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                                                                   EXHIBIT 10.2



                              EMPLOYMENT AGREEMENT


         This Agreement (the "Agreement") is entered into as of September 18,
1997, between FIRST NATIONAL BANK OF PORT ORCHARD (the "Bank"), Port Orchard,
Washington, and LINDA A. SMITH (the "Employee").

                                    PREAMBLE

         WHEREAS, Puget Sound Bancorp, Inc., which is the parent company of the
Bank, intends to merge into InterWest Bancorp, Inc.  ("InterWest"), and the
Bank will thereby become the wholly owned subsidiary of InterWest (the
"Merger");

         WHEREAS, the Bank wishes to assure itself of the services of Employee
for the period provided in this Agreement; and

         WHEREAS, Employee is willing to serve in the employ of the Bank (or
its successor, if any) on a full-time basis for such period.

                               TERMS OF AGREEMENT

         NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, and upon the other terms and conditions set forth in this
Agreement, the Bank and the Employee agree as follows:

1.       POSITION AND RESPONSIBILITIES.

         (a)     During the Term of Employment (as defined below), Employee
shall serve in such capacity as the Chief Executive Officer of InterWest
determines, and shall report to InterWest's Chief Executive Officer (or his
designee).  Employee will have the responsibilities set forth in Exhibit A, and
such other duties as InterWest's Chief Executive Officer may assign consistent
with Employee's existing duties.

         (b)     During the Term of Employment (as defined below), except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Employee shall devote substantially all her
business time, attention, skill, and efforts to the faithful performance of her
duties under this Agreement.

2.       TERM.

         The term of this Agreement shall be for twenty four (24) months,
commencing on the closing date of the Merger (the "Term of Employment").  This
Agreement will only become effective if the Merger is consummated.




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3.       COMPENSATION AND REIMBURSEMENT.

         (a)     The compensation specified under this Agreement shall
constitute the salary and benefits paid for the duties described in Section 1.
The Bank shall pay Employee as compensation a salary of $67,500 per year ("Base
Salary").  Such Base Salary shall be payable in accordance with the customary
payroll practices of the Bank.  The Bank shall provide Employee with all other
benefits as are generally provided to similarly situated, full-time employees
of InterWest Bank.  Employee's compensation will be reviewed annually, along
with that of other officers in similar positions.

         (b)     In addition to the Base Salary provided for by paragraph (a)
of this Section 3, the Bank shall pay or reimburse Employee for all reasonable
travel and other expenses incurred in connection with Employee's performance of
her obligations under this Agreement.

4.       PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.

         (a)     Upon the occurrence of an Event of Termination (as defined
below) during the Term of Employment, the provisions of this Section shall
apply.  As used in this Agreement, an "Event of Termination" means: (1)
termination by the Bank of Employee's full-time employment under this Agreement
for any reason other than (A) death, (B) disability, as defined in Section 5 of
this Agreement, or (C) for Cause, as defined in Section 6 of this Agreement;
(2) termination by Employee for "Good Reason" (as defined below); or (3)
termination of Employee's employment due to the expiration of the Term of
Employment.

         For purposes of this Agreement, Employee's termination for "Good
Reason" shall mean the occurrence of any of the following, in which event
Employee shall have the right to terminate her employment with the Bank, which
termination shall be deemed a justifiable termination of her employment and
shall excuse Employee from the obligation to render services under or relating
to this Agreement:

                 (1)      A material change in Employee's responsibilities or
         title (as set forth in paragraph 1 of this Agreement);

                 (2)      The Bank's requiring Employee to be based in any
         location other than Kitsap County, except for normal travel in the
         ordinary course of the Bank's business;

                 (3)      Any material breach of this Agreement by the Bank,
         including, without limitation, (A) the failure by the Bank to pay to
         Employee any installment of salary and/or benefit (including, without
         limitation, any benefit under any defined contribution plan or
         incentive plan) required to be paid or provided to Employee, which
         failure continues for a period of thirty (30) days after written
         notice thereof is given by Employee to the Bank, and (B) any failure
         by the Bank to adopt, continue or maintain in effect any plan or
         benefit that is required to be provided by the Bank to Employee
         pursuant to this Agreement.

         (b)     Upon the occurrence of an Event of Termination, the Bank shall
pay to Employee (1) all compensation and benefits earned, and all reimbursable
expenses incurred, through the date





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on which the Event of Termination occurs, and (2) all remaining installments of
Employee's Base Salary through the expiration of the Term of Employment.

5.       TERMINATION UPON DEATH OR DISABILITY.

         Upon the death of Employee during the Term of Employment, the Bank
shall pay to Employee's estate the compensation due to and reimbursable
expenses incurred by Employee through the last day of the calendar month in
which her death occurred.  In the event of Employee's termination by reason of
disability, as defined in the Bank's then-current disability plan, or if
Employee is otherwise unable to serve in the capacity required pursuant to
Section 1 of this Agreement, Employee shall be entitled to receive group and
other disability benefits of the type then provided by the Bank for other
similarly situated officers.

6.       TERMINATION FOR CAUSE.

         For purposes of this Agreement, termination for "cause" means
termination because Employee (a) willfully and continually fails to
substantially perform her principal responsibilities with the Bank, as outlined
in Section 1 of this Agreement (other than any such failure resulting from
Employee's incapacity due to injury or illness), and such failures continue for
a period of at least thirty (30) days after a written demand for performance is
delivered to Employee by a duly authorized member or representative of the
Board of Directors of the Bank that specifically identifies the manner in which
it is alleged that Employee has not substantially performed such duties, (b) is
adjudged guilty of any crime involving a breach of her fiduciary duties to the
Bank or involving moral turpitude, or (c) willfully and continually fails to
comply with any law, rule or regulation (other than traffic violations or
similar minor offenses) or any final cease and desist order of any government
agency having jurisdiction over the Bank.  For purposes of this Agreement, no
act or failure to act on the part of Employee shall be considered "willful"
unless done or omitted to be done in bad faith and without reasonable belief
that such action or omission was in, or not opposed to, the best interests of
the Bank.

7.       NON-COMPETITION.

         (a)     Upon any termination of Employee's employment under this
Agreement for any reason other than an Event of Termination, Employee will not
engage in Competition (as defined below) with the Bank or InterWest in Kitsap
County for a period of two (2) years following such termination.  The term
"Competition" means working for or advising, consulting or otherwise serving
with, directly or indirectly, any entity whose business materially competes
with the depository, lending or other business activities of the Bank or
InterWest; provided, however, that Competition shall not include the
acquisition and ownership of an interest not exceeding 5% of the total equity
interests in any publicly held entity (whether or not such entity competes with
InterWest, the Bank or any other affiliate of InterWest).  The Bank and
Employee recognize that irreparable injury will result to the Bank and/or
InterWest, its business and property in the event of Employee's breach of this
Subsection 7(a) and agree that, in the event of any such breach by Employee,
the Bank and/or InterWest will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation of this
non-competition covenant by Employee.  Employee represents and admits that in
the event of the termination of her employment





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for reasons other than an Event of Termination, Employee's experience and
capabilities are such that Employee can obtain employment in a business engaged
in other lines and/or of a different nature than the business in which the Bank
or InterWest is engaged, and that the enforcement of a remedy by way of
injunction will not prevent Employee from earning a livelihood.  Nothing in
this Agreement will be construed as prohibiting the Bank or InterWest from
pursuing any other remedies available to the Bank or InterWest for such breach
or threatened breach, including without limitation the recovery of damages from
Employee.

         (b)     Employee recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of InterWest, the Bank,
and other affiliates of InterWest (now existing or subsequently established or
acquired) is a valuable, special and unique asset of the business of the Bank
and InterWest.  Employee will not, during or after the Term of Employment,
disclose any knowledge of the past, present, planned or considered business
activities of InterWest, the Bank, or other affiliates of InterWest to any
person, firm, corporation, or other entity for any reason or purpose
whatsoever; provided, however, that the foregoing shall not apply to any
confidential or proprietary information or trade secret that (1) is or becomes
generally available to the public other than as a result of a disclosure by
Employee in violation of this Agreement, (2) becomes available to Employee on a
non-confidential basis from a source other than InterWest, the Bank, or other
affiliates of InterWest, or (3) Employee is required to disclose pursuant to
any law, rule, regulation, legal proceeding, subpoena, court order or other
similar process.  Notwithstanding the foregoing, Employee may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
that are not solely and exclusively derived from the business plans and
activities of InterWest, the Bank or other affiliates of InterWest.  In the
event of a breach or threatened breach by Employee of the provisions of this
Section 7(b), the Bank and/or InterWest will be entitled to an injunction
restraining Employee from disclosing, in whole or in part, the knowledge of the
past, present, planned or considered business activities of InterWest, the
Bank, or other affiliates of InterWest, or from rendering any services to any
person, firm, corporation, or other entity to whom such knowledge, in whole or
in part, has been disclosed or is actively threatened to be disclosed.  Nothing
in this Agreement will be construed as prohibiting the Bank and/or InterWest
from pursuing any other remedies available to them for such breach or
threatened breach, including the recovery of damages from Employee.

8.       NOTICE.

         For purposes of this Agreement, notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified mail, return
receipt requested, postage prepaid.  All notices to the Bank shall be sent to
the home office of InterWest, directed to the attention of InterWest's
President and Chief Executive Officer.  All notices to Employee shall be sent
to P.O. Box 694, Port Orchard, Washington 98366, or such other address as
Employee may designate by written notice delivered to the Bank.

9.       SOURCE OF PAYMENTS.

         All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Bank.





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10.      EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.

         This Agreement contains the entire understanding between the Bank and
Employee and supersedes any prior employment agreement between the Bank and
Employee, except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to Employee of a kind elsewhere provided.  No
provision of this Agreement shall be interpreted to mean that Employee is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.

11.      NO ATTACHMENT.

         (a)     Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.

         (b)     This Agreement shall be binding upon, and inure to the benefit
of, Employee, the Bank, and their respective successors and assigns.

12.      MODIFICATION AND WAIVER.

         (a)     This Agreement may not be modified or amended except by an
instrument in writing signed by the Bank and the Employee with the prior
written consent of InterWest.

         (b)     No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel and the prior written consent of InterWest.  No
such written waiver shall be deemed a continuing waiver unless specifically
stated therein, and each such waiver shall operate only as to the specific term
or condition waived and shall not constitute a waiver of such term or condition
for the future as to any act other than that specifically waived.

13.      SEVERABILITY.

         If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.

14.      HEADINGS FOR REFERENCE ONLY.

         The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.





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15.      GOVERNING LAW.

         This Agreement shall be governed by the laws of the State of
Washington, unless otherwise specified herein; provided, however, that in the
event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.

16.      ARBITRATION.

         Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Employee within one
hundred (100) miles from Port Orchard, Washington, in accordance with the rules
of the American Arbitration Association then in effect.  Judgment may be
entered on the arbitrator's award in any court having jurisdiction.  All
expenses of arbitration, including without limitation arbitration fees, costs
and reasonable attorneys' fees, shall be awarded by the arbitrator(s) in favor
of such party as the arbitrator(s) shall determine to be the prevailing party
in such arbitration.

17.      INDEPENDENT COUNSEL.

         Employee acknowledges that she has had the opportunity to consult with
her own, independent counsel with respect to the negotiation, preparation, and
execution of this Agreement.

         IN WITNESS OF THE FOREGOING, the Bank has caused this Agreement to be
executed and its seal to be affixed hereunto by a duly authorized officer, and
Employee has signed this Agreement, all as of the 18th day of September, 1997.


ATTEST:                                 FIRST NATIONAL BANK OF PORT ORCHARD



          /s/                           BY:           /s/
-------------------------------            -------------------------------

SEAL:



WITNESS:                                EXECUTIVE



          /s/                                         /s/
-------------------------------         -------------------------------
                                        Linda A. Smith















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STATE OF WASHINGTON              )
                                 ) ss.
COUNTY OF_________________       )

       On this _____ day of ________________, 1997, before me personally
appeared LINDA A. SMITH, to me known to be the individual that executed the
foregoing Employment Agreement, and acknowledged the Employment Agreement to be
her free and voluntary act for the uses and purposes therein mentioned, and on
oath stated that she was authorized to execute the Employment Agreement.

       In witness whereof I have hereunto set my hand and affixed my official
seal the day and year first above written.

                                       ________________________________________
                                       Signature                            

                                       ________________________________________
                                       Please print name clearly

                                       NOTARY PUBLIC in and for the State of
                                       Washington residing at_________________.
                                       My commission expires on ______________.

STATE OF WASHINGTON              )
                                 ) ss.
COUNTY OF_________________       )

       On this _____ day of ________________, 1997, before me personally
appeared ____________________, the _________________ of FIRST NATIONAL BANK OF
PORT ORCHARD, a national banking association, and such person on oath stated
that he or she was authorized to execute the foregoing Employment Agreement,
and acknowledged the Employment Agreement to be the free and voluntary act of
such party for the uses and purposes therein mentioned.

       In witness whereof I have hereunto set my hand and affixed my official
seal the day and year first above written. 

                                       ________________________________________
                                       Signature                            

                                       ________________________________________
                                       Please print name clearly

                                       NOTARY PUBLIC in and for the State of
                                       Washington residing at_________________.
                                       My commission expires on ______________.















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                                   EXHIBIT A

                 RESPONSIBILITIES AND DUTIES OF LINDA A. SMITH



During the Term of Employment, Employee shall have the following
responsibilities and duties with respect to that portion of Kitsap County now
served by First National Bank of Port Orchard:

1.       Directing and supervising all commercial, consumer, and mortgage loan
         officers, loan processors, and loan support staff.

2.       Hiring, training, evaluating, and making termination decisions with
         respect to all commercial, consumer, and mortgage loan officers, loan
         processors, and loan support staff.

3.       Meeting with major credit customers, analyzing credit risks, and
         designing credit packages consistent with guidelines.

4.       Participating in in-house loan committee review and approval of
         credits, the terms of which participation and approval shall be
         determined by InterWest's Credit Administrator.






















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