municipal bonds       | --                     | --         | 40        | 6.92    
|Mutual funds          | 23,654                 | 3.15       | --        | --      
|Equity securities     | --                     | --         | --        | --      
|                      |                        |            |           |         
|Total portfolio       | $23,654                | 3.15%      | $40       | 6.92%   

18

<PAGE>



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

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

At September 30, 2002 the Bank had $36.2 million of jumbo certificates of deposit of $100,000 or more, which
includes $8.6 million in public unit funds.  The Bank does not solicit brokered deposits and believes that its jumbo
certificates of deposit, which represented 12.4% of total deposits at September 30, 2002, present similar interest rate
risk compared to its other deposit products.

The following table sets forth information concerning the Bank's deposits at September 30, 2002.

|                                                | Weighted       |          | Percentage
|----------------------------------------------- | -------------- | -------- | ----------
|                                                | Average        |          | of Total  
|Category                                        | Interest Rate  | Amount   | Deposits  
|                                                | (In thousands)
|Non-Interest Bearing                            | -- %           | $ 23,585 | 8.07%     
|Negotiable order of withdrawal ("NOW") Checking | 0.873          | 42,222   | 14.44     
|Passbook Savings                                | 1.831          | 40,328   | 13.80     
|Money Market Accounts                           | 2.235          | 47,888   | 16.38     
|                                                |                |          |           
|Certificates of Deposit(1)                      |                |          |           
|                                                |                |          |           
|Maturing within 1 year                          | 3.226          | 108,899  | 37.26     
|Maturing after 1 year but within 2 years        | 3.625          | 18,946   | 6.48      
|Maturing after 2 years but within 5 years       | 4.305          | 8,985    | 3.07      
|Maturing after 5 years                          | 5.064          | 1,463    | 0.50      
|                                                | 2.339%         | $292,316 | 100.00%   

The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until
maturity as of September 30, 2002.  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           | $11,033       
|Over three through six months  | 10,280        
|Over six through twelve months | 9,153         
|Over twelve months             | 5,775         
|Total                          | $36,241       

19

<PAGE>

****

|                                  | At September 30,      
|--------------------------------- | ----------------------
|                                  | 2002                  
|                                  |                       
|                                  |                       
|                                  | Amount                
|                                  | (Dollars in thousands)
|                                  |                       
|Non-interest-bearing              | $  23,585             
|NOW checking                      | 42,222                
|Passbook savings accounts         | 40,328                
|Money market deposit              | 47,888                
|Certificates of deposit which     |                       
|mature in the year ending:        |                       
|Within 1 year                     | 108,899               
|After 1 year, but within 2 years  | 18,946                
|After 2 years, but within 5 years | 8,985                 
|Certificates maturing thereafter  | 1,463                 
|                                  |                       
|Total                             | $292,316              

20

<PAGE>



|               | At September 30,
|-------------- | ----------------
|               | 2002            
|               | (In thousands)  
|               |                 
|0.00 - 1.99%   | $        6,674  
|2.00 - 3.99%   | 104,611         
|4.00 - 4.99%   | 18,314          
|5.00 - 5.99%   | 6,284           
|6.00 - 6.99%   | 2,254           
|7.00% and over | 156             
|Total          | $138,293        

**Time Deposits by Maturities.**  The following table sets forth the amount and maturities of time deposits at
September 30, 2001.

|               | Amount Due    
|-------------- | --------------
|               |               
|               |               
|               | Less Than     
|               | One Year      
|               | (In thousands)
|               |               
|0.00 - 1.99%   | $    6,562    
|2.00 - 3.99%   | 87,400        
|4.00 - 4.99%   | 9,644         
|5.00 - 5.99%   | 4,148         
|6.00 - 6.99%   | 1,130         
|7.00% and over | 16            
|Total          | $108,900      

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

|                                      | Year Ended September 30,
|------------------------------------- | ------------------------
|                                      | 2002                    
|                                      | (In thousands)          
|                                      |                         
|Beginning balance                     | $242,372                
|Net deposits before interest credited | 42,428                  
|Interest credited                     | 7,516                   
|Net increase in deposits              | 49,944                  
|Ending balance                        | $292,316                

**Borrowings.**  Savings deposits are the primary source of funds for the Bank's lending and investment activities
and for general business purposes.  The Bank has the ability to use advances from the FHLB-Seattle to supplement its
supply of lendable funds and to meet deposit withdrawal requirements.  The FHLB-Seattle functions as a central reserve
bank providing credit for member financial institutions.  As a member of the FHLB-Seattle, the Bank is required to own
capital stock in the FHLB-Seattle and is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S.
Government)

21

<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, 2002, 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 $61.8 million was outstanding.

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

|                                    | At or For the           
|----------------------------------- | ------------------------
|                                    | Year Ended September 30,
|                                    | 2002                    
|                                    | (Dollars in thousands)  
|                                    |                         
|Maximum amount of short-term FHLB   |                         
|advances at any month end           | $10,690                 
|                                    |                         
|Approximate average short-term FHLB |                         
|advances outstanding                | 2,935                   
|                                    |                         
|Approximate weighted average rate   |                         
|paid on short-term FHLB advances    | 2.81%                   
|                                    |                         
|Total short-term FHLB advances at   |                         
|end of period                       | 155                     

**General**

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

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

**State Regulation and Supervision**

As a state-chartered savings bank, the Bank is subject to applicable provisions of Washington law and
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

22

<PAGE>

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.

**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 calendar 2002.

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 2002, the annualized rate was 1.70 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

23

<PAGE>

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.

At September 30, 2002, 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, 2002, the Bank had a Tier 1 leverage capital ratio of 15.6%.  The FDIC
retains the right to require a particular institution to maintain a higher capital level based on an institution's particular
risk profile.

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

The Division requires that net worth equal at least 5% of total assets.  Intangible assets must be deducted from
net worth and assets when computing compliance with this requirement.  At September 30, 2002, the Bank had
a net worth of 15.2% 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

24

<PAGE>

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.

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, 2002.  The definitions of the terms used in the table are those provided in the capital regulations issued by the FDIC.

|                                         | At September 30, 2002 
|---------------------------------------- | ----------------------
|                                         |                       
|                                         | Amount                
|                                         | (Dollars in thousands)
|                                         |                       
|Tier 1 (leverage) capital                | $64,679               
|Tier 1 (leverage) capital requirement    | 16,571                
|Excess                                   | $48,108               
|                                         |                       
|Tier 1 risk adjusted capital             | $64,679               
|Tier 1 risk adjusted capital requirement | 12,611                
|Excess                                   | $52,068               
|                                         |                       
|Total risk-based capital                 | $68,309               
|Total risk-based capital requirement     | 25,221                
|Excess                                   | $43,088               

|(1) | For the Tier 1 (leverage) capital and Washington regulatory capital calculations, percent of total average
assets of $414.3 million.  For the Tier 1 risk-based capital and total risk-based capital calculations, percent
of total risk-weighted assets of $315.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | As a Washington-chartered savings bank, the Bank is subject to the capital requirements of the FDIC and
the Division.  The FDIC requires state-chartered savings banks, including the Bank, to have a minimum
leverage ratio of Tier 1 capital to total assets of at least 3%, provided, however, that all institutions, other
than those (i) receiving the highest rating during the examination process and (ii) not anticipating any
significant growth, are required to maintain a ratio of 1% to 2% above the stated minimum, with an absolute
total capital to risk-weighted assets of at least 8%.  The Bank has not been notified by the FDIC of any
leverage capital requirement specifically applicable to it.

**Activities and Investments of Insured State-Chartered Banks**

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

25

<PAGE>

coverage or bankers' blanket bond group insurance coverage
for insured depository institutions, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met.

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

**Environmental Issues Associated With Real Estate Lending**

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

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

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

**Federal Reserve System**

The Federal Reserve Board requires under Regulation D that all depository institutions, including savings
banks, maintain reserves on transaction accounts or non-personal time deposits.  These reserves may be in the form of
cash or non-interest-bearing deposits with the regional Federal Reserve Bank.  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, 2002, the Bank's  deposit with the Federal Reserve Bank and vault
cash exceeded its reserve requirements.

26

<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,

27

<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 GLB Act was intended to modernize the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the 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) | provided a uniform framework for the functional regulation of the activities of banks, savings
institutions and their holding companies;                                                         
|    |                                                                                                                                                                                                  
|(3) | broadened the activities that may be conducted by national banks, banking subsidiaries of bank
holding companies and their financial subsidiaries;                                               
|    |                                                                                                                                                                                                  
|(4) | provided an enhanced framework for protecting the privacy of consumer information;                                                                                                               
|    |                                                                                                                                                                                                  
|(5) | adopted a number of provisions related to the capitalization, membership, corporate governance
and other measures designed to modernize the FHLB system;                                         
|    |                                                                                                                                                                                                  
|(6) | modified the laws governing the implementation of the Community Reinvestment Act; and                                                                                                            
|    |                                                                                                                                                                                                  
|(7) | addressed a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of financial institutions.                                                     

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

**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. By way of amendments to the Bank Secrecy
Act, 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, including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USAPATRIOT Act imposes the following requirements with
respect to financial institutions:

- Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include,
at minimum: (i) internal policies, procedures, and controls, (ii) specific
designation of an anti-money laundering

28

<PAGE>

compliance officer,
(iii) ongoing employee training programs, and (iv) an independent audit function
to test the anti-money laundering program.

- Section 326 of the Act authorizes the Secretary of the Department of Treasury, in conjunction with other bank
regulators, to issue regulations by October 26, 2002 that provide for minimum standards with respect to customer
identification at the time new accounts are opened.

- Section 312 of the Act requires 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.

- Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical
presence in any country), and will be subject to certain recordkeeping 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.

During the first quarter of 2002 the Federal Crimes Enforcement Network (FinCEN), a bureau of the
Department of Treasury, issued proposed and interim regulations to implement the provisions of Sections 312 and 352
of the USA PATRIOT Act.   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 the recent accounting
scandals at *Enron* and *WorldCom*. 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.

The Sarbanes-Oxley Act addresses, among other matters:

- audit committees;
- certification of financial
  statements by the chief executive officer and the chief financial officer;
- the forfeiture of bonuses or
  other incentive-based compensation and profits from the sale of an issuer's
  securities by directors and senior officers in the twelve month period
  following initial publication of any financial statements that later require
  restatement;
- a prohibition on insider trading during pension plan
  black out periods;
- disclosure of off-balance
  sheet transactions;
- a prohibition on personal
  loans to directors and officers;
- expedited filing
  requirements for Form 4s;
- disclosure of a code of
  ethics and filing a Form 8-K for a change or waiver of such code;
- "real time" filing of
  periodic reports
- the formation of a public
  accounting oversight board;
- auditor independence; and
- various increased criminal
  penalties for violations of securities laws.

The Sarbanes-Oxley Act contains provisions which became effective upon enactment on July 30, 2002 and
provisions which will become effective from within 30 days to one year from enactment. The SEC has been delegated
the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in
periodic filings pursuant to the Exchange Act.

**Acquisitions**

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

**Interstate Banking**

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

30

<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.

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.

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 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 repurchased
117,400 shares at an average price of $17.05.   As of September 30, 2002, the Company has
cumulatively repurchased 2,522,304 (38.1%) of the 6,612,500
shares that were issued when the Company went public in January 1998.

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, 2002, the Company's total risk based capital was 24.4% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
23.2% 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.

31

<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 new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995.  These rules also
require that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988).  The Bank has previously recorded deferred taxes equal to the bad debt
recapture and as such the new rules will have no effect on the net income or federal income tax expense.  For taxable
years beginning after December 31, 1995, the Bank's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of years or, if the Bank is a "large"
association (assets in excess of $500 million) on the basis of net charge-offs during the taxable year.  The new rules
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 34% corporate income tax rate (exclusive of state and local taxes).  See
"REGULATION OF THE BANK -- Dividends" for limits on the payment of dividends by the Bank.  The Bank does
not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.

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

**Dividends-Received Deduction**.  The Company may exclude from its income 100% of dividends received
from the Bank as a member of the same affiliated group of corporations.  The corporate dividends-received deduction
is 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.

32

<PAGE>

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

**Washington Taxation**

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

**Competition**

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

**Subsidiary Activities**

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

**Personnel**

As of September 30, 2002, the Bank had 140 full-time employees and 28 part-time employees.  The employees
are not represented by a collective bargaining unit and the Bank believes its relationship with its employees is good.

**Item 2.  Properties**

The Bank operates 13 full-service facilities.  The following table sets forth certain information regarding the Bank's offices at September 30, 2002, all of
which are owned, except for the Tacoma office, which is leased.

|                                      |             | Approximate    |               
|------------------------------------- | ----------- | -------------- | --------------
|Location                              | Year Opened | Square Footage | Deposits      
|                                      |             |                | (In thousands)
|*Main Office:*                        |             |                |               
|                                      |             |                |               
|624 Simpson Avenue                    | 1966        | 7,700          | $73,187       
|Hoquiam, Washington 98550             |             |                |               
|                                     
|*Branch Offices:*                     |             |                |               
|                                      |             |                |               
|300 N. Boone Street                   | 1974        | 3,400          | 28,637        
|Aberdeen, Washington 98520            |             |                |               
|                                     
|                                      |             |                |               
|314 Main South                        | 1975        | 2,800          | 21,711        
|Montesano, Washington 98563          
|                                      |             |                |               
|*(table continued on following page)*
|33

<PAGE>                           
|                                      |             |                |               
|                                      |             |                |               
|                                      |             | Approximate    |               
|Location                              | Year Opened | Square Footage | Deposits      
|                                      |             |                | (In thousands)
|                                      |             |                |               
|361 Damon Road                        | 1977        | 2,100          | $23,147       
|Ocean Shores, Washington 98569       
|                                     
|2418 Meridian East                    | 1980        | 2,400          | 43,259        
|Edgewood, Washington 98371           
|                                     
|202 Auburn Way South                  | 1994        | 4,200          | 19,287        
|Auburn, Washington 98002             
|                                     
|12814 Meridian East (South Hill)      | 1996        | 4,200          | 19,532        
|Puyallup, Washington 98373           
|                                     
|1201 Marvin Road, N.E.                | 1997        | 4,400          | 16,690        
|Lacey, Washington 98516              
|                                     
|101 Yelm Avenue W.                    | 1999        | 1,800          | 8,517         
|Yelm, Washington 98597               
|                                     
|20464 Viking Way NW                   | 1999        | 3,380          | 8,120         
|Poulsbo, Washington  98370           
|                                     
|2419 224th Street E.                  | 1999        | 3,865          | 10,733        
|Spanaway, Washington  98387          
|                                     
|801 Trosper Road SW                   | 2001        | 3,300          | 11,909        
|Tumwater, Washington 98512            |             |                |               
|                                      |             |                |               
|                                      |             |                |               
|7805 South Hosmer Street              | 2001        | 5,000          | 7,587         
|Tacoma, Washington 98408              |             |                |               
|                                      |             |                |               
|                                      |             |                |               
|*Data Center:*                        |             |                |               
|                                      |             |                |               
|                                      |             |                |               
|422 6th Street                        | 1990        | 2,700          | --            
|Hoquiam, Washington 98550            

The Bank operates 15 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, 2002, 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.

34

<PAGE>

**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, 2002.



**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, 2002, there were 4,340,976 shares of common stock issued and approximately 764 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, 2002, 2001 and 2000.  This information was provided by the Nasdaq Stock Market.

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

35

<PAGE>

**Item 6.	Selected Financial Data**

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

|                                              | At September 30,                     
|--------------------------------------------- | -------------------------------------
|                                              | 2002                                 
|                                              | (In thousands)                       
|SELECTED FINANCIAL CONDITION DATA:            |                                      
|                                              |                                      
|Total assets                                  | $431,054                             
|Loans receivable and loans held for sale, net | 322,528                              
|Investment securities available-for-sale      | 23,694                               
|Mortgage-backed securities available-for-sale | 17,888                               
|FHLB Stock                                    | 5,139                                
|Cash and due from financial institutions and 
|interest-bearing deposits in banks            | 36,073                               
|Deposits                                      | 292,316                              
|FHLB advances                                 | 61,759                               
|Shareholders' equity                          | 74,396                               
|                                              |                                      
|                                              |                                      
|                                              | Year Ended September 30,             
|                                              | 2002                                 
|                                              | (In thousands, except per share data)
|SELECTED OPERATING DATA:                      |                                      
|                                              |                                      
|Interest and dividend income                  | $30,263                              
|Interest expense                              | 10,890                               
|Net interest income                           | 19,373                               
|Provision for loan losses                     | 992                                  
|Net interest income after                    
|provision for loan losses                     | 18,381                               
|Noninterest income                            | 4,658                                
|Noninterest expense                           | 12,716                               
|Income before income taxes                    | 10,323                               
|Provision for income taxes                    | 3,432                                
|Net income                                    | $ 6,891                              
|                                             
|Earnings per common share:                   
|Basic                                         | $1.76                                
|Diluted                                       | $1.71                                
|Dividends per share                           | $0.45                                
|Dividend payout ratio                         | 25.57%                               

36

<PAGE>

|                                        | At September 30,
|--------------------------------------- | ----------------
|                                        | 2002            
|                                        |                 
|OTHER DATA:                             |                 
|                                       
|Number of real estate loans outstanding | 2,911           
|Deposit accounts                        | 36,896          
|Full-service offices                    | 13              



|                                                | At or For the Year Ended September 30,
|----------------------------------------------- | --------------------------------------
|                                                | 2002                                  
|                                                |                                       
|KEY FINANCIAL RATIOS:                           |                                       
|                                                |                                       
|Performance Ratios:                             |                                       
|Return on average assets (1)                    | 1.73%                                 
|Return on average equity (2)                    | 9.42                                  
|Interest rate spread (3)                        | 4.34                                  
|Net interest margin (4)                         | 5.08                                  
|Average interest-earning assets to average     
|interest-bearing liabilities                    | 125.73                                
|Noninterest expense as a  percent of           
|average total assets                            | 3.19                                  
|Efficiency ratio (5)                            | 52.91                                 
|Book value per share (6)                        | $17.14                                
|Book value per share (7)                        | 18.69                                 
|                                               
|Asset Quality Ratios:                          
|Nonaccrual and 90 days or more past due loans  
|as a percent of loans receivable, net (8)       | 1.15%                                 
|Nonperforming assets as a                      
|percent of total assets                         | 1.03                                  
|Allowance for loan losses as a percent of total
|loans receivable, net (8)                       | 1.11                                  
|Allowance for losses as a percent              
|of nonperforming loans                          | 97.03                                 
|Net charge-offs to average outstanding loans    | 0.13                                  
|Capital Ratios:                                
|Total equity-to-assets ratio                    | 17.26                                 
|Average equity to average assets (9)            | 18.37                                 

|(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.                                                                  

37

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

**Operating Strategy**

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

Emphasize Residential Mortgage Lending and Residential Construction Lending.  The Bank has 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 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, seven 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.

**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, 2002, adjustable rate mortgage loans and adjustable rate mortgage-backed securities constituted
$193.7 million or 55.6%, of the Bank's total combined mortgage loan and mortgage-backed securities portfolio.
Although the Bank has sought to originate ARM loans, the ability to originate such loans depends to a great extent on
market interest rates and borrowers' preferences.  Particularly in lower interest rate environments, borrowers often prefer
to obtain fixed rate loans.

Consumer loans and construction and land development loans typically have
shorter terms and higher yields than permanent residential mortgage loans, and
accordingly reduce the Bank's exposure to fluctuations in interest rates.

39

<PAGE>

At September 30, 2002, the construction and
land development, and consumer loan portfolios amounted to $80.1 million and
$21.8 million, or 22.2% and 6.0% 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, 2002.

|Projected     | Net Interest Income    | Current Market Value
|------------- | ---------------------- | --------------------
|Interest Rate | Estimated              | $ Change            
|Scenario      | Value                  | from Base           
|              | (Dollars in thousands)
|             
|+300          | $17,835                | $1,893              
|+200          | 17,313                 | 1,371               
|+100          | 16,680                 | 738                 
|BASE          | 15,942                 | --                  
|-100          | 14,904                 | (1,038)             
|-200          | 13,607                 | (2,336)             
|-300          | 11,499                 | (4,443)             

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

In the event of a 200 basis point decrease in interest rates, the Bank would be expected to experience a 16.1%
decrease in NPV and a 14.7% decrease in net interest income.  In the event of a 200 basis point increase in interest rates,
a 6.8% decrease in NPV and an 8.6% 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 decreases in NPV and
increases in net interest income in a rising interest rate environment.

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

**Comparison of Financial Condition at September 30, 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.

40

<PAGE>

**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.  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 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
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

41

<PAGE>

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 Financial Condition at September 30, 2001 and 2000**

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

**Cash and Due from Financial Institutions:**  Cash and due from financial institutions and interest-bearing
deposit balances in banks increased to $13.4 million at September 30, 2001 from $12.0 million at September 30, 2000.

**Investments, Mortgage-backed Securities and FHLB Stock:** Investments, mortgage-backed securities and
FHLB stock  increased to $34.2 million at September 30, 2001 from $29.1 million at September 30, 2000.  The increase
is primarily a result of the purchase of $10.0 million in mortgage-backed securities in connection with the Bank's asset
liability management strategies, and was partially offset by redemptions to fund share repurchases, and scheduled
amortization and prepayments.  During the year, the Bank converted  $11.9 million in fixed rate loans held for sale to
mortgage-backed securities.  These newly created securities were then sold and the proceeds were used to purchase other
mortgage-backed securities with shorter maturities.   For additional details on investments and mortgage-backed
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, increased 3.4% to $323.8 million at September 30, 2001 from $313.0 at September 30, 2000.  This
increase is primarily a result of $9.3 million increase in net construction loans, a $7.1 million increase in commercial
real estate loans, and a $2.3 million increase in commercial business loans. These increases are partially offset by a $6.7
million decrease in one-to-four family mortgage loans as the Company sold $27.6 million in fixed rate mortgage loans
during the year and converted $11.9 million in fixed rate mortgages to mortgage backed securities during the year.

**Real Estate Owned, Net:**  Real Estate Owned, net, decreased to $1.0 million at September 30, 2001 from $2.0
million at September 30, 2000.  This balance decreased primarily due to the sale of the Bank's largest REO, a
convenience store with retail space in Kitsap County, Washington.  For additional information see "Item 1, Business -
- Lending Activities - - Nonperforming Assets" and Note 7 to the Notes to Consolidated Financial Statements contained
in "Item 8, Financial Statements and Supplementary Data."

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

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

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

On September 24, 2001 the Company announced a plan to repurchase 200,872 shares
of the Company's stock. This marked the Company's ninth 5% stock repurchase
plan. As of September 30, 2001, the Company had repurchased

42

<PAGE>

44,000 of these shares and cumulatively had
repurchased a total of 2,248,032 (34.0%) of the 6,612,500 shares that were
issued when the Company went public in January 1998.

**Comparison of 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.

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

43

<PAGE>

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.

**Comparison of Operating Results for Years Ended September 30, 2001 and 2000**

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

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

**Provision for Loan Losses:**The provision for loan losses increased to $1.4 million for the year ended
September 30, 2001 from $885,000 for the year ended September 30, 2000. The
provision for loan losses was higher in 2001 primarily because the Bank
experienced a higher level of net charge-offs in 2001. For the years ended
September 30, 2001 and 2000, net charge-offs were $990,000 and $301,000,
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

44

<PAGE>

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  $410,000 to $3.05 million at September 30, 2001 from
$2.64 million at September 30, 2000.  The increased level of allowance for loan losses was primarily due to increased
loss factors utilized in the allowance for loan loss analysis and increased commercial business loans held in the Bank's
loan portfolio.

Changes in the composition of the loan portfolio were responsible for a portion of the increased allowance for
loan losses.  Commercial business loans increased by 48.7% to $7.2 million at September 30, 2001 from $4.8 million
at September 30, 2000.   One- to- four family residential mortgage loans, however, decreased by $6.7 million to $130.1
million at September 30, 2001 from $136.8 million at September 30, 2000.  Commercial business 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 historic 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, 2001.

Based on the systematic methodology management deemed the allowance for loan
losses of $3.05 million at September 30, 2001 (0.93% of loans receivable and
74.6 % 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:**  Noninterest income increased $1.2 million to $2.9 million, for the year ended
September 30, 2001 from $1.7 million for the year ended September 30, 2000.  The increase was primarily due to a
$533,000 increase in service charge on deposits, a $264,000 increase in gain on sale of loans, a $227,000 net increase
in gain on sales of securities, a $154,000 increase in servicing income on loans sold and a $129,000 increase in ATM
fees.  These increases are partially offset by a $233,000 net reduction in market value recoveries on loans held for sale.

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

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

**Nonperforming Assets**

Information with respect to the Bank's nonperforming assets at September 30, 2002 and September 30, 2001
is contained in "Item 1, Business -- Lending Activities -- Nonperforming Assets and Delinquencies."

45

<PAGE>

**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.

46

<PAGE>

|                                      | Year Ended September 30,
|------------------------------------- | ------------------------
|                                      | 2002                    
|                                      |                         
|                                      | Average                 
|                                      | Balance                 
|                                      |                         
|                                      |                         
|Interest-earning assets:              |                         
|Loans receivable (1)(2)               | $323,820                
|Mortgage-backed and                  
|investment securities                 | 23,287                  
|FHLB stock and equity securities      | 20,417                  
|Interest-bearing deposits             | 13,960                  
|Total interest-earning assets         | 381,484                 
|Non-interest-earning assets           | 16,859                  
|                                      |                         
|Total assets                          | $398,343                
|                                      |                         
|Interest-bearing liabilities:         |                         
|Passbook accounts                     | $37,311                 
|Money market accounts                 | 38,020                  
|NOW accounts                          | 34,654                  
|Certificates of deposit               | 130,110                 
|FHLB advances-other                  
|borrowed money                        | 63,315                  
|Total interest bearing liabilities    | 303,410                 
|Non-interest bearing liabilities      | 21,764                  
|Total liabilities                     | 325,174                 
|                                      |                         
|Shareholders' equity                  | 73,169                  
|Total liabilities and                 |                         
|shareholders' equity                  | $398,343                
|                                      |                         
|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 are included with interest and dividends.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average balance includes nonaccrual loans.                                                                                                                                   
|(3) | Net interest income divided by total interest earning assets.                                                                                                                

47

<PAGE>

**Rate/Volume Analysis**



|                                  | Year Ended September 30, | Year Ended September 30,
|--------------------------------- | ------------------------ | ------------------------
|                                  | 2002 Compared to Year    | 2001 Compared to Year   
|                                  | Ended September 30, 2001 | Ended September 30, 2000
|                                  | Increase (Decrease)      | Increase (Decrease)     
|                                  | Due to                   | Due to                  
|                                  |                          |                         
|                                  | Rate                     | Volume                  
|                                  |                          |                         
|                                  |                          |                         
|Interest-earning assets:          |                          |                         
|Loans receivable (1)              | $(2,007)                 | $   (6)                 
|Investments and mortgage-        
|backed securities                 | (5)                      | 459                     
|FHLB stock and equity securities  | (299)                    | 356                     
|Interest-bearing deposits         | (161)                    | 234                     
|Total net change in income        |                          |                         
|on interest-earning assets        | (2,472)                  | 1,043                   
|                                  |                          |                         
|Interest-bearing liabilities:     |                          |                         
|Passbook accounts                 | (185)                    | 184                     
|NOW accounts                      | (171)                    | 134                     
|Money market accounts             | (310)                    | 490                     
|Certificate accounts              | (2,227)                  | 110                     
|FHLB advances and other           |                          |                         
|borrowed money                    | (368)                    | (691)                   
|Total net change in expense       |                          |                         
|on interest-bearing liabilities   | (3,261)                  | 227                     
|Net change in net interest income | $    789                 | $816                    

******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, 2002, 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 26.8%.  At September 30, 2002, the Bank also maintained

48

<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 $61.8 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, 2002, 2001, and 2000, the Bank originated $83.1
million, $47.5 million and $34.2 million of one- to- four family mortgage loans and $52.6 million, $80.1 million and
$69.6 million of construction and land development loans, respectively.  At September 30, 2002, the Bank had mortgage
loan commitments totaling $19.6 million, standby letters of credit totaling $50,000, and undisbursed loans in process
totaling $32.3 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, 2002 totaled
$108.9 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, 2002, 2001, and 2000, the Bank sold $70.2 million, $27.6 million, and $11.8 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, 2002, 2001, and 2000, the Bank received
$136.7 million, $96.1 million, and $80.8 million in principal repayments.

The Bank's liquidity has been impacted by increases in deposit levels.  During the years ended September 30,
2002, 2001, and 2000, deposits increased by $49.9 million, $29.8 million, and $24.5 million.  The increased deposits
allowed the Bank to pay down the level of advances from the FHLB.   The level of advances from the FHLB has
decreased during this period to $61.8 million at September 30, 2002 from $81.1 million at September 30, 2000.

The level of investment securities and interest bearing deposits increased to $67.1 million at September 30,
2002 from $32.8 million at September 30, 2001.  The Bank also purchased $10.0 million in Bank owned life insurance
during the year ended 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, 2002, 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.

49

<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' Reports                                 | 51  
|Consolidated Balance Sheets as of September 30, 2002 and 2001 | 53  
|Consolidated Statements of Income For the Years Ended        
|September 30, 2002, 2001, and 2000                            | 54  
|Consolidated Statements of Shareholders' Equity For the      
|Years Ended September 30, 2002, 2001 and 2000                 | 55  
|Consolidated Statements of Cash Flows For the Years Ended    
|September 30, 2002, 2001 and 2000                             | 56  
|Consolidated Statements of Comprehensive Income For the      
|Years Ended September 30, 2002, 2001 and 2000                 | 58  
|Notes to Consolidated Financial Statements                    | 59  

50

<PAGE>

We have audited the accompanying consolidated balance sheets of Timberland Bancorp, Inc. and Subsidiaries as of September 30, 2002 and 2001, and the related consolidated statements of income, shareholders' equity, cash flows and comprehensive income for the years then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provided a reasonable basis for our opinion.
In our opinion, the 2002 and 2001 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Timberland Bancorp, Inc. and Subsidiaries as of September 30, 2002 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Tacoma, Washington
October 30, 2002

51

<PAGE>

We have audited the accompanying consolidated statements of income, shareholders' equity, cash flows and comprehensive income of Timberland Bancorp, Inc. and Subsidiaries for the year ended September 30, 2000.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Timberland Bancorp, Inc. and Subsidiaries for the year ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ Knight Vale & Gregory PLLC
Tacoma, Washington
November 2, 2000

52

<PAGE>

---

Consolidated Balance Sheets

---

Timberland Bancorp, Inc. and Subsidiaries
September 30, 2002 and 2001

|                                                                                                                                                                                                                                                                                               |             |            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | -----------
|                                                                                                                                                                                                                                                                                               | 2002        | 2001       
|Assets                                                                                                                                                                                                                                                                                         |             |            
|Cash and due from financial institutions                                                                                                                                                                                                                                                       | $    10,580 | $    10,017
|Interest bearing deposits in banks                                                                                                                                                                                                                                                             | 25,493      | 3,422      
|Investments and mortgage-backed securities (available for sale)                                                                                                                                                                                                                                | 41,582      | 29,369     
|Federal Home Loan Bank stock (at cost)                                                                                                                                                                                                                                                         | 5,139       | 4,830      
|                                                                                                                                                                                                                                                                                               |             |            
|Loans receivable, net                                                                                                                                                                                                                                                                          | 319,367     | 305,746    
|Loans held for sale                                                                                                                                                                                                                                                                            | 3,161       | 18,022     
|                                                                                                                                                                                                                                                                                               | 322,528     | 323,768    
|                                                                                                                                                                                                                                                                                               |             |            
|Premises and equipment                                                                                                                                                                                                                                                                         | 11,664      | 10,660     
|Real estate owned                                                                                                                                                                                                                                                                              | 680         | 1,006      
|Accrued interest receivable                                                                                                                                                                                                                                                                    | 1,604       | 1,880      
|Bank owned life insurance (BOLI)                                                                                                                                                                                                                                                               | 10,036      | - -        
|Other assets                                                                                                                                                                                                                                                                                   | 1,748       | 1,353      
|                                                                                                                                                                                                                                                                                               |             |            
|Total assets                                                                                                                                                                                                                                                                                   | $ 431,054   | $ 386,305  
|                                                                                                                                                                                                                                                                                               |             |            
|Liabilities and Shareholders' Equity                                                                                                                                                                                                                                                           |             |            
|                                                                                                                                                                                                                                                                                               |             |            
|Liabilities                                                                                                                                                                                                                                                                                    |             |            
|Deposits                                                                                                                                                                                                                                                                                       | $ 292,316   | $ 242,372  
|Federal Home Loan Bank advances                                                                                                                                                                                                                                                                | 61,759      | 68,978     
|Other liabilities and accrued expenses                                                                                                                                                                                                                                                         | 2,583       | 3,146      
|Total liabilities                                                                                                                                                                                                                                                                              | 356,658     | 314,496    
|                                                                                                                                                                                                                                                                                               |             |            
|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;      2002 - 4,340,976 shares issued, 3,856,536 shares outstanding;      2001 - 4,570,995 shares issued, 4,010,303 shares outstanding;      (unallocated ESOP shares and unvested MRDP shares are      not considered outstanding) | 43          | 46         
|Additional paid-in capital                                                                                                                                                                                                                                                                     | 35,857      | 39,574     
|Unearned shares issued to employee stock ownership trust                                                                                                                                                                                                                                       | (5,419)     | (5,948)    
|Unearned shares issued to management recognition and & development plan                                                                                                                                                                                                                        | (1,826)     | (2,471)    
|Retained earnings                                                                                                                                                                                                                                                                              | 45,210      | 40,332     
|Accumulated other comprehensive income                                                                                                                                                                                                                                                         | 531         | 276        
|Total shareholders' equity                                                                                                                                                                                                                                                                     | 74,396      | 71,809     
|                                                                                                                                                                                                                                                                                               |             |            
|Total liabilities and shareholders' equity                                                                                                                                                                                                                                                     | $ 431,054   | $ 386,305  

See notes to consolidated financial statements.

53

<PAGE>

---

Consolidated Statements of Income

---

Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2002, 2001 and 2000

|                                                          |            |            |           
|--------------------------------------------------------- | ---------- | ---------- | ----------
|                                                          | 2002       | 2001       | 2000      
|Interest and Dividend Income                              |            |            |           
|Loans receivable                                          | $27,764    | $29,777    | $26,325   
|Investments and mortgage-backed securities                | 1,416      | 962        | 1,183     
|Dividends from investments                                | 848        | 791        | 713       
|Interest bearing deposits in banks                        | 235        | 162        | 141       
|Total interest and dividend income                        | 30,263     | 31,692     | 28,362    
|                                                          |            |            |           
|Interest Expense                                          |            |            |           
|Deposits                                                  | 7,516      | 9,491      | 8,393     
|Federal Home Loan Bank advances                           | 3,374      | 4,433      | 4,034     
|Total interest expense                                    | 10,890     | 13,924     | 12,427    
|                                                          |            |            |           
|Net interest income                                       | 19,373     | 17,768     | 15,935    
|                                                          |            |            |           
|Provision for Loan Losses                                 | 992        | 1,400      | 885       
|                                                          |            |            |           
|Net interest income after provision for loan losses       | 18,381     | 16,368     | 15,050    
|                                                          |            |            |           
|Non-Interest Income                                       |            |            |           
|Service charges on deposits                               | 1,862      | 1,040      | 507       
|Gain on sale of loans, net                                | 976        | 367        | 103       
|Market value adjustment on loans held for sale            | - -        | 175        | 408       
|Gain (loss) on sale of securities available for sale, net | (15)       | 205        | (22)      
|Escrow fees                                               | 261        | 205        | 198       
|Servicing income (expenses) on loans sold                 | 326        | 152        | (2)       
|ATM transaction fees                                      | 632        | 379        | 250       
|Other                                                     | 616        | 404        | 296       
|Total non-interest income                                 | 4,658      | 2,927      | 1,738     
|                                                          |            |            |           
|Non-Interest Expense                                      |            |            |           
|Salaries and employee benefits                            | 6,987      | 6,042      | 4,535     
|Premises and equipment                                    | 1,380      | 1,208      | 960       
|Advertising                                               | 777        | 950        | 389       
|Real estate owned                                         | 114        | 481        | 134       
|ATM expenses                                              | 510        | 271        | 173       
|Other                                                     | 2,948      | 2,140      | 1,775     
|Total non-interest expense                                | 12,716     | 11,092     | 7,966     
|                                                          |            |            |           
|Income before federal income taxes                        | 10,323     | 8,203      | 8,822     
|                                                          |            |            |           
|Federal Income Taxes                                      | 3,432      | 2,741      | 2,925     
|                                                          |            |            |           
|Net income                                                | $    6,891 | $    5,462 | $    5,897
|                                                          |            |            |           
|Earnings Per Common Share                                 |            |            |           
|Basic                                                     | $1.76      | $1.30      | $1.31     
|Diluted                                                   | 1.71       | 1.28       | 1.31      

See notes to consolidated financial statements.

54

<PAGE>

---

Consolidated Statements of Shareholders' Equity

---

|                                                                      |              |                            |                               |                                                                          |                                                                                                       |                   |                                                                        |        
|--------------------------------------------------------------------- | ------------ | -------------------------- | ----------------------------- | ------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | ----------------- | ---------------------------------------------------------------------- | -------
|                                                                      | CommonShares | Stock               Amount | AdditionalPaid-in     Capital | Unearned  Shares      Issued to   Employee  Stock         OwnershipTrust | Unearned      Shares          Issued to       ManagementRecognition and Develop-ment             Plan | Retained Earnings | AccumulatedOther          Compre-     hensive      Income       (Loss) | Total  
|                                                                      |              |                            |                               |                                                                          |                                                                                                       |                   |                                                                        |        
|Balance, September 30, 1999                                           | 4,750,139    | $52                        | $46,943                       | ($7,005)                                                                 | $         - -                                                                                         | $32,646           | ($391)                                                                 | $72,245
|Net income                                                            | - -          | - -                        | - -                           | - -                                                                      | - -                                                                                                   | 5,897             | - -                                                                    | 5,897  
|Repurchase of common stock                                            | (424,127)    | (4)                        | (4,599)                       | - -                                                                      | - -                                                                                                   | - -               | - -                                                                    | (4,603)
|Cash dividends ($.35 per share)                                       | - -          | - -                        | - -                           | - -                                                                      | - -                                                                                                   | (1,748)           | - -                                                                    | (1,748)
|Earned ESOP shares                                                    | 35,267       | - -                        | (94)                          | 528                                                                      | - -                                                                                                   | - -               | - -                                                                    | 434    
|Change in fair value of 
  securities available for sale,  net of tax | - -          | - -                        | - -                           | - -                                                                      | - -                                                                                                   | - -               | 87                                                                     | 87     
|                                                                      |              |                            |                               |                                                                          |                                                                                                       |                   |                                                                        |        
|Balance,  September 30, 2000                                          | 4,361,279    | 48                         | 42,250                        | (6,477)                                                                  | - -                                                                                                   | 36,795            | (304)                                                                  | 72,312 
|                                                                      |              |                            |                               |                                                                          |                                                                                                       |                   |                                                                        |        
|Net income                                                            | - -          | - -                        | - -                           | - -                                                                      | - -                                                                                                   | 5,462             | - -                                                                    | 5,462  
|Issuance of MRDP shares                                               | - -          | 2                          | 3,222                         | - -                                                                      | (3,224)                                                                                               | - -               | - -                                                                    | - -    
|Repurchase of common stock                                            | (428,827)    | (4)                        | (5,914)                       | - -                                                                      | - -                                                                                                   | - -               | - -                                                                    | (5,918)
|Exercise of stock options                                             | 1,600        | - -                        | 19                            | - -                                                                      | - -                                                                                                   | - -               | - -                                                                    | 19     
|Cash dividends ($.41 per share)                                       | - -          | - -                        | - -                           | - -                                                                      | - -                                                                                                   | (1,925)           | - -                                                                    | (1,925)
|Earned ESOP shares                                                    | 35,266       | - -                        | (26)                          | 529                                                                      | - -                                                                                                   | - -               | - -                                                                    | 503    
|Earned MRDP shares                                                    | 40,985       | - -                        | 23                            | - -                                                                      | 753                                                                                                   | - -               | - -                                                                    | 776    
|Change in fair value of  securities available for sale,   net of tax  | - -          | - -                        | - -                           | - -                                                                      | - -                                                                                                   | - -               | 580                                                                    | 580    
|                                                                      |              |                            |                               |                                                                          |                                                                                                       |                   |                                                                        |        
|Balance,  September 30, 2001                                          | 4,010,3034   | 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

See notes to consolidated financial statements.

55

<PAGE>

---

Consolidated Statements of Cash Flows

---

|                                                                                                           |            |            |            
|---------------------------------------------------------------------------------------------------------- | ---------- | ---------- | -----------
|                                                                                                           | 2002       | 2001       | 2000       
|Cash Flows from Operating Activities                                                                       |            |            |            
|Net income                                                                                                 | $    6,891 | $    5,462 | $    5,897 
|Noncash revenues, expenses, gains and losses     included in net income:                                   |            |            |            
|Depreciation                                                                                               | 633        | 527        | 424        
|Deferred federal income taxes                                                                              | (171)      | (207)      | (231)      
|Earned ESOP shares                                                                                         | 556        | 503        | 434        
|Earned MRDP Shares                                                                                         | 713        | 770        | - -        
|Federal Home Loan Bank stock dividends                                                                     | (309)      | (310)      | (224)      
|Market value adjustment on loans held for sale                                                             | - -        | (175)      | (408)      
|Loss on sale of real estate owned, net                                                                     | 61         | 21         | 25         
|(Gain) loss on sale of securities available for sale                                                       | 15         | (205)      | 22         
|Gain on sale of loans                                                                                      | (976)      | (367)      | (103)      
|Provision for loan and real estate owned losses                                                            | 1,114      | 1,756      | 936        
|Loans originated for sale                                                                                  | (67,531)   | (1,063)    | (16,969)   
|Proceeds from loans held for sale                                                                          | 71,141     | - -        | 11,800     
|Net change in accrued interest receivable and other assets,     and other liabilities and accrued expenses | (1,022)    | 1,173      | (89)       
|Net cash provided by operating activities                                                                  | 11,115     | 7,885      | 1,514      
|                                                                                                           |            |            |            
|Cash Flows from Investing Activities                                                                       |            |            |            
|Net increase in interest-bearing deposits in banks                                                         | (22,071)   | (313)      | (1,793)    
|Activity in securities available for sale:                                                                 |            |            |            
|Sales                                                                                                      | 12,293     | 12,334     | 2,482      
|Maturities, prepayments and calls                                                                          | 5,326      | 10,549     | 2,421      
|Purchases                                                                                                  | (17,200)   | (14,720)   | (1,989)    
|Increase in loans receivable, net                                                                          | (14,879)   | (23,653)   | (54,139)   
|Additions to premises and equipment                                                                        | (1,641)    | (2,573)    | (1,416)    
|Additions to real estate owned                                                                             | (63)       | (198)      | (271)      
|Proceeds from sale of real estate owned                                                                    | 797        | 2,035      | 1,109      
|Purchase of BOLI                                                                                           | (10,000)   | - -        | - -        
|Net cash used in investing activities                                                                      | (47,438)   | (16,539)   | (53,596)   
|                                                                                                           |            |            |            
|Cash Flows from Financing Activities                                                                       |            |            |            
|Increase in deposits                                                                                       | 49,944     | 29,761     | 24,463     
|Repayment of Federal Home Loan Bank advances                                                               | (16,119)   | (227,859)  | (298,905)  
|Proceeds from Federal Home Loan Bank advances                                                              | 8,900      | 215,700    | 334,958    
|Proceeds from exercise of stock options                                                                    | 588        | 19         | - -        
|Repurchase of common stock                                                                                 | (4,414)    | (5,918)    | (4,603)    
|Payment of dividends                                                                                       | (2,013)    | (1,925)    | (1,748)    
|Net cash provided by financing activities                                                                  | 36,886     | 9,778      | 54,165     
|                                                                                                           |            |            |            
|Net increase in cash                                                                                       | 563        | 1,124      | 2,083      
|                                                                                                           |            |            |            
|Cash and Due from Financial Institutions                                                                   |            |            |            
|Beginning of year                                                                                          | 10,017     | 8,893      | 6,810      
|                                                                                                           |            |            |            
|End of year                                                                                                | $   10,580 | $   10,017 | $     8,893
|                                                                                                           |            |            |            
|(continued)                                                                                                |            |            |            

See notes to consolidated financial statements.

56

<PAGE>

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Consolidated Statements of Cash Flows

---

|                                                                            |            |            |           
|--------------------------------------------------------------------------- | ---------- | ---------- | ----------
|                                                                            | 2002       | 2001       | 2000      
|                                                                            |            |            |           
|Supplemental Disclosures of Cash Flow Information                           |            |            |           
|Income taxes paid                                                           | $    3,700 | $    2,260 | $    3,195
|Interest paid                                                               | 11,073     | 14,024     | 12,151    
|                                                                            |            |            |           
|Supplemental Disclosures of Non-Cash Investing     and Financing Activities |            |            |           
|Market value adjustment of securities held for sale,     net of tax         | $      255 | $      580 | $       87
|Loans transferred to real estate owned                                      | 689        | 1,254      | 2,013     
|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        | - -        | - -       

See notes to consolidated financial statements.

57

<PAGE>

---

Consolidated Statements of Comprehensive Income

---

|                                                                                                |            |            |           
|----------------------------------------------------------------------------------------------- | ---------- | ---------- | ----------
|                                                                                                | 2002       | 2001       | 2000      
|                                                                                                |            |            |           
|Comprehensive Income                                                                            |            |            |           
|Net income                                                                                      | $    6,891 | $    5,462 | $    5,897
|Change in fair value of unrealized gains (losses)     securities available for sale, net of tax | 255        | 580        | 87        
|                                                                                                |            |            |           
|Total comprehensive income                                                                      | $    7,146 | $    6,042 | $    5,984

See notes to consolidated financial statements.

58

<PAGE>

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Notes to Consolidated Financial Statements

---

Note 1 - Summary of Significant Accounting Policies

Principles of Consolidation

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

Nature of Operations

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

Consolidated Financial Statement Presentation

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

Certain prior year amounts have been reclassified to conform to the 2002 presentation.

Investments and Mortgage-Backed Securities

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

(continued)

59

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 1 - Summary of Significant Accounting Policies (continued)

Loans Held for Sale

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

Loans Receivable

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

Allowances for Losses

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

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

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

(continued)

60

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 1 - Summary of Significant Accounting Policies  (continued)

Interest on Loans and Loan Fees

Interest on loans is accrued daily based on the principal amount outstanding.  Allowances are established for uncollected interest on loans for which the interest is determined to be uncollectible.  Generally, all loans past due 90 days or morethree or more payments are placed on nonaccrual status and internally classified as substandard.  Any interest income accrued at that time is fully reserved.  Subsequent collections are applied proportionately to past due principal and interest, unless collectability of principal is in doubt, in which case all payments would be applied to principal.  Loans are removed from nonaccrual status only when the loan is deemed current, and the collectibility of principal and interest is no longer doubtful, or on 1-4 family loans, when the loan is less than 90 days delinquent.

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

Loan Servicing Rights

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

Premises and Equipment

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

Real Estate Owned

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

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

(continued)

61

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 1 - Summary of Significant Accounting Policies  (continued)

Income Taxes

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

In 1996, the percentage-of-income bad debt deduction for federal tax purposes was eliminated.  In addition, federal tax bad debt reserves which had been accumulated since October 1, 1988, that exceeded the reserves which would have been accumulated based on actual experience, are subject to recapture over a six-year recapture period.  As of September 30, 2002, the Bank's federal tax bad debt reserves subject to recapture approximated $600,000.

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

Employee Stock Ownership Plan

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

Cash Equivalents

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

Stock-Based Compensation

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

(continued)

62

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 1 - Summary of Significant Accounting Policies  (concluded)

Earnings Per Share

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

Recent Accounting Pronouncements

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.  This statement, which excludes goodwill, provides a single accounting model for recognition and impairment of long-lived assets to be held for sale or disposed of.  SFAS No. 144 retains many of the fundamental recognition and measurement provisions of SFAS No. 121; however, it significantly changes the criteria that would have to be met to classify an asset as either held for sale or to be disposed of.  SFAS No. 144 became effective on January 1, 2002.  The adoption of this statement had no material impact on the Company's financial condition or results of operations.

Note 2 - Restricted Assets

Federal Reserve Board regulations require that the Bank maintain certain minimum reserve balances on hand or on deposit with the Federal Reserve Bank.  The amount of such balances for the years ended September 30, 2002 and 2001 was approximately $2,405,000 and $926,000, respectively.

Note 3 - Investments and Mortgage-Backed Securities

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

|                           |               |                      |                       |              
|-------------------------- | ------------- | -------------------- | --------------------- | -------------
|                           | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | Fair    Value
|                           |               |                      |                       |              
|Available for Sale         |               |                      |                       |              
|                           |               |                      |                       |              
|September 30, 2002         |               |                      |                       |              
|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      

(continued)

63

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 3 - Investments and Mortgage-Backed Securities (concluded)

|                           |               |                      |                       |              
|-------------------------- | ------------- | -------------------- | --------------------- | -------------
|                           | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | Fair    Value
|                           |               |                      |                       |              
|Available for Sale         |               |                      |                       |              
|                           |               |                      |                       |              
|September 30, 2001         |               |                      |                       |              
|Mortgage-backed securities | $18,755       | $420                 | ($16)                 | $19,159      
|Municipal bonds            | 55            | 2                    | - -                   | 57           
|Mutual funds               | 10,020        | 40                   | - -                   | 10,060       
|Equity securities          | 121           | - -                  | (28)                  | 93           
|                           |               |                      |                       |              
|Total                      | $28,951       | $462                 | ($44)                 | $29,369      

Mortgage-backed securities pledged as collateral for public fund deposits and federal treasury tax and loan deposits totaled $2,402,000 and $2,437,000 at September 30, 2002 and 2001, respectively.

The contractual maturities of debt securities available for sale at September 30, 2002 are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

|                                |  |  |               |               
|------------------------------- |  |  | ------------- | --------------
|                                |  |  | AmortizedCost | Fair     Value
|                                |  |  |               |               
|Due within one year             |  |  | $        - -  | $        - -  
|Due from one year to five years |  |  | 37            | 40            
|Due from five to ten years      |  |  | 5,018         | 5,231         
|Due after ten years             |  |  | 12,178        | 12,657        
|Mutual funds                    |  |  | 23,545        | 23,654        
|                                |  |  |               |               
|Total                           |  |  | $40,778       | $41,582       

Gross realized gains on sales of securities available for sale were $8,000 and $227,000 in 2002 and 2001, respectively.  There were no gross realized gains in 2000.  Gross realized losses on sales of securities available for sale were $23,000, $22,000 and $22,000, for the years ended December 31, 2002, 2001 and 2000, respectively.

64

<PAGE>

---

Notes to Consolidated Financial Statements

---

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):

|                                               |  |  |          |         
|---------------------------------------------- |  |  | -------- | --------
|                                               |  |  | 2002     | 2001    
|Mortgage loans:                                |  |  |          |         
|One- to four-family                            |  |  | $109,983 | $112,060
|Multi-family                                   |  |  | 24,135   | 29,412  
|Commercial                                     |  |  | 97,644   | 65,731  
|Construction and land development              |  |  | 80,144   | 106,244 
|Land                                           |  |  | 15,453   | 13,632  
|Total mortgage loans                           |  |  | 327,359  | 327,079 
|                                               |  |  |          |         
|Consumer loans:                                |  |  |          |         
|Home equity and second mortgage                |  |  | 13,718   | 11,039  
|Other                                          |  |  | 8,097    | 6,825   
|Total consumer loans                           |  |  | 21,815   | 17,864  
|                                               |  |  |          |         
|Commercial business loans                      |  |  | 9,365    | 7,150   
|                                               |  |  |          |         
|Total loans receivable                         |  |  | 358,539  | 352,093 
|                                               |  |  |          |         
|Less:                                          |  |  |          |         
|Undisbursed portion of loans in process        |  |  | 32,324   | 39,803  
|Deferred loan origination fees Unearned income |  |  | 3,218    | 3,494   
|Allowance for loan losses                      |  |  | 3,630    | 3,050   
|                                               |  |  | 39,172   | 46,347  
|                                               |  |  |          |         
|Loans receivable, net                          |  |  | 319,367  | 305,746 
|                                               |  |  |          |         
|Loans held for sale (one- to four-family)      |  |  | 3,161    | 18,022  
|                                               |  |  |          |         
|Total loans receivable and loans held for sale |  |  | $322,528 | $323,768
|                                               |  |  |          |         

(continued)

65

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 4 - Loans Receivable and Loans Held for Sale  (continued)

Certain related parties of the Bank, principally Bank directors and officers, were loan customers of the Bank in the ordinary course of business during 2002 and 2001.  Activity in related party loans during the years ended September 30 is as follows (dollars in thousands):

|                           |  |  |         |        
|-------------------------- |  |  | ------- | -------
|                           |  |  | 2002    | 2001   
|Balance, beginning of year |  |  | $   793 | $   807
|New loans                  |  |  | 1,246   | 374    
|Repayments                 |  |  | (691)   | (388)  
|                           |  |  |         |        
|Balance, end of year       |  |  | $ 1,348 | $   793

At September 30, 2002 and 2001, the Bank had non-accruing loans totaling approximately $3,741,000 and $4,091,000, respectively.  At September 30, 2002 and 2001, 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, 2002, 2001 and 2000.  The average investment in non-accrual loans for the years ended September 30, 2002, 2001 and 2000 was $4,095,000, $3,778,000 and $3,460,000, respectively.

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

|                           |  |        |         |       
|-------------------------- |  | ------ | ------- | ------
|                           |  | 2002   | 2001    | 2000  
|Balance, beginning of year |  | $3,050 | $2,640  | $2,056
|Provision for loan losses  |  | 992    | 1,400   | 885   
|                           |  |        |         |       
|Loans charged off          |  | (521)  | (1,012) | (563) 
|Recoveries                 |  | 109    | 22      | 262   
|Net charge-offs            |  | (412)  | (990)   | (301) 
|                           |  |        |         |       
|Balance, end of year       |  | $3,630 | $3,050  | $2,640

(continued)

66

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Notes to Consolidated Financial Statements

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Note 4 - Loans Receivable and Loans Held for Sale  (concluded)

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

|                                              |  |  |        |       
|--------------------------------------------- |  |  | ------ | ------
|                                              |  |  | 2002   | 2001  
|                                              |  |  |        |       
|Impaired loans without a valuation allowance  |  |  | $3,599 | $2,300
|Impaired loans with a valuation allowance     |  |  | 142    | 1,791 
|                                              |  |  |        |       
|                                              |  |  | $3,741 | $4,091
|                                              |  |  |        |       
|Valuation allowance related to impaired loans |  |  | $57    | $270  

Note 5 - Loan Servicing

Loans serviced for the Federal Home Loan Mortgage Corporation and others are not included in the consolidated balance sheets.  The principal amounts of those loans at September 30, 2002 and 2001 were $140,387,000 and $90,303,000, respectively.

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

|                              |  |       |       |     
|----------------------------- |  | ----- | ----- | ----
|                              |  | 2002  | 2001  | 2000
|Balance, at beginning of year |  | $508  | $356  | $358
|Additions                     |  | 620   | 300   | 87  
|Amortization                  |  | (294) | (148) | (89)
|Balance, end of year          |  | $834  | $508  | $356

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 25).

The estimated fair value of the servicing assets aggregated $979 and $565 at September 30, 2002 and 2001, respectively.

There was no valuation allowance at September 30, 2002 and 2001.

67

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Notes to Consolidated Financial Statements

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Note 6 - Premises and Equipment

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

|                                       |  |  |            |           
|-------------------------------------- |  |  | ---------- | ----------
|                                       |  |  | 2002       | 2001      
|Land                                   |  |  | $    2,654 | $    2,654
|Buildings and improvements             |  |  | 7,798      | 7,675     
|Leasehold improvements                 |  |  | 416        | - -       
|Furniture and equipment                |  |  | 3,263      | 3,223     
|Automobiles                            |  |  | 19         | 19        
|Property held for future expansion     |  |  | 759        | 834       
|Construction and purchases in progress |  |  | 1,428      | 158       
|                                       |  |  | 15,921     | 14,563    
|Less accumulated depreciation          |  |  | 4,257      | 3,903     
|                                       |  |  |            |           
|Total premises and equipment           |  |  | $11,664    | $10,660   

Note 7 - Real Estate Owned

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

|                                         |  |  |       |       
|---------------------------------------- |  |  | ----- | ------
|                                         |  |  | 2002  | 2001  
|Real estate acquired through foreclosure |  |  | $781  | $1,143
|Allowance for possible losses            |  |  | (101) | (137) 
|                                         |  |  |       |       
|Total real estate owned                  |  |  | $680  | $1,006

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

|                                |  |       |       |      
|------------------------------- |  | ----- | ----- | -----
|                                |  | 2002  | 2001  | 2000 
|Balance, beginning of year      |  | $137  | $  26 | $  38
|Provision for additional losses |  | 122   | 356   | 51   
|Write-downs                     |  | (158) | (245) | (63) 
|Balance, end of year            |  | $101  | $137  | $  26

68

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Notes to Consolidated Financial Statements

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Note 8 - Deposits

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

|                        |  |  |            |           
|----------------------- |  |  | ---------- | ----------
|                        |  |  | 2002       | 2001      
|Non-interest bearing    |  |  | $  23,585  | $  16,976 
|NOW checking            |  |  | 42,222     | 30,626    
|Passbook savings        |  |  | 40,328     | 34,228    
|Money market accounts   |  |  | 47,888     | 27,251    
|Certificates of deposit |  |  | 138,293    | 133,291   
|Total deposits          |  |  | $  292,316 | $  242,372

Time deposits of $100,000 or greater totaled $36,241,000 and $44,186,000 at September 30, 2002 and 2001, respectively.

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

|           |  |  |  |          
|---------- |  |  |  | ---------
|2003       |  |  |  | $ 108,899
|2004       |  |  |  | 18,946   
|2005       |  |  |  | 5,661    
|2006       |  |  |  | 1,299    
|2007       |  |  |  | 2,025    
|Thereafter |  |  |  | 1,463    
|Total      |  |  |  | $ 138,293

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

|                        |  |        |        |       
|----------------------- |  | ------ | ------ | ------
|                        |  | 2002   | 2001   | 2000  
|Certificates of deposit |  | $5,278 | $7,396 | $6,573
|Money market accounts   |  | 1,101  | 921    | 741   
|Passbook savings        |  | 727    | 728    | 694   
|NOW checking            |  | 410    | 446    | 385   
|                        |  |        |        |       
|Total                   |  | $7,516 | $9,491 | $8,393

69

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Notes to Consolidated Financial Statements

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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; total credit on the lines is 35% of the Bank's total assets.  Total borrowings under these lines were $61,759,000 and $68,978,000 at September 30, 2002 and 2001, 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):

|           |  |  |  |           
|---------- |  |  |  | ----------
|2003       |  |  |  | $      155
|2004       |  |  |  | 6,673     
|2005       |  |  |  | 4,583     
|2006       |  |  |  | 10,591    
|2007       |  |  |  | 64        
|Thereafter |  |  |  | 39,693    
|           |  |  |  |           
|           |  |  |  | $61,759   

Note 10 - Other Liabilities and Accrued Expenses

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

|                                                       |  |  |            |           
|------------------------------------------------------ |  |  | ---------- | ----------
|                                                       |  |  | 2002       | 2001      
|Federal Income Taxes                                   |  |  | $      318 | $      425
|Accrued pension and profit sharing payable             |  |  | 900        | 807       
|Accrued interest payable on deposits and FHLB advances |  |  | 308        | 491       
|Accounts payable and accrued expenses - other          |  |  | 1,057      | 1,423     
|                                                       |  |  |            |           
|Total other liabilities and accrued expenses           |  |  | $2,583     | $3,146    

70

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Notes to Consolidated Financial Statements

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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):

|                           |  |        |        |       
|-------------------------- |  | ------ | ------ | ------
|                           |  | 2002   | 2001   | 2000  
|Current                    |  | $3,603 | $2,948 | $3,156
|Deferred benefit           |  | (171)  | (207)  | (231) 
|                           |  |        |        |       
|Total federal income taxes |  | $3,432 | $2,741 | $2,925

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

|                               |  |  |           |          
|------------------------------ |  |  | --------- | ---------
|                               |  |  | 2002      | 2001     
|Deferred Tax Assets            |  |  |           |          
|Accrued interest on loans      |  |  | $      82 | $      64
|Accrued vacation               |  |  | 75        | 59       
|Deferred compensation          |  |  | 118       | 106      
|Unearned ESOP shares           |  |  | 332       | 270      
|Allowance for possible losses  |  |  | 1,107     | 888      
|Unearned MRRDP shares          |  |  | 38        | 37       
|Total deferred tax assets      |  |  | 1,752     | 1,424    
|                               |  |  |           |          
|Deferred Tax Liabilities       |  |  |           |          
|FHLB stock dividends           |  |  | 707       | 576      
|Depreciation                   |  |  | 93        | 38       
|Unrealized securities gains    |  |  | 270       | 142      
|Other                          |  |  | - -       | 29       
|Total deferred tax liabilities |  |  | 1,070     | 785      
|                               |  |  |           |          
|Net deferred tax assets        |  |  | $    682  | $    639 

(continued)

71

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Notes to Consolidated Financial Statements

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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):

|                        |        |         |        |         |        |        
|----------------------- | ------ | ------- | ------ | ------- | ------ | -------
|                        | 2002   |         | 2001   |         | 2000   |        
|                        | Amount | Percent | Amount | Percent | Amount | Percent
|Taxes at statutory rate | $3,613 | 35.0%   | $2,871 | 35.0%   | $3,088 | 35.0%  
|Other - net             | (181)  | (1.8)   | (1307) | (1.6)   | (163)  | (1.8)  
|                        |        |         |        |         |        |        
|Federal income taxes    | $3,432 | 33.2%   | $2,741 | 33.4%   | $2,925 | 33.2%  

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 up to 15% of their compensation.  Matching contributions by the Bank are at the discretion of the Board of Directors.  Contributions totaled $385,000, $362,000 and $300,000 for the years ended September 30, 2002, 2001 and 2000, respectively.

In addition, the Bank has an employee bonus plan based on net income.  Bonuses accrued for the years ended September 30, 2002, 2001 and 2000 totaled $275,000, $208,000 and $229,000, 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, 2002, 4,599 shares had been distributed out of the ESOP 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, 2002 was $6,367,000.

(continued)

72

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Notes to Consolidated Financial Statements

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Note 13 - Employee Stock Ownership Plan(concluded)

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

|                               |  |         |         |        
|------------------------------ |  | ------- | ------- | -------
|                               |  | 2002    | 2001    | 2000   
|Unallocated shares             |  | 361,483 | 396,750 | 432,016
|Shares released for allocation |  | 162,918 | 129,722 | 96,143 
|                               |  |         |         |        
|Total ESOP shares              |  | 524,401 | 526,472 | 528,159

The approximate fair market value of the Bank's unallocated shares at September 30, 2002,  and 2001 and 2000, respectively, is $6,051,000, and $5,872,000 and $5,184,000.  Compensation expense recognized under the ESOP was $320,000, $273,000 and $199,000 for the years ended September 30, 2002, 2001 and 2000, respectively.

Note 14 - Stock Options

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

|                            |  |        |        |       
|--------------------------- |  | ------ | ------ | ------
|                            |  | 2002   | 2001   | 2000  
|Net income:                 |  |        |        |       
|As reported                 |  | $6,891 | $5,462 | $5,897
|Pro forma                   |  | 6,632  | 5,161  | 5,431 
|                            |  |        |        |       
|Earnings per basic share:   |  |        |        |       
|As reported                 |  | $1.76  | $1.30  | $1.31 
|Pro forma                   |  | 1.70   | 1.23   | 1.20  
|                            |  |        |        |       
|Earnings per diluted share: |  |        |        |       
|As reported                 |  | $1.71  | $1.28  | $1.31 
|Pro forma                   |  | 1.66   | 1.23   | 1.20  

(continued)

73

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Notes to Consolidated Financial Statements

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Note 14 - Stock Options  (continued)

Under the Company's stock option plan, the Company may grant options for up to 661,250 shares of its common stock to certain key employees and directors.  The exercise price of each option equals the fair market value of the Company's stock on the date of grant.  An option's maximum term is ten years.  Options are exercisable on a cumulative basis in annual installments of 10% on each of the ten anniversaries from the date of grant.  Vesting will be accelerated to 20% per year if certain criteria relating to Company performance are met.  At September 30, 2002, options for 47,047 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 | ExpectedLife (Years) | ExpectedDividends | ExpectedVolatility
|Fiscal 2002 | 4.7%                   | 8                    | 2.9%              | 19.3%             
|Fiscal 2001 | 5.3                    | 8                    | 2.8               | 36.2              

Stock option activity is summarized in the following table:

|                               |  |  |                      |                                            
|------------------------------ |  |  | -------------------- | -------------------------------------------
|                               |  |  | Number of     Shares | Weighted     Average     Exercise     Price
|                               |  |  |                      |                                            
|Outstanding September 30, 1999 |  |  | 582,494              | $12.02                                     
|Forfeited                      |  |  | (10,000)             | 12.38                                      
|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                                     

Exercisable options and the weighted average exercise price are as follows:  September 30, 2002 - 312,770 ($12.07); September 30, 2001 - 244,401 ($12.01); and September 30, 2000 - 114,499 ($12.01).

(continued)

74

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Notes to Consolidated Financial Statements

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Note 14 - Stock Options  (concluded)

Additional information regarding options outstanding as of September 30, 2002 is as follows:

|              |                                                 |                     |                              |                   |                             
|------------- | ----------------------------------------------- | ------------------- | ---------------------------- | ----------------- | ----------------------------
|              |                                                 | Options Outstanding | Options Exercisable         
|ExercisePrice | WeightedAverageRemainingContractualLife (Years) | NumberOutstanding   | WeightedAverageExercisePrice | NumberExercisable | WeightedAverageExercisePrice
|              |                                                 |                     |                              |                   |                             
|$12.00        | 6.2                                             | 497,511             | $12.00                       | 294,602           | $12.00                      
|12.06 - 12.38 | 6.7                                             | 22,500              | 12.31                        | 11,500            | 12.34                       
|13.59 - 14.90 | 8.7                                             | 33,339              | 14.70                        | 6,668             | 14.70                       
|15.20 - 15.96 | 9.5                                             | 15,000              | 15.62                        | - -               | - -                         
|              |                                                 |                     |                              |                   |                             
|              | 6.5                                             | 568,350             | $12.27                       | 312,770           | $12.07                      

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, 2002 and 2001, $239,000 has been accrued under the agreement.

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

75

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Notes to Consolidated Financial Statements

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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.  purchase, in the open market or through the issuance of Shares issued may be purchased in the open market or may be issued from authorized and unissued shares., of up to 264,500 shares of stock.  On July 26, 2001, the Company awarded 204,927 shares under the Plan to employees and directors.  No shares were awarded during the year ended September 30, 2002.  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, 2002, participants were vested in 81,970 of the shares initially awarded.  Compensation expense was $713,000 and $770,000 for the years ended September 30, 2002 and 2001, respectively.

Note 17 - Commitments and Contingencies

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

|                             |  |  |         |        
|---------------------------- |  |  | ------- | -------
|                             |  |  | 2002    | 2001   
|Commitments to extend credit |  |  | $19,599 | $17,807
|Standby letters of credit    |  |  | 50      | 350    

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.

76

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Notes to Consolidated Financial Statements

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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.

As of September 30, 2002, 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 Capitalized  Under Prompt  Corrective Action
|------------------------------------------- | --------------- | ----- | ----------------- | -------------------------------------------------------
|                                            | Actual   Amount | Ratio | Purposes   Amount | Ratio                                                  
|                                            |                 |       |                   |                                                        
|September 30, 2002                          |                 |       |                   |                                                        
|Tier 1 capital (to average assets):         |                 |       |                   |                                                        
|Consolidated                                | $73,782         | 17.6% | $16,732           | 4.0%                                                   
|Timberland Bank                             | 64,679          | 15.6  | 16,571            | 4.0                                                    
|Tier 1 capital (to risk-weighted   assets): |                 |       |                   |                                                        
|Consolidated                                | 73,782          | 23.2  | 12,706            | 4.0                                                    
|Timberland Bank                             | 64,679          | 20.5  | 12,611            | 4.0                                                    
|Total capital (to risk-weighted   assets):  |                 |       |                   |                                                        
|Consolidated                                | 77,412          | 24.4  | 25,413            | 8.0                                                    
|Timberland Bank                             | 68,309          | 21.7  | 25,221            | 8.0                                                    

(continued)

77

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Notes to Consolidated Financial Statements

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Note 18 - Regulatory Matters  (concluded)

|                                            |                 |       | Capital Adequacy  | To be Well Capitalized  Under Prompt  Corrective Action
|------------------------------------------- | --------------- | ----- | ----------------- | -------------------------------------------------------
|                                            | Actual   Amount | Ratio | Purposes   Amount | Ratio                                                  
|                                            |                 |       |                   |                                                        
|September 30, 2001                          |                 |       |                   |                                                        
|Tier 1 capital (to average assets):         |                 |       |                   |                                                        
|Consolidated                                | $71,482         | 18.8% | $15,218           | 4.0%                                                   
|Timberland Bank                             | 61,930          | 16.5  | 15,038            | 4.0                                                    
|Tier 1 capital (to risk-weighted   assets): |                 |       |                   |                                                        
|Consolidated                                | 71,482          | 26.2  | 10,915            | 4.0                                                    
|Timberland Bank                             | 61,930          | 22.7  | 10,907            | 4.0                                                    
|Total capital (to risk-weighted   assets):  |                 |       |                   |                                                        
|Consolidated                                | 74,532          | 27.3  | 21,830            | 8.0                                                    
|Timberland Bank                             | 64,980          | 23.8  | 21,814            | 8.0                                                    

Restrictions on Retained Earnings

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

At the time of conversion of the Bank from a Washington-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.

78

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Notes to Consolidated Financial Statements

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Note 19 - Condensed Financial Information - Parent Company Only

Condensed Balance Sheets - September 30
(Dollars in Thousands)

|                                                                |  |           |          
|--------------------------------------------------------------- |  | --------- | ---------
|                                                                |  | 2002      | 2001     
|Assets                                                          |  |           |          
|Cash and due from financial institutions                        |  | $      51 | $      24
|Interest bearing deposits in banks                              |  | 259       | 227      
|Investments and mortgage-backed securities (available for sale) |  | 3,748     | 3,837    
|Loan receivable from Bank                                       |  | 6,367     | 6,743    
|Investment in Bank                                              |  | 65,285    | 62,270   
|Other assets                                                    |  | 16        | 26       
|                                                                |  |           |          
|Total assets                                                    |  | $75,726   | $73,127  
|                                                                |  |           |          
|Liabilities and Shareholders' Equity                            |  |           |          
|Note payable to Bank                                            |  | $   1,325 | $    575 
|Accrued expenses                                                |  | 5         | 743      
|Shareholders' equity                                            |  | 74,396    | 71,809   
|                                                                |  |           |          
|Total liabilities and shareholders' equity                      |  | $75,726   | $73,127  

Condensed Statements of Income - Years Ended September 30
(Dollars in Thousands)

|                                                                        | 2002     | 2001     | 2000    
|----------------------------------------------------------------------- | -------- | -------- | --------
|Operating Income                                                        |          |          |         
|Interest bearing deposits in banks                                      | $      4 | $     40 | $     24
|Interest on investments and mortgage-backed securities                  | - -      | 67       | 175     
|Interest on loan receivable from Bank                                   | 561      | 592      | 621     
|Dividends on investments                                                | 130      | 180      | 235     
|Gain (loss) on sale of investment securities available for sale         | 5        | 227      | (22)    
|Dividends from Bank                                                     | 5,010    | 1,949    | 1,863   
|Other                                                                   | - -      | 1        | 2       
|Total operating income                                                  | 5,710    | 3,056    | 2,898   
|                                                                        |          |          |         
|Operating Expenses                                                      | 237      | 191      | 204     
|                                                                        |          |          |         
|Income before income taxes and equity   in undistributed income of Bank | 5,473    | 2,865    | 2,694   
|                                                                        |          |          |         
|Income Taxes                                                            | 83       | 238      | 220     
|                                                                        |          |          |         
|Income before equity in undistributed income of Bank                    | 5,390    | 2,627    | 2,474   
|                                                                        |          |          |         
|Equity in Undistributed Income of Bank                                  | 1,501    | 2,835    | 3,423   
|                                                                        |          |          |         
|Net income                                                              | $6,891   | $5,462   | $5,897  

(continued)

79

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 19 - Condensed Financial Information - Parent Company Only  (concluded)

Condensed Statements of Cash Flows - Years Ended September 30(Dollars in Thousands)

|                                                              | 2002      | 2001      | 2000     
|------------------------------------------------------------- | --------- | --------- | ---------
|Cash Flows from Operating Activities                          |           |           |          
|Net income                                                    | $6,891    | $5,462    | $5,897   
|Adjustments to reconcile net income to net cash provided:     |           |           |          
|Equity in undistributed income of Bank                        | (1,501)   | (2,835)   | (3,423)  
|ESOP shares earned                                            | 556       | 503       | 434      
|MRDP shares earned                                            | 724       | 776       | - -      
|(Gain) loss on sale of securities available for sale          | (5)       | (227)     | 22       
|Other, net                                                    | (739)     | 754       | (37)     
|Net cash provided by operating activities                     | 5,926     | 4,433     | 2,893    
|                                                              |           |           |          
|Cash Flows from Investing Activities                          |           |           |          
|Net (increase) decrease in interest-bearing deposits in banks | (32)      | 913       | (921)    
|Investment in Bank                                            | (1,280)   | (485)     | 1,859    
|Purchases of securities available for sale                    | - -       | (2,500)   | (269)    
|Proceeds from maturities of securities available for sale     | - -       | 4,122     | - -      
|Proceeds from sales of securities available for sale          | 126       | 430       | 2,482    
|Principal repayments on loan receivable from Bank             | 376       | 346       | 316      
|Net cash provided by (used in) investing activities           | (810)     | 2,826     | 3,467    
|                                                              |           |           |          
|Cash Flows from Financing Activities                          |           |           |          
|Increase in note payable                                      | 750       | 575       | - -      
|Proceeds from exercise of stock options                       | 588       | 19        | - -      
|Repurchase of common stock                                    | (4,414)   | (5,918)   | (4,603)  
|Payment of dividends                                          | (2,013)   | (1,925)   | (1,748)  
|Net cash provided by (used in) financing activities           | (5,089)   | (7,249)   | (6,351)  
|                                                              |           |           |          
|Net increase in cash                                          | 27        | 10        | 9        
|                                                              |           |           |          
|Cash and Due from Financial Institutions                      |           |           |          
|Beginning of year                                             | 24        | 14        | 5        
|                                                              |           |           |          
|End of year                                                   | $      51 | $      24 | $      14

80

<PAGE>

---

Notes to Consolidated Financial Statements

---

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):

|                                                             | 2002      | 2001      | 2000     
|------------------------------------------------------------ | --------- | --------- | ---------
|Basic EPS Computation                                        |           |           |          
|Numerator - net income                                       | $6,891    | $5,462    | $5,897   
|                                                             |           |           |          
|Denominator - weighted average common shares outstanding     | 3,905,544 | 4,193,314 | 4,508,427
|                                                             |           |           |          
|Basic EPS                                                    | $1.76     | $1.30     | $1.31    
|                                                             |           |           |          
|                                                             |           |           |          
|Diluted EPS Computation                                      |           |           |          
|Numerator - net income                                       | $6,891    | $5,462    | $5,897   
|                                                             |           |           |          
|Denominator - weighted average common shares outstanding     | 3,905,544 | 4,193,314 | 4,508,427
|Effect of dilutive stock options                             | 108,563   | 79,299    | - -      
|Effect of dilutive MRDP shares                               | 19,078    | - -       | - -      
|Weighted average common shares outstanding-assuming dilution | 4,033,185 | 4,272,613 | 4,508,427
|Diluted EPS                                                  | $1.71     | $1.28     | $1.31    

81

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---

Notes to Consolidated Financial Statements

---

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-Tax        Amount | Tax        (Benefit)        Expense | Net-of-Tax        Amount
|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                    
|                                                                   |                          |                                     |                         
|2000                                                               |                          |                                     |                         
|Unrealized holding gains arising during the year                   | $111                     | $39                                 | $72                     
|Reclassification adjustment for losses     included in net income  | 22                       | 7                                   | 15                      
|                                                                   |                          |                                     |                         
|Net unrealized gains                                               | $133                     | $46                                 | $87                     

82

<PAGE>

---

Notes to Consolidated Financial Statements

---

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 BanksThe recorded amount is a reasonable estimate of fair value.

Investments, Mortgage-Backed Securities and Loans Held for SaleThe fair value of investments, mortgage-backed securities and loans held for sale has been based on quoted market prices or dealer quotes.

Federal Home Loan Bank StockThe carrying values of stock holdings approximate fair value.

Loans ReceivableFair 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.

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 carrying amounts of accrued interest approximate fair value.

Off-Balance Sheet Instruments
The fair value of commitments to extend credit and standby letters of 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.

(continued)

83

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 22 - Fair Values of Financial Instruments  (concluded)

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

|                                                                                    | 2002       Recorded       Amount | Fair       Value | 2001       Recorded       Amount | Fair       Value
|----------------------------------------------------------------------------------- | -------------------------------- | ---------------- | -------------------------------- | ----------------
|Financial Assets                                                                    |                                  |                  |                                  |                 
|Cash and due from financial institutions     and interest bearing deposits in banks | $   36,073                       | $   36,073       | $   13,439                       | $   13,439      
|Investments and mortgage-backed securities                                          | 41,582                           | 41,582           | 29,369                           | 29,369          
|Federal Home Loan Bank stock                                                        | 5,139                            | 5,139            | 4,830                            | 4,830           
|Loans receivable                                                                    | 322,528                          | 324,927          | 323,768                          | 327,153         
|Accrued interest receivable                                                         | 1,604                            | 1,604            | 1,880                            | 1,880           
|                                                                                    |                                  |                  |                                  |                 
|Financial Liabilities                                                               |                                  |                  |                                  |                 
|Deposits                                                                            | $292,316                         | $293,411         | $242,372                         | $243,368        
|Federal Home Loan Bank advances                                                     | 61,759                           | 68,695           | 68,978                           | 78,405          
|Accrued interest payable                                                            | 308                              | 308              | 491                              | 491             

Note 23 - Stock Repurchase Plan

In May 2002, the Company initiated a stock repurchase plan for the purchase of 193,659 shares of stock, which had not been completed as of September 30, 2002.  As of September 30, 2002, 117,400 shares had been repurchased.  The remainder is anticipated to be purchased during the year ending September 30, 2003.

Note 24 - Securitization of Mortgage Loans

In 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.

84

<PAGE>

---

Notes to Consolidated Financial Statements

---

Note 25 - Subsequent Event

Subsequent to September 30On October 15, 2002, the Board of DirectorsCompany approved a dividend in the amount of $.12 per share to be paid on November 19, 2002 tofor shareholders of record as of November 5, 2002.

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,   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     | $0.45                | $0.46             | $0.42              | $0.43              
|Diluted earnings per share   | $0.44                | $0.45             | $0.41              | $0.42              

|                             |                      |                   |                    |                     
|---------------------------- | -------------------- | ----------------- | ------------------ | --------------------
|                             | September 30,   2001 | June 30,     2001 | March 31,     2001 | December 31,    2000
|Interest and dividend income | $7,915               | $7,977            | $7,845             | $7,955              
|Interest expense             | (3,237)              | (3,352)           | (3,519)            | (3,816)             
|Net interest income          | 4,678                | 4,625             | 4,326              | 4,139               
|                             |                      |                   |                    |                     
|Provision for loan losses    | (250)                | (800)             | (200)              | (150)               
|Noninterest income           | 664                  | 857               | 798                | 608                 
|Noninterest expense          | (3,543)              | (2,554)           | (2,703)            | (2,292)             
|                             |                      |                   |                    |                     
|Income before income taxes   | 1,549                | 2,128             | 2,221              | 2,305               
|                             |                      |                   |                    |                     
|Federal income taxes         | 522                  | 721               | 734                | 764                 
|                             |                      |                   |                    |                     
|Net income                   | $1,027               | $1,407            | $1,487             | $1,541              
|                             |                      |                   |                    |                     
|Basic earnings per share     | $0.25                | $0.34             | $0.35              | $0.35               
|Diluted earnings per share   | $0.24                | $0.34             | $0.35              | $0.35               

85

<PAGE>

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

Not applicable.



**Item 10.  Directors and Executive Officers of the Registrant**

The information contained under the section captioned "Proposal I -- Election of Directors" is included in the
Company's Definitive Proxy Statement for the 2003 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 at    |                                 
|----------------- | --------- | --------------------------------
|                  | September | Position                        
|Name              | 30, 2002  | Company                         
|                  |           |                                 
|Clarence E. Hamre | 68        | Chairman of the Board, President
|                  |           | and Chief Executive Officer     
|Michael R. Sand   | 48        | Executive Vice President        
|                  |           | and Secretary                   
|Dean J. Brydon    | 35        | Chief Financial Officer         
|Marci A. Basich   | 34        | Treasurer                       

**Biographical Information**

**Clarence E. Hamre** has served as the Bank's President and Chief Executive Officer since 1969.

**Dean J. Brydon** has been affiliated with the Bank since 1994 and has served as the Chief Financial Officer
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 since January 2002.
Ms. Basich is a Certified Public Accountant.

**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.

86

<PAGE>

**Item 12.    Security Ownership of Certain Beneficial Owners and Management**

**Equity Compensation Plan Information.**The following table summarizes share and exercise price information about
the Company's equity compensation plans as of September 30, 2002.

|                                   |                        |                     | *(c)*                     
|---------------------------------- | ---------------------- | ------------------- | --------------------------
|                                   |                        |                     | *Number of securities*    
|                                   | *(a)*                  | *(b)*               | *remaining available*     
|                                   | *Number of securities* | *Weighted-average*  | *for future issuance*     
|                                   | *to be issued upon*    | *exercise price*    | *under equity*            
|                                   | *exercise of*          | *of outstanding*    | *compensation plans*      
|                                   | *outstanding options,* | *options, warrants* | *(excluding securities*   
|*Plan category***                  | *warrants and rights*  | *and rights*        | *reflected in column (a))*
|                                   |                        |                     |                           
|Equity compensation plans approved |                        |                     |                           
|by security holders:               |                        |                     |                           
|Option plan                        | 568,350                | $12.27              | 47,047                    
|Restricted stock plan              | --                     | --                  | 59,573                    
|                                   |                        |                     |                           
|Equity compensation plans not      |                        |                     |                           
|approved by security holders       | --                     | --                  | --                        
|Total                              | 568,350                | $12.27              | 106,620                   
|                                   |                        |                     |                           

(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.

(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.  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

87

<PAGE>

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, 2002, 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.  The Company did, however, continue to implement suggestions from its internal
auditor on ways to strengthen existing controls.

**Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K**

(a)          	Exhibits

3.1      
Articles of Incorporation of the Registrant (1)3.2       Bylaws of the Registrant (1)3.3       Amendment to Bylaws10.1    	Employee Severance Compensation Plan (2)10.2     Employee Stock Ownership Plan (2)10.3     1999 Stock Option Plan (3)10.4     Management Recognition and Development Plan (3)21        Subsidiaries of the Registrant23        Consent of Accountants99.1     Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

88

<PAGE>



TIMBERLAND BANCORP, INC.

|Date:  December  20, 2002 | By:/s/Clarence E. Hamre                   
|------------------------- | ------------------------------------------
|                          | Clarence E. Hamre                         
|                          | Chairman of the Board, President and Chief
|                          | Executive Officer                         

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

|SIGNATURES              | TITLE                                        | DATE             
|----------------------- | -------------------------------------------- | -----------------
|                       
|                       
|/s/
  Clarence E. Hamre | Chairman of the Board, President,            | December 20, 2002
|Clarence E. Hamre       | Chief Executive Officer and Director        
|                        | (Principal Executive Officer)                |                  
|                       
|                       
|                        |                                              |                  
|/s/ Michael R. Sand     | Executive Vice President, Secretary          | December 20, 2002
|Michael R. Sand         | and Director                                
|                       
|                       
|/s/ Dean J. Brydon      | Chief Financial Officer                      | December 20, 2002
|Dean J. Brydon          | (Principal Financial and Accounting Officer)
|                       
|                       
|/s/ Andrea M. Clinton   | Director                                     | December 20, 2002
|Andrea M. Clinton      
|                       
|                       
|/s/ Robert Backstrom    | Director                                     | December 20, 2002
|Robert Backstrom       
|                       
|                       
|                        | Director                                     |                  
|Richard R. Morris, Jr. 
|                       
|                       
|                        | Director                                     |                  
|David A. Smith         
|                       
|                       
|/s/ Harold L. Warren    | Director                                     | December 20, 2002
|Harold L. Warren       
|                       
|                       
|                        | Director                                     |                  
|Jon C. Parker          
|                       
|                       
|/s/ James C. Mason      | Director                                     | December 20, 2002
|James C. Mason          |                                              |                  
|                        |                                              |                  
|                        |                                              |                  
|                        |                                              |                  
|/s/ Ronald A. Robbel    | Director                                     | December 20, 2002
|Ronald A. Robbel       

89

<PAGE>

**CERTIFICATIONS**

**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 annual 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 annual report;                                                              
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(3)                       | Based on my knowledge, the financial statements, and other financial information included in this annual
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 annual report;                                                                                 
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(4)                       | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and  have:                                                                                                                                                               
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | a)                                                                                                                                                                                                                                                                                                                                                                                    
|                         
|                          | b)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | c)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(5)                       | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | a)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | b)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(6)                       | The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|Date: December
  20, 2002

/s/ Clarence E. HamreClarence E. HamreChief Executive Officer

90

<PAGE>

**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 annual 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 annual report;                                                              
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(3)                       | Based on my knowledge, the financial statements, and other financial information included in this annual
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 annual report;                                                                                 
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(4)                       | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and  have:                                                                                                                                                               
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | a)                                                                                                                                                                                                                                                                                                                                                                                    
|                         
|                          | b)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | c)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(5)                       | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):                                                                                                                                        
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | a)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|                          | b)                                                                                                                                                                                                                                                                                                                                                                                    
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|(6)                       | The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
|                          |                                                                                                                                                                                                                                                                                                                                                                                       
|Date: December
  20, 2002













91

<PAGE>

Exhibit 3

Bylaw Amendment to Increase Size of Board of Directors



Timberland Bancorp, Inc.'s Board of Directors determined to increase the size of the Board and adopted an
amendment to Article III, Section 2 of the Company's Bylaws on August 8, 2002.  Article III, Section 2, as amended,
reads as follows:

**Section 2.  Number, Term and Election.**  The Board of Directors shall consist of ten (10)
members.  The number of directors may be increased or decreased from time to time by amendment
to or in the manner provided in these bylaws, but shall be no less than and no more than the numbers
set forth in the Articles of Incorporation.  No decrease, however, shall have the effect of shortening
the term of any incumbent director unless such director is removed in accordance with the provisions
of these bylaws.  Unless removed in accordance with the Articles of Incorporation, each director shall
hold office until his successor shall have been elected and qualified.



* * * * *



<PAGE>

**Exhibit 21**

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>



<PAGE>



We consent to
the use of our report, dated October 30, 2002, included in the Annual Report on
Form 10-K of Timberland Bancorp, Inc. for the year ended September 30, 2002.



/s/ McGladrey & Pullen, LLP

Tacoma, Washington
December 19, 2002

<PAGE>



CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our report,
dated November 2, 2000, included in the Annual Report on Form 10-K of Timberland
Bancorp, Inc. for the year ended September 30, 2002.



/s/ Knight, Vale & Gregory PLLC

Tacoma, Washington
December 19, 2002

<PAGE>

























<PAGE>

******CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER****OF TIMBERLAND BANCORP, INC.**
**PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in
connection with this Annual Report on Form 10-K, that:

| | (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/ Clarence H. Hamre                                           
    /s/ Dean J. Brydon

Dated: December 20, 2002

<PAGE>