SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

         For the fiscal year ended September 30, 2003
                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
                         Commission File Number: 0-26556

                          KLAMATH FIRST BANCORP, INC.
             (Exact name of registrant as specified in its charter)

                     Oregon                                  93-1180440
(State or other jurisdiction of incorporation              (I.R.S. Employer
or organization)                                             I.D. Number)

540 Main Street, Klamath Falls, Oregon                           97601
 (Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:     ___   (541) 882-3444_

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

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

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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

     Indicate by check mark whether  disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the  best  of the  Registrant's  knowledge,  in  definitive  proxy  or  other
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
YES    X     NO

     Indicate by check mark whether the Registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2).
YES    X    NO

     As of November 28, 2003, there were issued and outstanding 6,746,481 shares
of the  Registrant's  common  stock.  The  Registrant's  common  stock is traded
over-the-counter  and is listed on the Nasdaq  National  Market under the symbol
"KFBI." The aggregate  market value of the common stock held by nonaffiliates of
the  Registrant,  based on the closing  sales price of the  Registrant's  common
stock as quoted on the Nasdaq  National  Market on November  28, 2003 of $25.70,
was $154,006,967.  For purposes of this  calculation,  officers and directors of
the  Registrant  and the Klamath  First  Federal  Savings  and Loan  Association
Employee Stock Ownership Plan are considered affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

 <PAGE>


                                     PART I
Item 1.  Business

General

     Klamath  First  Bancorp,  Inc.  ("Company"),  an  Oregon  corporation,  was
organized on June 16, 1995 for the purpose of becoming  the holding  company for
Klamath  First Federal  Savings and Loan  Association  ("Association")  upon the
Association's  conversion  from a federal  mutual to a federal stock savings and
loan  association  ("Conversion").  The  Conversion  was completed on October 4,
1995.  At  September  30, 2003,  the Company had total assets of $1.54  billion,
total deposits of $1.07 billion and shareholders'  equity of $120.3 million. All
references to the Company herein include the Association where applicable.

     The  Association was organized in 1934. The Association is regulated by the
Office  of  Thrift  Supervision  ("OTS")  and its  deposits  are  insured  up to
applicable limits under the Savings  Association  Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Association also is a member
of the Federal Home Loan Bank ("FHLB") System through the FHLB of Seattle.

     In July 1997,  the  Association  acquired 25 former First  Interstate  Bank
branches  from  Wells  Fargo  Bank,  N.A.  The  branches  are  located  in rural
communities  throughout  Oregon and expanded and  complemented the then existing
network of the  Association's  branches.  The acquisition was accounted for as a
purchase  and  resulted  in the  addition  of  approximately  $241.3  million in
deposits on the acquisition date of July 18, 1997.

     In September  2001, the  Association  acquired 13 branches from  Washington
Mutual Bank  ("WAMU"),  11 of which are  located on the  northern  and  southern
Oregon  coast  and two of  which  are  located  in  northeastern  Oregon.  These
locations  enhance  the  Association's  geographic  coverage on the coast and in
northeastern  Oregon.  The  acquisition  was  accounted  for as a  purchase  and
resulted in the addition of approximately $179.3 million in loans, assumption of
$423.5 million in deposits,  and addition of 124 experienced branch personnel on
the acquisition date of September 7, 2001. As part of the purchase,  the Company
also  recorded  $15.0  million of core deposit  intangible  and $24.1 million of
other  intangible  assets.  See Note 2 of the  Notes to  Consolidated  Financial
Statements  contained  in  Item 8 of this Form 10-K.

     The Association is a progressive,  community-oriented financial institution
that focuses on serving  customers within its primary market area.  Accordingly,
the  Association  is primarily  engaged in attracting  deposits from the general
public through its offices and using those and other available  sources of funds
to originate permanent  residential one- to four-family real estate loans within
its market area, as well as commercial real estate and multi-family  residential
loans, loans to consumers,  and loans for commercial purposes.  At September 30,
2003, permanent residential one- to four-family real estate loans totaled $195.8
million,  or  34.04% of total  loans.  While the  Association  has  historically
emphasized  fixed  rate  mortgage  lending,  it has been  diversifying  its loan
portfolio by focusing on  increasing  the number of  originations  of commercial
real estate loans,  multi-family  residential  loans,  residential  construction
loans,  small business loans and consumer loans.  Significant  progress was made
toward  increasing  the  commercial and consumer loans in the portfolio with the
purchase of the branches from WAMU.  These newer loan products  generally  carry
adjustable  rates,  higher yields,  or shorter terms than the traditional  fixed
rate mortgages.  This lending strategy is designed to enhance  earnings,  reduce
interest rate risk, and provide a more complete  range of financial  services to
customers and the local communities served by the Association.  At September 30,
2003, the Association's  total loan portfolio consisted of 47.99% fixed rate and
52.01%   adjustable   rate  loans,   after   deducting   loans  in  process  and
non-performing loans.

     On July  15,  2003,  the  Company  announced  that it had  entered  into an
Agreement and Plan of Merger (the  "Sterling  Merger")  with Sterling  Financial
Corporation a Washington  corporation  ("Sterling").  The Company will be merged
with and into  Sterling,  with Sterling  being the surviving  corporation in the
merger.  The Association  will be merged with and into  Sterling's  wholly-owned
subsidiary,  Sterling  Savings  Bank,  with  Sterling  Savings  Bank  being  the
surviving institution.


                                        1

<PAGE>


     Under the terms of the Sterling Merger,  each share of the Company's common
stock will be converted  into 0.77 shares of Sterling  common  stock  subject to
certain  conditions.  Based upon the closing price for Sterling on July 14, 2003
of $26.55 per share, the  consideration is equivalent to $20.44 per share of the
Company's   common   stock.   The  merger  will  be  structured  as  a  tax-free
reorganization  and is expected to be completed  on January 2, 2004.  The merger
has received  regulatory approvals and was approved by the  shareholders of both
the Company and Sterling on December 11, 2003.

     As of  the  close  of  business  on  December  12,  2003,  the  Association
successfully completed the sale of seven branches located in northeastern Oregon
to the Bank of Eastern  Oregon.  The branches are located in the towns of Burns,
Condon,  Fossil,  Heppner,  John Day,  Prairie City and Moro,  Oregon.  The sale
included  deposit accounts of  approximately  $65 million.  The fixed assets and
branch locations were included in the sale, but loans were not.

Market Area

     In fiscal year 2003, the Association continued to expand its market area in
Oregon and Washington. At September 30, 2003, the Association had 57 branches in
26 of  Oregon's  36  counties  and had two  in-store  branches  in the  state of
Washington. In fiscal 2003, new in-store branches were opened in Grants Pass and
Woodburn,  Oregon.  After  completion  of the  sale of  branches  to the Bank of
Eastern  Oregon  in  December  2003,  the  Association  had  52  branches.   The
Association's  primary market area,  which  encompasses  the State of Oregon and
some adjacent areas of California,  Idaho, and Washington,  can be characterized
as a  predominantly  rural  area  containing  a number of  communities  that are
experiencing  moderate to rapid population  growth. The population growth in the
market area,  particularly in Southern Oregon,  has been supported in large part
by the agreeable  climate,  and by favorable real estate values.  The economy of
the market  area is still based  primarily  on  agriculture  and lumber and wood
products, but is experiencing  diversification into light manufacturing,  health
care and other services and sectors.  Tourism is a significant  industry in many
regions of the market area,  including  Central Oregon and the Oregon coast. The
addition of branches in the Eugene-Springfield metropolitan area provides access
to this major population center.



                                        2

<PAGE>

Yields Earned and Rates Paid

     The following table sets forth,  for the periods and at the date indicated,
the weighted  average  yields earned on  interest-earning  assets,  the weighted
average interest rates paid on  interest-bearing  liabilities,  and the interest
rate spread between the weighted average yields earned and rates paid.
<TABLE>
<CAPTION>

                                                                              At                         Year Ended
                                                                   September 30,                        September 30,
                                                                            2003                  2003      2002       2001

Weighted average yield:
<S>                                                                         <C>                    <C>       <C>       <C>
   Loans receivable................................................         6.39%                  7.32%     7.90%     7.86%
   Mortgage-backed and related securities..........................         3.42                   3.50      5.18      6.02
   Investment securities...........................................         3.78                   3.82      4.72      5.64
   Federal funds sold..............................................         0.94                   1.24      2.09      4.13
   Interest-earning deposits.......................................         1.03                   1.24      1.75      4.06
   FHLB stock......................................................         5.25                   5.96      6.25      6.75

Combined weighted average yield on interest-bearing assets.........         4.68                   5.12      6.35      6.99

Weighted average rate paid on:
   Tax and insurance reserve.......................................         0.25                   1.31      2.85      3.85
   Passbook and statement savings..................................         0.25                   0.43      1.13      2.26
   Interest-bearing checking. . . . . . . . . . . .................         0.19                   0.13      0.74      1.08
   Money market  . . . ............................................         0.88                   1.02      2.00      3.85
   Certificates of deposit.........................................         3.34                   3.56      4.35      5.76
   FHLB advances/short term borrowings.............................         3.74                   4.71      5.69      5.95

Combined weighted average rate on interest-bearing liabilities.....         2.71                   2.53      3.31      4.81

Interest rate spread...............................................         1.96%                  2.59%     3.04%     2.18%

</TABLE>

Average Balances, Net Interest Income and Yields Earned and Rates Paid

     Reference is made to the section entitled "Average  Balances,  Net Interest
Income  and Yields  Earned and Rates  Paid"  included  in Item 7.  "Management's
Discussion and Analysis of the Financial Condition and Results of Operations" of
this report.

Interest Sensitivity Gap Analysis

     Reference  is  made  to the  section  entitled  "Interest  Sensitivity  Gap
Analysis" included in Item 7A.  "Quantitative and Qualitative  Disclosures about
Market Risk" of this report.

Rate/Volume Analysis

     Reference is made to the section entitled  "Rate/Volume  Analysis" included
in Item 7. "Management's  Discussion and Analysis of the Financial Condition and
Results of Operations" of this report.


<PAGE>

Lending Activities

     General.  As a  federally  chartered  savings  and  loan  association,  the
Association has authority to originate and purchase loans secured by real estate
located throughout the United States.  With the expanded market area provided by
the branch acquisitions in 1997 and 2001, the Association's mortgage lending has
diversified  throughout the State of Oregon.  The  Association  will continue to
originate  long-term mortgage loans for the purchase,  construction or refinance
of one- to four-family residential real estate to meet the needs of customers in
our market area.  However,  to enhance  interest income and reduce interest rate
risk,  the  Association  is placing  increased  emphasis on the  origination  or
purchase of adjustable  rate loans secured by one- to  four-family  residential,
multi-family  residential and commercial real estate,  the majority of which are
located outside  Klamath,  Jackson,  and Deschutes  counties.  Subject to market
conditions,  the  Association  sells loans to Fannie Mae  (formerly  the Federal
National Mortgage Association) and other agents.

     Permanent residential one- to four-family mortgage loans amounted to $195.8
million,  or 34.04%, of the Association's  total loan portfolio before net items
at  September  30,  2003.  The  Association  originates  other loans  secured by
multi-family  residential  and  commercial  real estate,  construction  and land
loans.  Those loans  amounted to $191.9  million,  or 33.35%,  of the total loan
portfolio  before net items at September  30,  2003.  Approximately  32.61%,  or
$187.6 million,  of the Association's  total loan portfolio before net items, as
of September  30, 2003,  consisted of non-real  estate  loans.  Commercial  real
estate and non-real estate loans increased significantly as a result of the WAMU
branch acquisition in September 2001. The acquisition included $179.3 million in
loans,  of which  $118.8  million  were  commercial  real estate and  commercial
business  loans and $50.7  million  were  consumer  loans.  Fiscal  2003  showed
continued growth in non-real estate loans.

     Permissible  loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation  was $15.9 million at September 30, 2003. At September 30, 2003,  the
Association had 62 borrowing  relationships with outstanding  balances in excess
of $1.0 million,  the largest of which amounted to $7.0 million and consisted of
two loans which were unsecured.

     The  Association  has emphasized the  origination or purchase of adjustable
rate  loans in order to  increase  the  interest  rate  sensitivity  of its loan
portfolio.  The  Association  has been successful in expanding the production of
adjustable rate consumer loans and has purchased  adjustable rate single family,
multi-family   residential  and  non-   residential   real  estate  loans.   See
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS  --  Market  Risk  and  Asset/Liability   Management"  and  "INTEREST
SENSITIVITY  GAP ANALYSIS" in the Annual Report.  At September 30, 2003,  $293.1
million,  or 52.01%,  of loans in the  Association's  total loan portfolio after
loans in process and non-performing  loans,  consisted of adjustable rate loans.
At September 30, 2002, $207.5 million,  or 33.57%,  of the  Association's  loans
carried adjustable rates.

                                        4
<PAGE>


     Loan Portfolio Analysis.  The following table sets forth the composition of
the loan portfolio by type of loan at the dates indicated.

<TABLE>
<CAPTION>

                                                                          At September 30,
                                 --------------------------------------------------------------------------------------------------
                                        2003                2002                2001                2000                1999
                                 -----------------   -----------------   -----------------    ----------------    -----------------
                                   Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent
                                 --------  -------   --------  -------   --------  -------    -------  -------    -------  --------
                                                                       (Dollars in thousands)

Real estate loans:
  Permanent residential
<S>                              <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>         <C>
    one- to four-family          $195,785   34.04%   $339,404   54.53%   $421,499   60.12%   $639,165   85.12%   $647,130    83.56%
  Multi-family residential         32,030    5.57      21,595    3.47      23,257    3.32      19,015    2.53      18,412     2.38
  Construction                     16,650    2.89      15,224    2.45      21,674    3.09      25,289    3.37      53,219     6.87
  Agricultural                      9,383    1.63       4,889    0.79       4,218    0.60          -       -           -        -
  Commercial                      125,725   21.86      91,703   14.73      99,318   14.17      42,277    5.63      37,079     4.79
  Land                              8,082    1.40       4,164    0.67       3,697    0.53       3,394    0.45       2,064     0.27
Total real estate loans           387,655   67.39     476,979   76.64     573,663   81.83     729,140   97.10     757,904    97.87

Non-real estate loans:
  Savings accounts                  1,294    0.22       1,262    0.20       2,091    0.3        1,957    0.26       1,800     0.23
  Home improvement and home
    equity loans                  112,248   19.51      65,092   10.46      50,464    7.2        8,338    1.11       6,726     0.87
  Other consumer                   16,073    2.79      16,926    2.72      18,697    2.6        6,888    0.92       4,568     0.59
  Commercial                       57,975   10.08      62,102    9.98      56,098    8.0        4,586    0.61       3,443     0.44
Total non-real estate loans       187,590   32.61     145,382   23.36     127,350   18.1       21,769    2.90      16,537     2.13
 Total loans                      575,245  100.00%    622,361  100.00     701,013  100.0      750,909  100.00%    774,441   100.00%

Less:
Undisbursed portion of loans        7,541               3,609               8,473              10,350              24,176
Deferred loan fees                  3,219               3,911               4,599               7,440               7,988
Allowance for loan losses           6,934               7,376               7,951               4,082               2,484
Net loans                        $557,551            $607,465            $679,990            $729,037            $739,793

</TABLE>


                                                             5

<PAGE>



     The following table sets forth the amount of fixed-rate and adjustable rate
loans, net of loans in process and non-performing  loans,  included in the total
loan portfolio at the dates indicated.
<TABLE>
<CAPTION>

                                                       At September 30,
                                     ------------------------------------------------
                                               2003                     2002
                                     ----------------------    ----------------------
                                       Amount      Percent      Amount       Percent
                                     ---------     -------     ---------     --------
                                                    (Dollars in thousands)

<S>                                  <C>           <C>          <C>           <C>
Fixed rate . . . . .                 $270,479       47.99%      $410,499       66.43%
Adjustable-rate...                    293,106       52.01        207,458       33.57
                                     --------      -------      --------      -------
     Total........                   $563,585      100.00%      $617,957      100.00%
</TABLE>


     Permanent  Residential  One- to  Four-Family  Mortgage  Loans.  The primary
lending  activity  of the  Association  has been the  origination  of  permanent
residential one- to four-family  mortgage loans.  Management  believes that this
policy  of  focusing  on  single-family  residential  mortgage  loans  has  been
successful in contributing to interest  income while keeping  delinquencies  and
losses to a minimum.  At September 30, 2003,  $195.8 million,  or 34.04%, of the
Association's  total loan  portfolio,  before net items,  consisted of permanent
residential  one- to  four-family  mortgage  loans,  down from $339.4 million at
September  30,  2002.  At  September  30,  2003,  the  average  balance  of  the
Association's  permanent  residential  one- to  four-family  mortgage  loans was
$73,245.

     The Association  presently  originates  both fixed-rate  mortgage loans and
adjustable-rate  mortgages  ("ARMs")  secured by one- to four-family  properties
with terms of 15 to 30 years. Historically,  most of the loans originated by the
Association   have  been  fixed-rate   loans  secured  by  one-  to  four-family
properties. At September 30, 2003, $161.9 million, or 28.73%, of the total loans
after  loans in  process  and  non-performing  loans  were  fixed  rate  one- to
four-family loans and $41.6 million,  or 7.38%, were ARM loans.  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. In order to improve interest rate risk, the Association
sells the majority of its  conforming  fixed rate one- to  four-family  mortgage
production, while ARM loans are retained in the portfolio.

     The  loan  fees  charged,  interest  rates  and  other  provisions  of  the
Association's  ARM loans are  determined by the  Association on the basis of its
own pricing criteria and competitive market  conditions.  At September 30, 2003,
the Association  charged origination fees ranging from 1.00% to 1.75% on its ARM
loans.

     In an attempt to increase  adjustable rate mortgages in the loan portfolio,
the Association  offers several loan products which are  competitive  with other
institutions originating mortgages in the Association's primary market area. The
Association has introduced variable rate loan products that bear fixed rates for
the first three or five years and then reprice  annually  thereafter.  The loans
which bear  fixed  rates for five years are  indexed  to the  One-Year  Constant
Maturity  Treasury  Bill Index and have a maximum  rate  increase of 5% over the
life of the loan. The loans which bear fixed rates for the first three years are
indexed  to the FHLB of Seattle  12-Month  Short  Term  Advance  Rate and have a
maximum  rate  increase of 6% over the life of the loan.  All ARM loan  products
have a maximum  increase or decrease of 2% in any one year.  As a supplement  to
origination of ARM loans, the Association purchases ARMs from other institutions
when suitable loans can be found which meet its underwriting criteria.

     The  Association  qualifies an ARM loan  borrower  based on the  borrower's
ability  to repay the loan  using  the  fully  indexed  rate.  As a result,  the
Association  believes that the potential for  delinquencies  and defaults on ARM
loans when rates adjust upwards is lessened.

                                        6

<PAGE>

     The retention of ARM loans in the Association's loan portfolio helps reduce
the  Association's  exposure to changes in interest rates.  There are,  however,
unquantifiable  credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising  interest  rates,  the risk of default on ARM loans may  increase as a
result  of  repricing  with  increased  costs  to the  borrower.  The ARM  loans
originated by the Association  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  (discounting).  Increased risks of default or
delinquency could occur because of discounting the rate.  Another  consideration
is that although ARM loans allow the  Association to increase the sensitivity of
its asset base 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 Association has no assurance that
yields on ARM loans will be sufficient to offset increases in the  Association's
cost of funds.

     The loan-to-value ratio, maturity and other provisions of the loans made by
the  Association  generally  have  reflected  the  policy  of  making  loans  in
accordance  with sound lending  practices,  market  conditions and  underwriting
standards established by the Association.  The Association's lending policies on
permanent  residential  one- to four-family  mortgage loans  generally limit the
maximum  loan-to-value  ratio to 97% of the  lesser  of the  appraised  value or
purchase price of the property.  All permanent  residential  one- to four-family
mortgage loans in excess of an 80% loan-to-value  ratio require private mortgage
insurance.

     The Association also has a limited amount of  non-owner-occupied  permanent
residential one- to four-family mortgage loans in its portfolio. These loans are
underwritten  using  generally  the same  criteria as  owner-occupied  permanent
residential  one-  to  four-family  mortgage  loans,  except  that  the  maximum
loan-to-value  ratio is generally  80% of the lesser of the  appraised  value or
purchase  price of the  property  and such loans are  generally  provided  at an
interest rate higher than loans on owner-occupied residences.

     The  Association   offers   fixed-rate,   permanent   residential  one-  to
four-family  mortgage  loans  with  terms of 15 to 30 years.  Substantially  all
permanent one- to four-family loans have original  contractual terms to maturity
of 30 years.  Such loans are  amortized on a monthly  basis with  principal  and
interest  due each month and  customarily  include  "due-on-sale"  clauses.  The
Association   enforces   due-on-sale  clauses  to  the  extent  permitted  under
applicable laws.  Substantially all of the Association's mortgage loan portfolio
consists of conventional loans.

     Commercial and Multi-Family  Real Estate Loans. The Association  originates
loans secured by  multi-family  and  commercial  real estate and also  purchases
participations  in loans secured by multi-family and commercial real estate when
suitable  investments can be found. See "-- Loan  Originations,  Purchases,  and
Sales." At September 30, 2003,  $32.0 million,  or 5.57%,  of the  Association's
total loan  portfolio  before net items  consisted of loans  secured by existing
multi-family  residential  real  estate and $125.7  million,  or 21.86%,  of the
Association's  total loan portfolio  before net items consisted of loans secured
by  existing   commercial  real  estate.   The   Association's   commercial  and
multi-family  real  estate  loans  primarily  include  loans  secured  by office
buildings,  small  shopping  centers,  churches,   mini-storage  warehouses  and
apartment  buildings.  Substantially  all of the  Association's  commercial  and
multi-family  real  estate  loans  are  secured  by  properties  located  in the
Association's primary market area. The average outstanding balance of commercial
and  multi-family  real estate  loans was $312,617 at  September  30, 2003,  the
largest of which was a $4.5  million  commercial  loan secured by  retail space.
Originations of commercial real estate and multi-family  residential real estate
amounted  to  17.19%,11.20%   and  16.46%  of  the   Association's   total  loan
originations  in the fiscal  years ended  September  30, 2003,  2002,  and 2001,
respectively. As part of the WAMU acquisition in September 2001, the Association
purchased $9.1 million in  multi-family  residential  loans and $54.6 million in
commercial  real  estate  loans.  During the year ended  September  30, 2003 the
Association purchased $3.9 million in commercial real estate participations. The
properties  securing  these loans were located within the  Association's  market
area.

     The  Association's  commercial and multi-family  loans generally have terms
which  range  up to 25  years  and  loan-to-value  ratios  of  up  to  75%.  The
Association  currently  originates  fixed and  adjustable  rate  commercial  and
multi-family  real  estate  loans.   Commercial  real  estate  and  multi-family
adjustable rate loans are priced to be competitive with other commercial lenders
in the  Association's  market  area.  A variety of terms are  available  to meet
specific  commercial  and  multi-family   residential  financing  needs.  As  of
September  30,  2003,  $151.6  million,  or 26.89%,  after  loans in process and
non-performing   loans  of  other  mortgage  loans,   including  commercial  and
multi-family residential real estate loans, had adjustable rates of interest.

                                       7
<PAGE>

     Multi-family  residential  and commercial  real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family  lending.  Such  lending  typically  involves  large  loan  balances
concentrated in a single borrower or groups of related  borrowers.  In addition,
the  payment  experience  on loans  secured by  income-producing  properties  is
typically  dependent  on the  successful  operation  of the related  real estate
project and thus may be subject to a greater extent to adverse conditions in the
real  estate  market or in the  economy  generally.  The  Association  generally
attempts to mitigate the risks  associated  with  multi-family  residential  and
commercial  real estate  lending by, among other  things,  lending on collateral
located in its market area and following strict  underwriting  standards.  Loans
considered  for purchase are  subjected  to the same  underwriting  standards as
those originated by the Association.

     Construction Loans. The Association makes construction loans to individuals
for the  construction of their  single-family  residences.  The Association also
makes loans to builders for the construction of  single-family  residences which
are  not  presold  at the  time of  origination  ("speculative  loans")  and for
construction of commercial  properties.  Speculative  loans are scheduled to pay
off in 12 to 18 months.  At September 30, 2003,  construction  loans amounted to
$16.7  million  (including  $804,912 of  speculative  loans),  or 2.89%,  of the
Association's  total loan portfolio before net items. The Association  purchased
$1.7 million in  commercial  construction  loans from WAMU as part of the branch
purchase.  During the construction phase, the borrower pays only interest on the
disbursed  loan  proceeds  until  maturity,  when the total  amount is due.  The
Association's  construction loan agreements generally provide that loan proceeds
are  disbursed  in  increments  as  construction  progresses.   The  Association
periodically reviews the progress of the underlying construction project through
physical inspections.

     Construction  financing is generally  considered to involve a higher degree
of risk of loss than financing on improved,  owner-occupied  real estate because
of the  uncertainties  of  construction,  including  the  possibility  of  costs
exceeding the initial estimates and, in the case of speculative  loans, the need
to  obtain a  purchaser.  The  Association  has  sought  to  minimize  the risks
associated with construction lending by limiting construction loans to qualified
owner-occupied borrowers with construction performed by qualified state licensed
builders located primarily in the  Association's  market area. The Association's
underwriting  criteria  are  designed to evaluate and minimize the risks of each
construction loan.

     Loan proceeds are disbursed only as construction progresses and inspections
warrant.  These loans are  underwritten  to the same  standards  and to the same
terms and requirements as one- to four-family  purchase  mortgage loans,  except
the loans provide for  disbursement of funds during a construction  period of up
to one year.  During this  period,  the  borrower  is  required to make  monthly
payments of accrued  interest on the  outstanding  loan  balance.  Disbursements
during  the  construction  period  are  limited  to no more than the  percent of
completion.  Up to 97%  loan-to-value  upon  completion of  construction  may be
disbursed if private mortgage insurance above 80% loan-to-value is in place.

     Land Loans.  The Association  makes loans to individuals for the purpose of
acquiring  land upon  which to build  their  permanent  residence.  These  loans
generally have 20 year amortization  periods, with a balloon payment due in five
years, and maximum  loan-to-value  ratios of 80%. As of September 30, 2003, $8.1
million,  or 1.40%, of the Association's  total loan portfolio consisted of land
loans.

     Commercial  Business  Lending.  The purchase of the  branches  from WAMU in
September  2001 included  significant  commercial  business loans as well as the
lending  expertise  needed  for  commercial  lending  activities.  As a  result,
commercial  business lending has increased due to both loans purchased from WAMU
and new originations  during fiscal 2003. The Association's  commercial business
lending  activities  focus primarily on small to medium size businesses owned by
individuals  well known to the Association  and who reside in the  Association's
primary market area. At September 30, 2003,  commercial  business loans amounted
to $58.0  million,  or 10.08% of the total  loan  portfolio  and 30.91% of total
non-real estate loans. Included in these loans are $14.1 million of agricultural
production loans. See "-- Agricultural Lending."

                                       8
<PAGE>

     Commercial business loans may be unsecured loans, but generally are secured
by  various  types of  business  collateral  other  than real  estate  (such as,
inventory,  equipment,  etc.). In many instances,  however, such loans are often
also  secured by junior  liens on real  estate.  Lines of credit  are  generally
renewable and made for a one-year  term and are generally  variable rate indexed
to the prime rate.  Term loans are generally  originated with three to five year
maturities,  with a maximum of seven years, on a fully amortizing basis. As with
commercial  real  estate  loans,  the  Association   generally  requires  annual
financial statements from its commercial business borrowers and, if the borrower
is a corporation, personal guarantees from the principals.

     Commercial   business   lending   generally   involves  greater  risk  than
residential  mortgage  lending and involves  risks that are different from those
associated with  residential,  commercial and multi-family  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  not  a  sufficient  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 primarily  depends on cash flow and profitability of the business,
and  creditworthiness  of the borrower (and guarantors) and requires  successful
operation  and  management  of the  business  entity  while  liquidation  of the
collateral  is a  secondary  and  sometimes  insufficient  source of  repayment.
Consequently,  repayment  of such loans may be affected  by adverse  business or
economic conditions.

     As part of its commercial  business  lending  activities,  the  Association
issues standby letters of credit or
performance bonds as an accommodation to its borrowers.

     Agricultural  Lending.  The Association did not offer loans on agricultural
properties or for  agricultural  production  until the WAMU branch  acquisition,
even though agriculture is a major industry in the Association's market area. As
part of the WAMU branch acquisition,  the Association  purchased $4.2 million of
agricultural  real estate  loans and $11.9  million of  agricultural  production
loans, as well as obtaining  lending personnel with expertise in originating and
monitoring  agricultural  loans. At September 30, 2003, total agricultural loans
amounted to $23.5 million,  or 4.08%, of the total loan portfolio;  $9.4 million
of these loans were secured by real estate and the  remaining  $14.1 million are
agricultural production loans.

     In underwriting agricultural operating loans, the Association considers the
cash flow of the borrower  based upon the expected  income stream as well as the
value of collateral used to secure the loan.  Collateral  generally  consists of
livestock or cash crops produced by the farm, such as grains, corn, and alfalfa.
In addition to considering cash flow and obtaining a blanket  security  interest
in the farm's cash crop, the  Association  may also  collateralize  an operating
loan with the equipment,  breeding stock, real estate, and federal  agricultural
program  payments to the  borrower.  Payments on  agricultural  operating  loans
depend on the successful  operation of the farm, which may be adversely affected
by weather conditions that limit crop yields,  fluctuations in market prices for
agricultural products and livestock,  and changes in government  regulations and
subsidies.

     Agricultural  real  estate  loans  primarily  are secured by first liens on
farmland and improvements  thereon located in the  Association's  market area to
service the needs of the Association's existing customers.

     Among the  greater  and more common  risks to  agricultural  lending can be
weather conditions and disease. These risks can be mitigated through multi-peril
crop  insurance.  Uncertain  supplies  of water  in some  market  areas  has the
potential  to decrease  yields and increase  energy costs for the  Association's
borrowers. However, very few of the Association's agricultural loans are secured
by real  estate or  operations  in the  Klamath  Basin,  which was  affected  by
curtailment  of  irrigation  water  during the summer of 2001,  and those  being
financed  have liquid  secondary  sources of  repayment.  Commodity  prices also
present a risk which may be reduced by the use of set price contracts.

                                        9
<PAGE>

     Federal savings and loan  associations are authorized to make loans secured
by business or agricultural  real estate in amounts up to 400% of capital and to
make  additional  loans to  businesses  and farms  (which  may,  but need not be
secured by real estate) in amounts up to 20% of assets  provided  that all loans
in excess of the 10% of assets must be made to small  businesses  and farms that
qualify as small  businesses.  Effective  January 1, 2003, the OTS increased the
dollar amount limit in the definition of small business loans from $1 million to
$2 million and farm loans from $500,000 to $2 million. As of September 30, 2003,
the Association was well within the regulatory limits for such business loans.

     Consumer  and Other  Lending.  The  Association  originates  a  variety  of
consumer  loans.  Such loans generally have shorter terms to maturity and higher
interest rates than mortgage  loans.  At September 30, 2003,  the  Association's
consumer loans totaled $129.6 million,  or 22.53%,  of the  Association's  total
loans. A total of $50.6 million in consumer loans were added to the portfolio as
part of the  WAMU  branch  acquisition  in  September  2001.  The  Association's
consumer  loans  consist   primarily  of  home  improvement  and  equity  loans,
automobile  loans,  boat and  recreational  vehicle loans,  unsecured loans, and
deposit account loans.

     The  Association  has placed  increasing  emphasis  on the  origination  of
consumer  loans due to their shorter  terms and higher  yields than  residential
mortgage  loans.  Factors  that may affect the  ability  of the  Association  to
increase  its  originations  in this area  include  the demand  for such  loans,
interest rates and the state of the local and national economy.

     The  Association  offers  consumer  lines of credit on either a secured  or
unsecured  basis.  Secured  lines of credit  are  generally  secured by a second
mortgage on the borrower's  primary  residence.  Secured and unsecured  lines of
credit have  interest  rates that vary above the prime lending rate based on the
credit risk of the borrower,  collateral,  and loan amount.  In both cases,  the
rate adjusts monthly. The Association requires minimum payment of interest only,
and  depending  on the loan  product,  may  require  at  least 2% of the  unpaid
principal balance monthly.  At September 30, 2003, $57.4 million was outstanding
on approved lines of credit.

     The Association offers home equity and home improvement loans that are made
on the security of primary  residences.  Loans  normally  have terms of up to 15
years  requiring  monthly  payments of principal and interest.  At September 30,
2003, home equity loans and home  improvement  loans amounted to $112.2 million,
or 86.60% of consumer loans, and 19.51% of total loans.

     At September 30, 2003, the Association's automobile loan portfolio amounted
to $5.5 million,  or 4.26%, of consumer loans and less than 1% of total loans at
that date. The maximum term for the Association's  automobile loans is 72 months
with the  amount  financed  based  upon a  percentage  of  purchase  price.  The
Association   generally  requires  all  borrowers  to  maintain  the  automobile
insurance,  including  collision,  fire  and  theft,  with a  maximum  allowable
deductible and with the Association listed as loss payee.

     At September 30, 2003,  unsecured  consumer loans amounted to $5.1 million,
or less than 1%, of total loans. These loans are made for a maximum of 48 months
or less with fixed  rates of  interest  and are  offered  primarily  to existing
customers of the Association.

     Consumer loans potentially have a greater risk than do residential mortgage
loans,  particularly  in the case of loans  that are  unsecured  or  secured  by
rapidly  depreciating  assets such as automobiles  and other  vehicles.  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
thus 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.  At  September  30,  2003,  the
Association had $60,217 in consumer loans accounted for on a nonaccrual basis.

     Loan  Maturity  and  Repricing.  The  following  table sets  forth  certain
information  at September  30, 2003  regarding the dollar amount of total loans,
after loans in process and non-performing  loans,  maturing in the Association's
portfolio,  based on the contractual terms to maturity or repricing date. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.



                                       10
<PAGE>
<TABLE>
<CAPTION>

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

Permanent residential
   one- to four-family:
<S>                                <C>                    <C>              <C>                 <C>
  Adjustable rate..........        $17,343                $24,229          $        --         $ 41,572
  Fixed rate...............          4,118                  1,496              156,290          161,904
Other mortgage loans:
  Adjustable rate..........         48,895                101,515                1,144          151,554
  Fixed rate...............            402                  8,163               12,804           21,369
Non-real estate loans:
  Adjustable rate..........         95,402                  4,228                  350           99,980
  Fixed rate...............          2,922                 16,526               67,758           87,206
    Total loans............       $169,082               $156,157             $238,346         $563,585

</TABLE>

     Scheduled  contractual  amortization  of loans does not  reflect the actual
term  of the  Association's  loan  portfolio.  The  average  life  of  loans  is
substantially  less than their  contractual  terms  because of  prepayments  and
due-on-sale  clauses,  which  gives  the  Association  the  right to  declare  a
conventional loan 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.

     Loan  Commitments.   The  Association  issues  commitments  for  fixed  and
adjustable rate loans  conditioned  upon the occurrence of certain events.  Such
commitments are made on specified terms and conditions and are honored for up to
60 days from  commitment.  The Association had outstanding  loan  commitments of
approximately $45.1 million at September 30, 2003 consisting of $24.8 million of
variable  rate loans and $20.3  million of fixed rate loans.  See Note 15 of the
Notes to Consolidated Financial Statements contained in Item 8 of this Report.

     Loan  Solicitation and Processing.  The Association  originates real estate
and other loans at each of its  offices.  Loan  originations  are  obtained by a
variety  of  sources,  including  developers,   builders,   existing  customers,
newspapers,  radio,  periodical  advertising  and  walk-in  customers,  although
referrals from local realtors have been the primary  source.  Loan  applications
are taken by  lending  personnel,  and the loan  processing  department  obtains
credit reports,  appraisals and other documentation involved with a loan. All of
the   Association's   lending  is  subject  to  its  written   nondiscriminatory
underwriting  standards,   loan  origination  procedures  and  lending  policies
prescribed by the  Association's  Board of Directors.  Property  valuations  are
required on all real estate loans and are prepared by employees  experienced  in
the  field  of  real  estate  or  by  independent  appraisers  approved  by  the
Association's  Board of  Directors.  Additionally,  all  appraisals  on loans in
excess of $250,000 must meet applicable regulatory standards.

     The  Association's   loan  approval  process  is  intended  to  assess  the
borrower's ability to repay the loan, the viability of the loan, the adequacy of
the  value of the  property  that will  secure  the  loan,  and,  in the case of
commercial and multi-family  real estate loans, the cash flow of the project and
the quality of management involved with the project.  The Association  generally
requires title insurance on all loans and also that borrowers  provide  evidence
of fire and extended casualty insurance in amounts and through insurers that are
acceptable to the  Association.  A loan  application file is first reviewed by a
loan officer of the  Association,  then is  submitted  to a credit  officer with
appropriate underwriting authority for approval.  Certain large loans, where the
borrower has  aggregate  debt with the  Association  of $1 million or more,  are
reviewed  by the  Board of  Directors.  For  those  relationships  in which  the
aggregate debt with the Association is $3 million or greater,  Board approval is
required prior to funding of the loan. The  Association  can generally make loan
commitments,  subject to property  valuation  and possible  other  conditions of
approval,  in three to five days if income and credit data of the  borrower  are
readily available.

                                       11

<PAGE>

     Loan  Originations,  Purchases and Sales.  The Association has originated a
majority  of the loans in its  portfolio.  During the year ended  September  30,
2003, the  Association  originated  $428.2  million in total loans,  compared to
$283.3  million  during  the same  period  of  2002.  The  higher  level of loan
originations  was  attributable  to  decreasing   interest  rates  which  fueled
refinancing activity.  The Association has a program to sell loans to Fannie Mae
and other lenders.  Through this program,  $99.1 million of primarily fixed rate
loans were sold during the year ended September 30, 2003, all of which were one-
to  four-family  mortgages.  Servicing was not retained on the loans sold during
fiscal 2003.  During the year ended  September 30, 2002,  the Company sold $68.7
million of fixed rate single family mortgages on the secondary market. Servicing
was not retained on these loans.

     As noted previously, the Association purchased $179.3 million in loans from
WAMU as part of the  branch  acquisition.

     The Association has also previously purchased permanent residential one- to
four-family  mortgage  loans on  detached  residences  from  various  localities
throughout  the  western  United  States,  primarily  Oregon,   Washington,  and
California.  These  loans  were  underwritten  on the same  basis  as  permanent
residential one- to four-family real estate loans originated by the Association.
At September 30, 2003, the balance of these loans was $2.0 million.

     The  Association  also purchases  multi-family  and commercial  real estate
mortgage  loans secured by properties  within the  Association's  primary market
area.  At September  30,  2003,  the balance of such  purchased  loans was $16.6
million.  These  loans were  underwritten  on the same  basis as  similar  loans
originated by the Association.


                                       12

<PAGE>


     The following table shows total loans originated,  purchased and sold, loan
reductions  and the net increase in the  Association's  loans during the periods
indicated.
<TABLE>
<CAPTION>

                                                          Year Ended September 30,
                                                  --------------------------------------
                                                     2003          2002           2001
                                                  ----------     ---------      --------
                                                                 (In thousands)

<S>                                                 <C>           <C>           <C>
Total net loans at beginning of period......        $607,465      $679,990      $729,037

Loans originated and purchased:
 Real estate loans originated (1)...........         247,256       161,278        93,907
 Real estate loans purchased................           3,875         1,683        83,192
 Non-real estate loans originated...........         117,073       120,388        42,586
 Non-real estate loans purchased............              --            --        99,720
                                                    --------      --------      --------
   Total loans originated and purchased.....         428,204       283,349       319,405

Loan reductions:
 Principal paydowns.........................        (375,880)     (287,526)     (145,544)
 Loans sold.................................         (99,100)      (68,661)      (30,709)
 Loans securitized..........................               -             -      (190,300)
 Other reductions (2).......................          (3,138)          313        (1,899)
                                                    --------      --------      --------
    Total loan reductions...................        (478,118)     (355,874)     (368,452)
                                                    --------      --------      --------
Total net loans at end of period............        $557,551      $607,465      $679,990
                                                    ========      ========      ========
<FN>

(1)  Includes  decreases/increases  from  loans-in-process.

(2)  Includes  net  reductions  due to  deferred  loans fees,  discounts  net of
     amortization, provision for loan loss and transfers to real estate owned.
</FN>
</TABLE>

     Loan  Origination  and Other Fees. In addition to interest earned on loans,
the  Association  receives  loan  origination  fees or "points" for  originating
loans.  Loan points are a percentage of the principal  amount of the real estate
loan and are charged to the borrower in connection  with the  origination of the
loan.  The  amount  of  points  charged  by the  Association  varies,  though it
generally is 1.00% on permanent loans and 1.75% on construction loans.

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, the Association's loan origination fees and
certain related direct loan origination costs are offset,  and the resulting net
amount is deferred  and  amortized  as income over the  contractual  life of the
related loans as an adjustment to the yield of such loans,  or until the loan is
paid in full. At September  30, 2003,  the  Association  had $3.2 million of net
loan fees which had been  deferred and are being  recognized  as income over the
contractual maturities of the related loans.



                                       13

<PAGE>

Asset Quality

     Delinquent  Loans.  The following table sets forth  information  concerning
delinquent  loans at September 30, 2003, in dollar amount and as a percentage of
the  Association's  total loan portfolio.  The amounts  presented  represent the
total  outstanding  principal  balances  of the related  loans,  rather than the
actual payment amounts which are past due.
<TABLE>
<CAPTION>

                      Permanent resident            Commercial            Commercial
                          1-4 family                Real Estate         Non-Real Estate         Consumer              Total
                      Amount Percentage          Amount Percentage     Amount Percentage    Amount Percentage     Amount Percentage
                                            (Dollars in thousands)

Loans delinquent for
<C>                     <C>       <C>             <C>        <C>         <C>       <C>        <C>       <C>        <C>        <C>
90 days and more..      $175      0.03%           $ 103      0.02%       $461      0.08%      $60       0.01%      $799       0.14%
</TABLE>

     Delinquency Procedures. When a borrower fails to make a required payment on
a loan,  the  Association  attempts to cure the  delinquency  by contacting  the
borrower.  In the case of loans past due, appropriate late notices are generated
on the seventh and fifteenth days after the due date. If the  delinquency is not
cured,  the borrower is contacted by telephone  the  twenty-fifth  day after the
payment is due.

     For real estate loans, in the event a loan is past due for 30 days or more,
the Association will attempt to arrange an in-person interview with the borrower
to  determine  the  nature of the  delinquency;  based  upon the  results of the
interview  and its review of the loan status,  the  Association  may negotiate a
repayment program with the borrower.  If a loan remains past due at 60 days, the
Association performs an in-depth review of the loan status, the condition of the
property and the circumstances of the borrower.  If appropriate,  an alternative
payment  plan is  established.  At 90 days past due,  a letter  prepared  by the
Association is sent to the borrower  describing the steps to be taken to collect
the loan, including acceptance of a voluntary  deed-in-lieu of foreclosure,  and
of the initiation of foreclosure proceedings.  A decision as to whether and when
to  initiate  foreclosure  proceedings  is made by senior  management,  with the
assistance of legal counsel, and reviewed by the Board of Directors.

     For commercial loans, the borrowers are assigned to a commercial lender who
is  responsible  for  monitoring  the  relationship   including   collecting  on
delinquencies. When necessary, repossession, foreclosure, or other action may be
taken including use of outside counsel.

     For consumer loans, at 60 days past due a letter demanding  payment is sent
to the borrower.  If the delinquency is not cured prior to becoming 90 days past
due,  repossession  procedures are implemented for  collateralized  loans. At 90
days past due,  consumer loans are generally  charged off and sent to an outside
collection agency.

     Nonaccrual,   Past   Due  and   Restructured   Loans.   The   Association's
non-performing  assets consist of nonaccrual loans,  accruing loans greater than
90 days delinquent,  real estate owned and other repossessed  assets.  All loans
are reviewed on a regular  basis and are placed on a nonaccrual  status when, in
the opinion of  management,  the  collection  of  additional  interest is deemed
insufficient to warrant further accrual.  Generally,  the Association places all
loans more than 90 days past due on nonaccrual status. Uncollectible interest on
loans is  charged-off  or an allowance for losses is  established by a charge to
earnings equal to all interest  previously  accrued and interest is subsequently
recognized  only to the extent  cash  payments  are  received  until  delinquent
interest is paid in full and, in management's  judgment,  the borrower's ability
to make periodic interest and principal payments is back to normal in which case
the loan is returned to accrual status.

     Real estate  acquired by  foreclosure  is  classified  as real estate owned
until such time as it is sold. See Note 1 of the Notes to Consolidated Financial
Statements  contained Item 8 of this Report. When such property is acquired,  it
is recorded at the lower of the balance of the loan on the  property at the date
of acquisition  (not to exceed the net  realizable  value) or the estimated fair
value. Costs, excluding interest,  relating to holding the property are expensed
as  incurred.  Valuations  are  periodically  performed  by  management  and  an
allowance  for losses is  established  by a charge to operations if the carrying
value of the property exceeds its estimated net realizable  value.  From time to
time, the  Association  also acquires  personal  property which is classified as
other  repossessed  assets and is carried on the books at estimated  fair market
value and disposed of as soon as commercially reasonable.

                                       14

<PAGE>

     As of September 30, 2003, the Association's total nonaccrual loans amounted
to  $799,476,  or 0.14% of total  loans,  before net items,  compared  with $1.1
million,  or 0.18% of total  loans,  before net items,  at  September  30, 2002.
Nonaccrual  loans at September 30, 2003 by type are detailed in the table below.
The  decrease in  nonaccrual  loans is  primarily  attributable  to decreases in
nonaccrual  commercial and consumer  loans.  The balance of these types of loans
increased  considerably with the WAMU branch  acquisition in 2001,  resulting in
increased nonaccrual loans of these types for 2002.

     At September 30, 2003, the Association had $67,290 in restructured loans.

     Real estate owned  decreased  somewhat  from the prior year due to sales of
properties  held at September 30, 2002.  Real estate owned at September 30, 2003
consists of one commercial property and one single-family residence.

     The  following   table  sets  forth  the  amounts  and  categories  of  the
Association's non-performing assets at the dates indicated.

<TABLE>
                                                                        At September 30,
                                               2003       2002        2001        2000        1999
                                                              (Dollars in thousands)

Non-accruing loans:
<S>                                             <C>        <C>         <C>        <C>           <C>
    One- to four-family real estate ......      $175       $444        $270       $715          $915
    Commercial real estate................       461        353          --         --         2,400
    Commercial non-real estate............       103         47          --         --            --
    Consumer..............................        60        247          --         95            --
Accruing loans greater than 90
  days delinquent.........................        --         --          --         --            --
    Total non-performing loans............       799      1,091         270        810         3,315

Real estate owned.........................       645        717         446        788         1,495
Other repossessed assets..................         6         42          --         --            --
    Total repossessed assets..............       651        759         446        788         1,495
    Total non-performing assets...........    $1,450     $1,850       $ 716     $1,598        $4,810

Total non-performing assets as a
  percentage of total assets..............      0.09%      0.12%       0.05%      0.16%         0.46%

Total non-performing loans as a
  percentage of total loans,
  before net items........................      0.14%      0.18%       0.04%      0.21%         0.62%

Allowance for loan losses as a
  percentage of total non-performing
  assets..................................    477.88%    398.70%    1110.47%    255.44%        51.64%

Allowance for loan losses as a percentage
  of total non-performing loans...........    866.75%    676.08%    2944.81%    503.95%        74.93%
</TABLE>

     The allowance for loan losses as a percentage of both total  non-performing
assets and total  non-performing  loans decreased  significantly  when comparing
September  30, 2003 and 2002 to September  30,  2001.  These  decreases  are the
result  of  increases  in  non-performing  loans  and  non-performing  assets at
September 30, 2003 and 2002 when compared with  September 30, 2001. In addition,
at September 30, 2001,  the allowance  balance was greatly  increased due to the
loans purchased from WAMU. Because the majority of the loans purchased from WAMU
were commercial and consumer loans with higher  associated  risks, the allowance
increased,  yet,  because the loans were added in  September  2001 there had not
been an impact causing the level of non-performing  loans and assets to increase
by

                                       15

<PAGE>

September  30, 2002. At present,  the  performance  of the  purchased  loans has
exceeded  expectations  and the Association  believes that current  reserves are
adequate  to  cover  the  risk in the  portfolio  based  on  current  levels  of
delinquency and non-performing assets.

     For the year ended  September  30,  2003,  the amount of gross  income that
would have been  recorded  in the period  then  ended if  non-accrual  loans and
troubled debt restructurings had been current according to their original terms,
and the amount of interest  income on such loans that was included in net income
for each of such periods,  were, in both cases,  less than 1% of total  interest
income.

     Classified Assets.  Federal  regulations  require that each insured savings
association  classify its assets on a regular basis. In addition,  in connection
with examinations of insured  institutions,  federal examiners have authority to
identify  problem  assets and, if  appropriate,  classify  them.  There are four
categories used to classify problem assets:  "special  mention,"  "substandard,"
"doubtful,"  and "loss."  Special  mention assets are not considered  classified
assets,  but are assets of  questionable  quality  that have  potential  or past
weaknesses that deserve management's close attention and monitoring. 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. If an asset or
portion  thereof  is  classified  loss,  the  insured  institution  must  either
establish  specific  allowances  for loan  losses  in the  amount of 100% of the
portion of the asset  classified  loss or charge-off  such amount.  General loss
allowances  established  to cover  probable  losses  related to special  mention
assets  and  assets  classified  substandard  or  doubtful  may be  included  in
determining  an  institution's  regulatory  capital,  while  specific  valuation
allowances  for loan  losses  do not  qualify  as  regulatory  capital.  Federal
examiners may disagree  with an insured  institution's  classifications  and the
amounts reserved.

     As of September  30, 2003,  total  classified  assets  amounted to 0.16% of
total assets,  a decrease from 0.30% at September  30, 2002.  Assets  classified
substandard at September 30, 2003 totaled $2.5 million and included  $175,640 in
one- to four-family  residential  loans, $1.4 million in commercial real estate,
$185,486 in commercial  non-real  estate loans and $651,254 in  foreclosed  real
estate and other repossessed assets consisting of one single family residence, a
commercial  property,  and  an  automobile.  Assets  classified  substandard  at
September  30,  2002  totaled  $4.4  million  and  included  $353,781 in one- to
four-family  construction  loans, a $843,144 land development loan, $2.1 million
in  commercial  real  estate and  $758,663 in  foreclosed  real estate and other
repossessed  assets  consisting of five single family  residences,  a commercial
property  and a boat.  These  problem  assets were not  concentrated  in any one
market area.

     Impaired Loans.  Management  generally identifies loans to be evaluated for
impairment when such loans are on nonaccrual  status or have been  restructured.
However, not all nonaccrual loans are impaired. In accordance with SFAS No. 114,
Accounting  by Creditors  for  Impairment of a Loan, as amended by SFAS No. 118,
loans are considered  impaired when it is probable that the Association  will be
unable to collect all amounts  contractually due,  including  scheduled interest
payments.  Factors  involved  in  determining  impairment  include,  but are not
limited to, the  financial  condition of the  borrower,  the value of underlying
collateral, and current economic conditions.

     Allowance for Loan Losses. The allowance for loan losses is maintained at a
level  considered  adequate by  management  to provide for probable  loan losses
based  on  management's   assessment  of  various  factors  affecting  the  loan
portfolio, including a review of all loans for which full collectability may not
be reasonably  assured,  an overall  evaluation of the quality of the underlying
collateral,  economic  conditions,  historical  loan loss  experience  and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.  The  level of  allowance  for loan  losses  is  determined  based on
stratifying the loan portfolio into based on internal loan loss rates startified
by loan type,  the  Company's  internal risk ratings for  individual  commercial
loans,  thrift  industry charge off rates by loan type, and peer group levels of
allowance  for  loan  losses.   While  management  believes  it  uses  the  best
information  available to determine the  allowance  for loan losses,  unforeseen
market  conditions  could result in adjustments to the allowance for loan losses
and net  earnings  could  be  significantly  affected  if  circumstances  differ
substantially  from the assumptions used in making the final  determination.  At
September  30, 2003,  the  Association  had an allowance for loan losses of $6.9
million,  which was equal to 477.88% of non-performing assets and 1.21% of total
loans. 16

<PAGE>

     Provisions  for loan  losses  are  charged to  earnings  to bring the total
allowance  for  loan  losses  to  a  level  deemed  appropriate  by  management.
Management  considers  historical loan loss  experience,  the volume and type of
lending  conducted  by  the  Association,  industry  standards,  the  amount  of
non-performing assets, general economic conditions  (particularly as they relate
to  the   Association's   market  area),   and  other  factors  related  to  the
collectibility of the Association's loan portfolio in their determination of the
adequacy of the  allowance and the  provision.  The  provisions  for loan losses
charged  against  income for the years ended  September 30, 2003,  2002 and 2001
were zero,  $156,000,  and $387,000  respectively.  Management believes that the
amount maintained in the allowance will be adequate to absorb probable losses in
the portfolio.

     The year ended September 30, 2001 included two  transactions  that affected
the  allowance and provision  for loan losses.  The sale and  securitization  of
$190.3  million in fixed rate  single  family  loans to Fannie Mae  reduced  the
required allowance on mortgage loans. In conjunction with the sale,  $231,000 of
allowance was reclassified as part of the basis of the resulting mortgage-backed
securities.  The reduction in the loan portfolio reduced the need for additional
allowance  and thus the  provision for loan losses was much lower this year than
the previous  year.  The WAMU  acquisition  added $179.3 million of loans to the
portfolio, a significant proportion of which were commercial and consumer loans.
These loans by nature have higher  credit risk. As part of the  acquisition,  an
allowance for loan losses was established related to the acquired loans based on
the types of loans and the best  information  available  regarding  the  factors
which may affect their  collectibility.  The higher balance of the allowance for
loan losses  reflects  these  changes  whereby a block of low risk single family
mortgage  loans were sold and were replaced by a block of higher risk loans from
the acquired branches.


                                       17

<PAGE>

     The  following  table  sets  forth for the  periods  indicated  information
regarding  changes  in  the  Association's   allowance  for  loan  losses.   All
information is before net items.
<TABLE>
<CAPTION>

                                                              At or for the Year Ended September 30,
                                                     2003           2002         2001        2000         1999
                                                                            (Dollars in thousands)
<S>                                                <C>            <C>         <C>          <C>         <C>
Total loans outstanding........................    $575,245       $622,361    $701,013     $750,909    $774,441

Average loans outstanding......................    $585,737       $660,246    $611,095     $747,842    $721,658

Allowance at beginning of period...............   $   7,376      $   7,951   $   4,082      $ 2,484   $   1,950
Loans charged off:
     One-to four-family........................          --             --          (3)          --          --
     Construction..............................          (7)            --         (19)         (32)         --
     Commercial real estate....................          --           (323)         --         (559)       (392)
     Commercial business.......................        (100)          (134)        (12)          --          --
     Consumer..................................        (400)          (290)        (56)         (16)         (6)
          Total charge offs                            (507)          (747)        (90)        (607)       (398)
Recoveries of loans previously charged off:
     Commercial real estate....................         --              --          34          440          --
     Commercial business.......................          21             --          --           --          --
     Consumer..................................          44             16           8            1          --
          Total recoveries                               65             16          42          441          --
Provision for loans losses.....................          --            156         387        1,764         932
Acquisitions...................................          --             --       3,761           --          --
Allowance reclassified with loan securitization          --             --        (231)          --          --
Allowance at end of period.....................  $    6,934     $    7,376  $    7,951      $ 4,082   $   2,484
Allowance for loan losses as a percentage
 of total loans outstanding....................       1.21%          1.19%       1.13%        0.54%       0.31%

Ratio of net charge-offs to average loans
 outstanding during the period.................       0.08%          0.11%       0.01%        0.02%       0.06%
</TABLE>

                                                        18

<PAGE>


     The  following  table sets forth the  breakdown of the  allowance  for loan
losses by loan category and summarizes the percentage of total loans, before net
items,  in each  category  to  total  loans,  before  net  items,  at the  dates
indicated.
<TABLE>
<CAPTION>
                                                                  At September 30,

                                2003                                     2002                                     2001
                             Percent of                               Percent of                              Percent of
                   Amount  Allowance in   Percent of       Amount  Allowance in   Percent of       Amount  Allowance in   Percent of
                       of   Category to  Total Loans           of   Category to  Total Loans           of   Category to  Total Loans
                Allowance    Total Loan  by Category    Allowance   Total Loans  by Category    Allowance   Total Loans  by Category
                                                               (Dollars in thousands)
<S>                <C>            <C>        <C>           <C>            <C>        <C>           <C>            <C>        <C>

Permanent
  residential One
  to Four family.. $1,365         0.24%      34.04%        $1,191         0.19%      54.53%        $1,292          0.19%     60.12%

  residential.....    386         0.07        5.57            528         0.09        3.47            540          0.08       3.32
Construction......    201         0.03        2.89            422         0.07        2.45             12          0.01       3.09
Agriculture.......    113         0.02        1.63            169         0.03        0.79            158          0.02       0.60
Commercial
  real estate.....  1,590         0.28       21.86          2,611         0.42       14.73          3,611          0.52      14.17
Land..............     97         0.02        1.40             77         0.01        0.67            324          0.02       0.53
Commercial and
  industrial......  1,482         0.25       10.08          1,560         0.25        9.98          1,325          0.19       8.00
Consumer..........  1,700         0.30       22.53            818         0.13       13.38            689          0.10      10.17


   Total.......... $6,934         1.21%     100.00%        $7,376         1.19%     100.00%      $7,951          1.13%     100.00%
</TABLE>
<TABLE>
<CAPTION>
                                                                  At September 30,

                                2000                                     1999
                             Percent of                               Percent of
                   Amount  Allowance in   Percent of       Amount  Allowance in   Percent of
                       of   Category to  Total Loans           of   Category to  Total Loans
                Allowance    Total Loan  by Category    Allowance   Total Loans  by Category
                                                               (Dollars in thousands)
<S>                <C>            <C>        <C>           <C>            <C>        <C>

Permanent
  residential One
  to Four family.. $1,449         0.19%      85.12%        $1,103         0.14%      83.56%
Multi-family
  residential.....    385         0.05        2.53            267         0.03        2.38
Construction......    420         0.05        3.37            221         0.03        6.87
Agriculture.......     --         -           -                --         -           -
Commercial
  real estate.....  1,403         0.19        5.63            730         0.09        4.79
Land..............    168         0.02        0.45             28           --        0.27
Commercial and
  industrial......     86         0.01        0.61             23           --        0.44
Consumer..........    191         0.03        2.29            112         0.02        1.69


   Total.......... $4,082        0.54%      100.00%        $2,484        0.31%      100.00%
</TABLE>


                                       19

<PAGE>

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

Investment Activities

     Federally  chartered  savings  institutions have the authority to invest in
securities of various federal agencies,  certain insured certificates of deposit
of banks and savings  institutions,  certain  bankers'  acceptances,  repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.  OTS regulations  restrict investments in corporate
debt  securities  of any  one  issuer  in  excess  of  15% of the  Association's
unimpaired capital and unimpaired  surplus,  as defined by federal  regulations,
which totaled  $105.8  million at September 30, 2003,  plus an additional 10% if
the  investments  are  fully  secured  by  readily  marketable  collateral.  See
"REGULATION OF THE ASSOCIATION -- Federal Regulation of Savings  Associations --
Loans to One  Borrower"  for a  discussion  of  additional  restrictions  on the
Association's investment activities.

     The investment securities portfolio is managed in accordance with a written
investment  policy  adopted by the Board of Directors  and  administered  by the
Investment  Committee,  which  consists of the President and four Board members.
Generally,  the investment policy is to invest funds among various categories of
investments  and maturities  based upon the need for  liquidity,  to achieve the
proper balance  between its desire to minimize risk and maximize  yield,  and to
fulfill the  asset/liability  management  policy.  The  President  and the Chief
Financial  Officer may  independently  invest up to 1.0% of total  assets of the
Company  within  the  parameters  set  forth  in the  Investment  Policy,  to be
subsequently reviewed with the Investment Committee or Board of Directors at its
next  scheduled  meeting.  Transactions  or  investments  in  any  one  security
determined  by type,  maturity and coupon in excess of $10.0  million or 1.0% of
assets are not permitted without investment committee or board approval.

     Investment securities held to maturity are carried at cost and adjusted for
amortization  of premiums and accretion of discounts.  As of September 30, 2003,
the  Company  had no held to  maturity  securities.  Securities  to be held  for
indefinite  periods  of  time  and not  intended  to be  held  to  maturity  are
classified as available for sale and carried at fair value. Securities available
for  sale  include  securities  that  management  intends  to use as part of its
asset/liability  management  strategy that may be sold in response to changes in
interest  rates or  significant  prepayment  risks or both.  As of September 30,
2003, the portfolio of securities  available for sale consisted of $44.6 million
in tax exempt securities issued by states and  municipalities,  $10.1 million in
FHLB  obligations,  $15.4 million in federal agency  preferred  stock, and $70.8
million in investment grade corporate investments.

     During the year ended  September  30,  2003,  the  Company  recorded a $3.5
million loss related to recognition  of other than  temporary  impairment of the
federal agency preferred stock.

     During the years ended  September  30, 2003,  2002,  and 2001,  neither the
Company nor the Association  held any  off-balance  sheet  derivative  financial
instruments in their  investment  portfolios to which the provisions of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, would apply.



                                       20

<PAGE>

     The  following  tables  set  forth  certain  information  relating  to  the
investment  securities  portfolio held to maturity and securities  available for
sale at the dates indicated.
<TABLE>
<CAPTION>

                                                                                    At September 30,
                                                             2003                          2002                          2001
                                                Amortized      Fair          Amortized      Fair         Amortized        Fair
                                                  Cost         Value           Cost         Value         Cost            Value
                                                                                     (In thousands)
Held to maturity:
<S>                                             <C>           <C>           <C>           <C>          <C>            <C>
  State and municipal obligations.............  $     --      $     --      $     --      $     --     $     135      $     137

Available for sale:
  U.S. Government obligations.................        --            --            --            --        40,120          40,852
  State and municipal obligations.............    42,242        44,585        39,578        42,026        32,951          33,640
  FHLB obligations............................    10,000        10,087             -             -             -              --
  Corporate obligations.......................    71,382        70,834        61,648        59,423        65,404          64,718
  FHLMC preferred stock.......................    15,170        15,433        18,715        18,093        15,716          15,466
    Total.....................................  $138,794      $140,939      $119,941      $119,542      $154,326        $154,813
</TABLE>
<TABLE>
<CAPTION>

                                                                                  At September 30,
                                                          2003                         2002                       2001
                                                Amortized      Percent of    Amortized      Percent of   Amortized     Percent of
                                                  Cost         Portfolio       Cost         Portfolio    Cost          Portfolio
                                                                               (Dollars in thousands)
Held to maturity:
<S>                                             <C>             <C>         <C>             <C>         <C>               <C>
  State and municipal obligations............. $      --            --%    $      --            --%   $      135            0.09%

Available for sale:
  U.S. Government obligations.................        --            --            --            --        40,120           26.00
  State and municipal obligations.............    42,242         30.44        39,578         33.00        32,951           21.35
  FHLB obligations............................    10,000          7.20             -             -             -               -
  Corporate obligations.......................    71,382         51.43        61,648         51.40        65,404           42.38
  FHLMC preferred stock.......................    15,170         10.93        18,715         15.60        15,716           10.18


    Total.....................................  $138,794        100.00%     $119,941        100.00%     $154,326          100.00%
</TABLE>

     The following  table sets forth the maturities and weighted  average yields
of the debt securities in the investment portfolio at September 30, 2003.
<TABLE>
<CAPTION>

                                    One Year        After One Through      After Five Through           After Ten
                                      or Less             Five Years              Ten Years               Years
                               Amount      Yield    Amount      Yield      Amount        Yield     Amount     Yield
                                                                     (Dollars in thousands)
Available for sale:
<S>                           <C>          <C>    <C>           <C>       <C>            <C>      <C>        <C>
  State and municipal
   obligations (1)               $485      4.11%      $--       -          $2,182        4.10%    $39,575     5.11%
  FHLB obligations                 --      -       10,000       3.85%          --        -             --     -

  Corporate obligations        11,860      4.04%   39,680       3.80%          --        -         19,842     1.74%
  FHLMC preferred stock            --      -           --       -              --        -         15,170     2.75%
                               ______               ______                   ____                  ______
    Total                     $12,345             $49,680                  $2,182                 $74,587

<FN>

(1) Interest on state and municipal obligations is tax-exempt for federal income tax purposes.  The yields reported have
not been calculated on a tax-equivalent basis.
</FN>
</TABLE>

                                       21
<PAGE>

     At September 30, 2003 the Company did not hold any securities from a single
issuer, other than the U.S. Government, whose aggregate book value was in excess
of 10% of the Company's shareholders' equity, or $12.0 million.

Mortgage-Backed and Related Securities

     At September  30,  2003,  the  Company's  net  mortgage-backed  and related
securities,  all  designated as available-  for-sale,  totaled $680.7 million at
fair value ($678.9 million at amortized  cost) and had a weighted  average yield
of 3.42%.  At September  30,  2003,  20.58% of the  mortgage-backed  and related
securities were adjustable rate securities.

     Mortgage-backed and related securities ("MBS") can be divided into two main
groups.  The  first  group,  called  mortgage   participation   certificates  or
pass-through  certificates,  typically represents a participation  interest in a
pool of  single-family  or  multi-family  mortgages.  The principal and interest
payments on these  mortgages are passed from the mortgage  originators,  through
intermediaries  (generally  U.S.  Government  agencies and government  sponsored
enterprises)  that pool and resell the  participation  interests  in the form of
securities,  to investors such as the Company. Such U.S. Government agencies and
government sponsored  enterprises,  which guarantee the payment of principal and
interest  to  investors,  primarily  include  the  Federal  Home  Loan  Mortgage
Corporation ("FHLMC"),  Fannie Mae, the Government National Mortgage Association
("GNMA") and the U.S. Small Business Administration ("SBA").

     The second group, called agency-backed  collateralized mortgage obligations
("CMOs"),  consists of securities  created from and secured by the securities in
the first  group  described  above.  CMOs are an example of a security  called a
derivative,  because they are derived  from  mortgage  pass-through  securities.
Underwriters  of CMOs create  these  securities  by dividing up the interest and
principal  cash flows from the pools of mortgages  and selling  these  different
slices of cash flows as a new and different  class of  individual  securities or
"tranches."  At  September  30, 2003,  the Company held $285.2  million of CMOs,
comprised  primarily  of three  classes,  planned  amortization  class  tranches
("PACs"),  Sequentials,  and Floaters.  The least  volatile CMOs are PACs.  With
PACs, the yields,  average lives, and lockout periods when no principal payments
are  received  are  designed to be more stable and  predictable  than the actual
performance of the underlying MBS. PACs are available in a variety of short term
maturities,  usually two, three, five, or seven years. Sequentials,  as the name
implies, pay principal and interest  sequentially.  For example, the "A" tranche
receives  payments  of  principal  and  interest  first,  while  the "B" and "C"
tranches  only receive  interest  until the "A" tranche  principal  par value is
completely  paid. Then the "B" tranche begins  receiving  principal and interest
until all of its principal is paid,  and so on.  Sequential pay CMOs are created
to obtain a more predictable cash flow than the underlying  simple  pass-through
securities.  However,  the cash flow risk from the  underlying  pool remains the
same.  CMO  floaters are similar to  adjustable  rate  mortgages;  they carry an
interest  rate that changes in a fixed  relationship  to an interest rate index,
typically the London Interbank Offer Rate ("LIBOR").  Floaters usually have caps
that determine the highest interest that can be paid by the securities.  Except
for caps on Floaters, PACs and Floaters may help to manage interest rate risk by
reducing asset duration.  They also may help manage price  volatility since they
typically  have short  maturities  or coupons that reset monthly or quarterly to
reflect changes in the index rate.

     MBS typically are issued with stated principal amounts,  and the securities
are backed by pools of mortgages  that have loans with interest  rates that fall
within a specific range and have varying  maturities.  MBS generally  yield less
than the loans  that  underlie  such  securities  because of the cost of payment
guarantees  and credit  enhancements.  In addition,  MBS are usually more liquid
than  individual  mortgage  loans  and  may be  used  to  collateralize  certain
liabilities  and  obligations  of the Company.  These types of  securities  also
permit the Association to optimize its regulatory  capital because they have low
risk weighting.

                                       22
<PAGE>

     Expected maturities of MBS will differ from contractual  maturities because
borrowers may have the right to call or prepay  obligations with or without call
or  prepayment  penalties.  Prepayments  that are faster  than  anticipated  may
shorten the life of the security  and may result in a loss of any premiums  paid
and thereby  reduce the net yield on such  securities.  Although  prepayments of
underlying  mortgages  depend on many factors,  including the type of mortgages,
the  coupon  rate,  the  age of  mortgages,  the  geographical  location  of the
underlying  real estate  collateralizing  the  mortgages  and general  levels of
market  interest rates,  generally the difference  between the interest rates on
the underlying  mortgages and the prevailing mortgage interest rates is the most
significant determinant of the rate of prepayments.  During periods of declining
mortgage interest rates, if the coupon rate of the underlying  mortgages exceeds
the prevailing  market  interest rates offered for mortgage  loans,  refinancing
generally  increases and accelerates the prepayment of the underlying  mortgages
and the related security.  Under such circumstances,  the Company may be subject
to reinvestment  risk because,  to the extent that the Company's MBS amortize or
prepay  faster than  anticipated,  the  Company may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.

     During the year ended September 30, 2002, MBS with a fair value of $376,335
were transferred from the held- to-maturity  category to the  available-for-sale
portfolio. The Company does not have plans to purchase or classify securities as
held-to-maturity in the foreseeable future.

     The  following  tables  set  forth  certain  information  relating  to  the
mortgage-backed and related securities  portfolio held to maturity and available
for sale at the dates indicated.
<TABLE>
<CAPTION>

                                                                                               At September 30,
                                                             2003                          2002                          2001

                                                Amortized      Fair          Amortized      Fair         Amortized        Fair
                                                  Cost         Value           Cost         Value          Cost           Value
                                                                             (In thousands)
Held to maturity:
<S>                                             <C>           <C>           <C>           <C>           <C>             <C>
  GNMA........................................      $ --          $ --          $ --          $ --       $ 1,621         $ 1,642

Available for sale:
  Fannie Mae..................................   259,120       260,524       128,867       130,233        56,833          57,194
  FHLMC.......................................   127,321       126,188        56,605        57,348        19,538          19,797
  GNMA........................................     8,809         8,775        24,346        24,593         6,816           6,977
  CMOs........................................   283,638       285,232       430,487       438,622       336,452         337,670


    Total.....................................  $678,888      $680,719      $640,305      $650,796      $421,260        $423,280
</TABLE>

<TABLE>
<CAPTION>

                                                                                                  At September 30,
                                                                2003                             2002                          2001
                                                Amortized      Percent of    Amortized      Percent of   Amortized        Percent of
                                                  Cost         Portfolio       Cost         Portfolio      Cost           Portfolio
                                                                               (Dollars in thousands)
Held to maturity:
<S>                                             <C>             <C>         <C>             <C>         <C>               <C>
  GNMA........................................      $ --            --          $ --            --       $ 1,621            0.38%

Available for sale:
  Fannie Mae..................................   259,120         38.17       128,867         20.13        56,833           13.49
  FHLMC.......................................   127,321         18.75        56,605          8.84        19,538            4.64
  GNMA........................................     8,809          1.30        24,346          3.80         6,816            1.62
  CMOs........................................   283,638         41.78       430,487         67.23       336,452           79.87


    Total.....................................  $678,888        100.00%     $640,305        100.00%     $421,260          100.00%
</TABLE>

Other Interest-Earning Assets

     The Company has an other  interest-earning  asset of $457,000 earning 8.07%
and maturing in May 2112.

                                       23

<PAGE>

Interest-Earning Deposits

     The Company had interest-earning  deposits in the FHLB of Seattle amounting
to $613,016 and $5.9 million at September 30, 2003 and 2002, respectively.

Deposit Activities and Other Sources of Funds

     General.  Deposits are the primary  source of the  Association's  funds for
lending and other investment purposes. In addition to deposits,  the Association
derives funds from loan principal  repayments.  Loan repayments are a relatively
stable  source of funds,  while deposit  inflows and outflows are  significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term  basis to compensate for reductions in the  availability
of funds from other  sources.  They may also be used on a longer  term basis for
general business purposes.

     Deposits.  The Association's deposits are attracted principally from within
the Association's  primary market area through the offering of a broad selection
of  deposit  instruments,  including  checking  accounts,  negotiable  order  of
withdrawal  ("NOW")  accounts,  money  market  deposit  accounts,  passbook  and
statement  savings   accounts,   and  individual   retirement   account  ("IRA")
certificates and  certificates of deposit.  Deposit account terms vary, with the
principal  differences being the minimum balance  required,  the time period the
funds must remain on deposit and the interest rate.

     The  Association  occasionally  accepts  deposits  from outside its primary
market area through both private  placements and brokered  deposits if the terms
of the deposits  fit the  Association's  specific  needs and are at a rate lower
than the rates on similar maturity  borrowings  through the FHLB of Seattle.  At
September 30, 2003, there were no such deposits.

     Interest rates paid, maturity terms,  service fees and withdrawal penalties
are  established   and  reviewed  on  a  periodic  basis  by  the   Association.
Determination  of rates  and  terms  are  predicated  on funds  acquisition  and
liquidity  requirements,  rates paid by  competitors,  growth  goals and federal
regulations.

     For the year ended  September 30, 2003, the  Association  experienced a net
decrease in deposits (before interest  credited) of $90.2 million.  The majority
of the decrease relates to declining balances in certificates of deposit. During
fiscal 2003, the Association  continued the conscious  effort to reduce interest
expense on higher-priced  certificate accounts resulting in a decrease of $106.6
million  for  certificates  as they  matured  and  were not  renewed.  Checking,
savings, and money market accounts increased $32.7 million during the year ended
September 30, 2003.

     At September 30, 2003, certificate accounts maturing during the year ending
September 30, 2004 totaled $201.3 million. Based on historical  experience,  the
Association  expects  that  a  significant  amount  will  be  renewed  with  the
Association at maturity.  In the event a significant amount of such accounts are
not renewed at maturity,  the Association  would not expect a resultant  adverse
impact on  operations  and  liquidity  because  of the  Association's  borrowing
capacity. See "-- Borrowings."

     In the unlikely event the  Association is  liquidated,  depositors  will be
entitled to full payment of their  deposit  accounts  prior to any payment being
made to the  Company,  which is the sole  shareholder  of the  Association.  The
majority of the Association's depositors are residents of the State of Oregon.


                                       24

<PAGE>


     The  following  table  indicates  the amount of  certificate  accounts with
balances of $100,000 or greater by time remaining until maturity as of September
30, 2003.
<TABLE>
<CAPTION>


                                                           Certificate
                  Maturity Period                            Accounts
                                                           (In thousands)

                     <S>                                      <C>
                     Three months or less...............      $13,204
                     Over three through six months......        8,618
                     Over six through twelve months.....       18,018
                     Over twelve months.................       44,169
                         Total..........................      $84,009
</TABLE>

     The following table sets forth the deposit balances in the various types of
deposit accounts offered by the Association at the dates indicated.
<TABLE>
<CAPTION>


                                                                                 At September 30,
                                     -----------------------------------------------------------------------------------------------
                                                   2003                                2002                            2001
                                     ----------------------------------  ------------------------------------  ---------------------
                                                 Percent                             Percent                                Percent
                                                    of        Increase                  of          Increase                   of
                                         Amount    Total     (Decrease)      Amount    Total       (Decrease)     Amount      Total
                                     ----------   ------     ----------  -----------  -------      ----------  ---------    --------
                                                                               (Dollars in thousands)
<S>                                  <C>          <C>         <C>        <C>          <C>          <C>         <C>          <C>
Certificates of deposit..........      $350,113    32.78%    ($106,606)    $456,719    39.99%      ($87,161)     $543,880    47.17%

Transaction accounts:

Non-interest checking............       161,451    15.12        18,678      142,773    12.50         12,124       130,649    11.33
Interest-bearing checking........       136,557    12.79        10,690      125,867    11.02          9,111       116,756    10.13
Passbook and statement savings...        93,311     8.74         7,310       86,001     7.53          8,355        77,646     6.74
Money market deposits............       326,631    30.58        (4,015)     330,646    28.96         46,753       283,893    24.63
Total transaction accounts.......       717,950    67.22        32,663      685,287    60.01         76,343       608,944    52.83

Total deposits...................    $1,068,063   100.00%     ($73,943)  $1,142,006   100.00%      ($10,818)   $1,152,824   100.00%
</TABLE>


     The following  table sets forth the deposit  activities of the  Association
for the periods indicated.
<TABLE>
<CAPTION>

                                                     Year   Ended September 30,
                                                  2003          2002           2001
                                                       (Dollars in thousands)

<S>                                            <C>           <C>          <C>
Beginning balance........................      $1,142,006    $1,152,824     $695,381
Increase due to acquired deposits........              --            --      423,457
Net inflow (outflow) of deposits before
 interest credited.......................         (90,208)      (38,002)       6,902
Interest credited........................          16,265        27,184       27,084
Net increase (decrease) in deposits......         (73,943)      (10,818)     457,443

Ending balance...........................      $1,068,063    $1,142,006   $1,152,824
</TABLE>

                                       25
<PAGE>

     Borrowings.  Deposit  liabilities  are the primary  source of funds for the
Association's  lending and investment  activities  and for its general  business
purposes.  The  Association  may rely upon  advances  from the FHLB of  Seattle,
reverse repurchase  agreements and bank lines of credit to supplement its supply
of  lendable  funds and to meet  deposit  withdrawal  requirements.  The FHLB of
Seattle serves as the Association's primary borrowing source after deposits.

     The FHLB of Seattle  functions as a central reserve bank,  providing credit
for  savings  and  loan   associations   and  certain  other  member   financial
institutions.  As a member,  the Association is required to own capital stock in
the FHLB of Seattle and is  authorized  to apply for advances on the security of
certain of its mortgage loans and other assets (principally securities which are
obligations  of,  or  guaranteed  by,  the  U.S.  Government)  provided  certain
creditworthiness  standards have been met. Advances are made pursuant to several
different  credit  programs.  Each credit  program has its own interest rate and
range of  maturities.  Depending  on the program,  limitations  on the amount of
advances are based on the financial  condition of the member institution and the
adequacy of  collateral  pledged to secure the credit.  As a member of the FHLB,
the  Association  maintains a credit line that is a percentage of its regulatory
assets,  subject to collateral  requirements.  At September 30, 2003, the credit
line was 30% of  total  assets  of the  Association.  The  Company  has  pledged
mortgage-backed securities and collateralized mortgage obligations issued by the
U.S. government and agencies thereof as collateral for the borrowings.

     The Company has  established  credit lines at two commercial  banks.  These
credit  lines  represent  aggregate  borrowing  capacity  of $16.7  million.  At
September 30, 2003, there were no borrowings under these lines of credit.

     The following table sets forth certain information  regarding borrowings by
the Company and Association at the end of and during the periods indicated:
<TABLE>
<CAPTION>

                                                              At September 30,
                                                     2003            2002              2001
Weighted average rate paid on:
<S>                                                  <C>             <C>               <C>
  FHLB advances...............................       3.74%           5.07%             5.73%
  Short term borrowings.......................         --            4.75%             5.58%
</TABLE>
<TABLE>
<CAPTION>

                                                               Year Ended September 30,
                                                        2003             2002                2001
                                                                (Dollars in thousands)
Maximum amount outstanding at any month end:
<S>                                                 <C>              <C>                 <C>
  FHLB advances...............................      $369,000         $205,250            $173,000
  Short term borrowings.......................         1,700            1,700               6,400

Approximate average balance:
  FHLB advances...............................       231,256          168,333            170,521
  Short term borrowings.......................         1,216            1,705              3,265

Approximate weighted average rate paid on:
  FHLB advances...............................          4.71%            5.71%              5.90%
  Short term borrowings.......................          4.43%            4.32%              8.22%
</TABLE>

     Subsidiaries.  The Association established an operating subsidiary, Pacific
Cascades Financial,  Inc.,  effective July 14, 2000. Pacific Cascades Financial,
Inc. is an Oregon chartered  corporation,  of which the Association owns 100% of
its  capital  stock.  Pacific  Cascades  Financial  serves as the  Association's
trustee  on  deeds  of  trust  and  as  trustee,   handles  normal  reconveyance
transactions on paid-off Association loans and non-judicial foreclosures.

     The  Association  also  owns 100% of the  capital  stock of  Klamath  First
Financial  Services,  Inc.  Klamath  First  Financial  serves  as an  investment
subsidiary, providing investment and brokerage services to customers.

     The Company  established  a  subsidiary,  Klamath First Capital Trust I, in
July  2001  for  the  purpose  of  issuing  mandatorily   redeemable   preferred
securities. The Company also established Klamath First Capital Trust II in April
2002 for the  purpose of issuing  additional  mandatorily  redeemable  preferred
securities.  See  Note 13 of the  Notes  to  Consolidated  Financial  Statements
contained in Item 8 of this Report.

                                       26
<PAGE>


                          REGULATION OF THE ASSOCIATION

General

     The  Association  is  subject  to  extensive  regulation,  examination  and
supervision by the OTS, as its chartering  agency,  and the FDIC, as the insurer
of its deposits.  The activities of federal savings institutions are governed by
the Home Owners Loan Act ("HOLA") and, in certain respects,  the Federal Deposit
Insurance Act, and the  regulations  issued by the OTS and the FDIC to implement
these statutes.  These laws and  regulations  delineate the nature and extent of
the  activities  in which  federal  savings  associations  may  engage.  Lending
activities  and  other  investments  must  comply  with  various  statutory  and
regulatory capital  requirements.  In addition,  the Association's  relationship
with  its  depositors  and  borrowers  is  also  regulated  to a  great  extent,
especially in such matters as the ownership of deposit accounts and the form and
content of the Association's mortgage documents.  The Association is required to
file reports with the OTS and the FDIC  concerning  its activities and financial
condition in addition to obtaining  regulatory  approvals prior to entering into
certain  transactions  such as mergers with, or acquisitions of, other financial
institutions.  There are periodic examinations by the OTS and the FDIC to review
the  Association's   compliance  with  various  regulatory   requirements.   The
regulatory structure also gives the regulatory  authorities extensive discretion
in connection with their supervisory and enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the  establishment of adequate loan loss reserves for regulatory  purposes.  Any
change in such policies,  whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Company, the Association and their operations.

Federal Regulation of Savings Associations

     Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury.  The
OTS has extensive authority over the operations of savings  associations.  Among
other functions,  the OTS issues and enforces  regulations  affecting  federally
insured savings associations and regularly examines these institutions.

     All savings associations are required to pay assessments to the OTS to fund
the agency's operations.  The general assessments,  paid on a semi-annual basis,
are  determined  based on the  savings  association's  total  assets,  including
consolidated subsidiaries.  The Association's OTS assessment for the fiscal year
ended September 30, 2003 was $263,722.

     Federal Home Loan Bank System. The FHLB System,  consisting of 12 FHLBs, is
under the  jurisdiction  of the Federal  Housing  Finance  Board  ("FHFB").  The
designated  duties of the FHFB are to  supervise  the FHLBs,  to ensure that the
FHLBs carry out their housing finance  mission,  to ensure that the FHLBs remain
adequately  capitalized and able to raise funds in the capital  markets,  and to
ensure that the FHLBs operate in a safe and sound manner.

     The Association, as a member of the FHLB of Seattle, is required to acquire
and hold  shares of capital  stock in the FHLB of Seattle in an amount  equal to
the  greater  of (i)  1.0% of the  aggregate  outstanding  principal  amount  of
residential  mortgage loans, home purchase contracts and similar  obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings) from
the FHLB of Seattle. The Association is in compliance with this requirement with
an investment in FHLB of Seattle stock of $17.2 million at September 30, 2003.

     Among other  benefits,  the FHLB  provides a central  credit  facility  for
member institutions.  It is funded primarily from proceeds derived from the sale
of consolidated  obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Seattle.

     Federal Deposit Insurance  Corporation.  The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed statutory
limits,  of federally  insured banks and to preserve the safety and soundness of
the banking industry.  The FDIC maintains two separate insurance funds: the Bank
Insurance  Fund ("BIF") and the SAIF.  The  Association's  deposit  accounts are
insured by the FDIC under the SAIF to the maximum  extent  permitted  by law. As
insurer of the Association's deposits, the FDIC has examination, supervisory and
enforcement authority over the Association.


                                       27

<PAGE>

     As insurer,  the FDIC imposes deposit insurance  premiums and is authorized
to  conduct   examinations   of  and  to  require   reporting  by   FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC  determines  by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate  enforcement
actions  against  savings  institutions,  after giving the OTS an opportunity to
take such action,  and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.

     The FDIC's  deposit  insurance  premiums are assessed  through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1,
or core capital,  to  risk-weighted  assets ("Tier 1 risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.

     The FDIC is  authorized  to increase  assessment  rates,  on a  semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     The premium schedule for BIF and SAIF insured institutions ranged from 0 to
27 basis points. However, SAIF insured institutions and BIF insured institutions
are  required to pay a  Financing  Corporation  assessment  in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s. This amount is
currently equal to about 1.70 points for each $100 in domestic deposits for SAIF
and BIF insured institutions. These assessments, which may be revised based upon
the level of BIF and SAIF deposits, will continue until the bonds mature in 2017
through 2019.

     Under the Federal  Deposit  Insurance  Act,  insurance  of deposits  may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or  unsound  practices,  is  in an  unsafe  or  unsound  condition  to  continue
operations  or has violated  any  applicable  law,  regulation,  rule,  order or
condition imposed by the FDIC or the OTS. Management of the Association does not
know of any practice,  condition or violation  that might lead to termination of
deposit insurance.

     Prompt Corrective Action.  The OTS is required to take certain  supervisory
actions against  undercapitalized  savings  associations,  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  OTS is  required  to  appoint  a  receiver  or  conservator  for a  savings
institution that is "critically  undercapitalized." OTS regulations also require
that a capital restoration plan be filed with the OTS within 45 days of the date
a  savings   institution   receives   notice  that  it  is   "undercapitalized,"
"significantly  undercapitalized" or "critically  undercapitalized."  Compliance
with the plan must be guaranteed by any parent  holding  company in an amount of
up to the lesser of 5% of the  institution's  assets or the amount  which  would
bring the institution into compliance with all capital  standards.  In addition,
numerous  mandatory  supervisory  actions  become  immediately  applicable to an
undercapitalized   institution,   including,   but  not  limited  to,  increased
monitoring by regulators and restrictions on growth,  capital  distributions and
expansion.  The OTS  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.

                                       28
<PAGE>

     At  September  30,  2003,  the   Association   was   categorized  as  "well
capitalized" under the prompt corrective action regulations of the OTS.

     Standards for Safety and Soundness. The federal banking regulatory agencies
have   prescribed,   by  regulation,   standards  for  all  insured   depository
institutions  relating  to:  (i)-internal  controls,   information  systems  and
internal  audit systems;  (ii)-loan  documentation;  (iii)-credit  underwriting;
(iv)-interest rate risk exposure;  (v)-asset growth;  (vi) asset quality;  (vii)
earnings;  and  (viii)-compensation,   fees  and  benefits  ("Guidelines").  The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital  becomes  impaired.  If the OTS determines  that the  Association
fails to meet any  standard  prescribed  by the  Guidelines,  it may require the
Association  to submit to the agency an  acceptable  plan to achieve  compliance
with the standard. Management is aware of no conditions relating to these safety
and soundness standards which would require submission of a plan of compliance.

     Qualified  Thrift  Lender Test.  All savings  associations,  including  the
Association,  are  required to meet a qualified  thrift  lender  ("QTL") test to
avoid certain  restrictions  on their  operations.  This test requires a savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal Revenue Code ("Code").  Under either test, such assets primarily
consist of residential  housing related loans and investments.  At September 30,
2003,  the  Association  met the qualified  thrift  investment  test and its QTL
percentage was 79.63%.

     Any savings  association  that fails to meet the QTL test must convert to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "REGULATION OF THE COMPANY."

     Capital Requirements.  Federally insured savings associations,  such as the
Association, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a  leverage  ratio  (or  core  capital)  requirement  and a  risk-based  capital
requirement applicable to such savings associations.

     The  capital  regulations  require  tangible  capital  of at least  1.5% of
adjusted  total assets (as defined by  regulation).  At September 30, 2003,  the
Association  had tangible  capital of $98.9  million,  or 6.6% of adjusted total
assets,  which is approximately  $76.6 million above the minimum  requirement of
1.5% of adjusted total assets in effect on that date. At September 30, 2003, the
Association  had $36.7 million of intangible  assets  consisting of core deposit
intangible  and goodwill  related to the Wells Fargo branch  acquisition in 1997
and the WAMU branch acquisition in 2001.

     The capital  standards also require core capital equal to at least 3% to 4%
of adjusted total assets, depending on an institution's supervisory rating. Core
capital  generally  consists of tangible  capital.  At September  30, 2003,  the
Association  had core capital equal to $98.9 million,  or 6.6% of adjusted total
assets,  which is $39.3 million above the minimum leverage ratio  requirement of
4% as in effect on that date.

                                       29
<PAGE>


     The OTS risk-based  requirement requires savings associations to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital.

     In determining the amount of risk-weighted  assets,  all assets,  including
certain  off-balance sheet items, are multiplied by a risk weight,  ranging from
0% to 100%,  based on the risk inherent in the type of asset.  For example,  the
OTS has assigned a risk weight of 50% for prudently  underwritten permanent one-
to four- family first lien mortgage  loans not more than 90 days  delinquent and
having a loan-to-value  ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by Fannie Mae or FHLMC.

     On September 30, 2003,  the  Association  had total  risk-based  capital of
approximately  $105.8 million,  including $98.9 million in core capital and $6.8
million in qualifying  supplementary capital, and risk-weighted assets of $830.8
million,  or total  capital of 12.7% of  risk-weighted  assets.  This amount was
$39.3 million above the 8% requirement in effect on that date.

     The OTS is authorized  to impose  capital  requirements  in excess of these
standards on individual  associations on a case-by-case  basis.  The OTS and the
FDIC are authorized and, under certain  circumstances  required, to take certain
actions   against  savings   associations   that  fail  to  meet  their  capital
requirements.  The OTS is  generally  required to take  action to  restrict  the
activities of an  "undercapitalized  association"  (generally  defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based  capital
ratio or an 8% risk-based  capital ratio).  Any such  association  must submit a
capital  restoration  plan and until such plan is approved  by the OTS,  may not
increase its assets,  acquire another institution,  establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is  authorized  to impose the  additional  restrictions  that are  applicable to
significantly undercapitalized associations.

     The OTS is also generally  authorized to reclassify an  association  into a
lower capital category and impose the  restrictions  applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

     The  imposition  by the OTS or the  FDIC of any of  these  measures  on the
Company  or the  Association  may have a  substantial  adverse  effect  on their
operations and profitability.

     Limitations on Capital Distributions.  The OTS imposes various restrictions
on savings  associations with respect to their ability to make  distributions of
capital,  which include  dividends,  stock redemptions or repurchases,  cash-out
mergers  and other  transactions  charged to the capital  account.  The OTS also
prohibits a savings  association  from declaring or paying any dividends or from
repurchasing  any of its stock if, as a result of such  action,  the  regulatory
capital of the  association  would be reduced  below the amount  required  to be
maintained  for the  liquidation  account  established  in  connection  with the
association's mutual to stock conversion.

     The  Association  may make a  capital  distribution  without  OTS  approval
provided  that the  Association  notifies the OTS 30 days before it declares the
capital  distribution  and  that the  following  requirements  are met:  (i) the
Association  has  a  regulatory  rating  in  one  of  the  two  top  examination
categories,  (ii) the Association is not of supervisory concern, and will remain
adequately or well  capitalized,  as defined in the OTS prompt corrective action
regulations,  following the proposed  distribution,  and (iii) the  distribution
does not exceed the Association's net income for the calendar  year-to-date plus
retained  net income for the previous  two  calendar  years (less any  dividends
previously paid). If the Association does not meet these stated requirements, it
must  obtain  the  prior  approval  of the OTS  before  declaring  any  proposed
distributions.

                                       30
<PAGE>

     In  the  event  the  Association's   capital  falls  below  its  regulatory
requirements  or the OTS  notifies  it that  it is in need of more  than  normal
supervision,  the Association's  ability to make capital  distributions  will be
restricted.  In addition,  no  distribution  will be made if the  Association is
notified by the OTS that a proposed  capital  distribution  would  constitute an
unsafe  and  unsound  practice,  which  would  otherwise  be  permitted  by  the
regulation.

     Loans to One Borrower.  Federal law provides that savings  institutions are
generally subject to the national bank limit on loans to one borrower. A savings
institution may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus.  An additional
amount may be lent, equal to 10% of unimpaired  capital and surplus,  if secured
by  specified   readily-marketable   collateral.  At  September  30,  2003,  the
Association's limit on loans to one borrower was $15.9 million. At September 30,
2003, the  Association's  largest  aggregate amount of loans to one borrower was
$7.0 million, all of which were performing according to their original terms.

     Activities  of  Associations  and  Their   Subsidiaries.   When  a  savings
association  establishes  or acquires a subsidiary  or elects to conduct any new
activity  through  a  subsidiary  that the  association  controls,  the  savings
association  must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation,  require.  Savings associations also
must  conduct  the  activities  of  subsidiaries  in  accordance  with  existing
regulations and orders.

     The OTS may determine that the continuation by a savings association of its
ownership or control of, or its  relationship  to, the subsidiary  constitutes a
serious risk to the safety,  soundness or  stability  of the  association  or is
inconsistent  with sound  banking  practices  or with the  purposes of the FDIA.
Based upon that  determination,  the FDIC or the OTS has the  authority to order
the savings association to divest itself of control of the subsidiary.  The FDIC
also may  determine by regulation  or order that any specific  activity  poses a
serious  threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.

     Transactions  with  Affiliates.   Savings  associations  must  comply  with
Sections 23A and 23B of the Federal  Reserve Act relative to  transactions  with
affiliates  in the  same  manner  and  to  the  same  extent  as if the  savings
association were a Federal Reserve member association.  Generally,  transactions
between  a  savings  association  or its  subsidiaries  and its  affiliates  are
required to be on terms as favorable to the  association  as  transactions  with
non-affiliates.  In addition, certain of these transactions, such as loans to an
affiliate,  are  restricted  to  a  percentage  of  the  association's  capital.
Affiliates of the Association include the Company and any company which is under
common control with the Association.  In addition, a savings association may not
lend to any  affiliate  engaged  in  activities  not  permissible  for a savings
association  holding company or acquire the securities of most  affiliates.  The
OTS  has the  discretion  to  treat  subsidiaries  of  savings  associations  as
affiliates on a case by case basis.

     Certain  transactions with directors,  officers or controlling  persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

     Community  Reinvestment Act. Under the federal  Community  Reinvestment Act
("CRA"),  all federally-  insured  financial  institutions have a continuing and
affirmative  obligation  consistent with safe and sound  operations to help meet
all the credit needs of its  delineated  community.  The CRA does not  establish
specific  lending  requirements  or programs nor does it limit an  institution's
discretion  to develop the types of products and  services  that it believes are
best suited to meet all the credit needs of its  delineated  community.  The CRA
requires  the  federal   banking   agencies,   in  connection   with  regulatory
examinations,  to assess an institution's  record of meeting the credit needs of
its  delineated  community  and to take such record into  account in  evaluating
regulatory  applications  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,   among  others.   The  CRA  requires   public   disclosure  of  an
institution's CRA rating. The Association received a "satisfactory"  rating as a
result of its latest evaluation.

                                       31
<PAGE>

     Regulatory  and  Criminal  Enforcement  Provisions.  The  OTS  has  primary
enforcement  responsibility  over savings  institutions and has the authority to
bring   action   against   all   "institution-affiliated   parties,"   including
stockholders,  and any attorneys,  appraisers and  accountants  who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership,   conservatorship  or  termination  of  deposit  insurance.  Civil
penalties cover a wide range of violations and can amount to $27,500 per day, or
$1.1 million per day in especially egregious cases. Under the FDIA, the FDIC has
the authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings  institution.  If action is not taken
by the  Director,  the FDIC has  authority  to take such  action  under  certain
circumstances.  Federal  law also  establishes  criminal  penalties  for certain
violations.


                                       32
<PAGE>


                            REGULATION OF THE COMPANY

General

     The  Company  is a unitary  savings  and loan  holding  company  within the
meaning of the HOLA. As such,  it is  registered  with the OTS and is subject to
OTS  regulations,  examinations,  supervision  and reporting  requirements.  The
Company is also subject to the information, proxy solicitation,  insider trading
restrictions,  and other requirements of the Securities Exchange Act of 1934, as
amended.

Company Acquisitions

     The HOLA and OTS regulations issued thereunder generally prohibit a savings
and loan holding company,  without prior OTS approval,  from acquiring more than
5% of the voting  stock of any other  savings  association  or savings  and loan
holding  company or controlling the assets  thereof.  They also prohibit,  among
other things, any director or officer of a savings and loan holding company,  or
any  individual  who owns or controls more than 25% of the voting shares of such
holding  company,  from  acquiring  control  of any  savings  association  not a
subsidiary of such savings and loan holding  company,  unless the acquisition is
approved by the OTS.

Holding Company Activities

     As a unitary savings and loan holding company, the Company generally is not
subject to activity  restrictions.  If the Company  acquires  control of another
savings association as a separate subsidiary, it would become a multiple savings
and  loan  holding  company.  There  generally  are  more  restrictions  on  the
activities of a multiple savings and loan holding company than a unitary savings
and loan holding company.  Specifically,  if either federally insured subsidiary
savings  association  fails to meet the QTL test,  the activities of the Company
and any of its subsidiaries  (other than the Company or other federally  insured
subsidiary  savings   associations)  would  thereafter  be  subject  to  further
restrictions.  The HOLA provides that,  among other things,  no multiple savings
and  loan  holding  company  or  subsidiary  thereof  which  is not  an  insured
association  shall commence or continue for more than two years after becoming a
multiple savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing  management  services
for a subsidiary  insured  institution,  (ii) conducting an insurance  agency or
escrow  business,  (iii) holding,  managing,  or liquidating  assets owned by or
acquired  from a  subsidiary  insured  institution,  (iv)  holding  or  managing
properties used or occupied by a subsidiary insured  institution,  (v) acting as
trustee  under  deeds  of  trust,  (vi)  those  activities  previously  directly
authorized  by  regulation  as of March 5,  1987 to be  engaged  in by  multiple
holding  companies or (vii) those  activities  authorized by the Federal Reserve
Board as permissible for bank holding  companies,  unless the OTS by regulation,
prohibits  or limits such  activities  for savings and loan  holding  companies.
Those activities described in (vii) above also must be approved by the OTS prior
to being engaged in by a multiple holding company.

Recent Federal Legislation

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

     a.   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;

     b.   provided a uniform  framework  for the  functional  regulation  of the
          activities of banks, savings institutions and their holding companies;

     c.   broadened  the  activities  that may be conducted  by national  banks,
          banking  subsidiaries  of bank holding  companies and their  financial
          subsidiaries;

     d.   provided an enhanced  framework for protecting the privacy of consumer
          information;

                                       33
<PAGE>


     e.   adopted  a  number  of  provisions  related  to  the   capitalization,
          membership,  corporate  governance  and  other  measures  designed  to
          modernize the FHLB system;

     f.   modified the laws governing the implementation of the CRA; and

     g.   addressed a variety of other  legal and  regulatory  issues  affecting
          day-to-day   operations   and   long-term   activities   of  financial
          institutions.

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

     The USA Patriot Act. In response to the terrorist events of September 11th,
2001,  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 USA  PATRIOT  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
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.

     The Association has implemented a Customer  Identification porgram pursuant
to the regualtions  under the USA PATRIOT Act. The impact to the Company and the
Association has not been material.

     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.

                                       34
<PAGE>

     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 of the provisions with respect to, among
other matters, disclosure in periodic filings pursuant to the Exchange Act.


                                       35
<PAGE>
Affiliate Restrictions

     The affiliate restrictions contained in Sections 23A and 23B of the Federal
Reserve Act apply to all federally  insured  savings  associations  and any such
"affiliate." A savings and loan holding company,  its subsidiaries and any other
company under common control are considered affiliates of the subsidiary savings
association  under  the HOLA.  Generally,  Sections  23A and 23B:  (i) limit the
extent  to which the  insured  association  or its  subsidiaries  may  engage in
certain covered transactions with an affiliate to an amount equal to 10% of such
institution's  capital and surplus,  and contain an aggregate  limit on all such
transactions  with all  affiliates to an amount equal to 20% of such capital and
surplus,  and (ii) require that all such transactions be on terms  substantially
the same, or at least as favorable to the  institution or  subsidiary,  as those
provided to a non-affiliate.  The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and other similar types of
transactions.  Also, a savings association may not make any loan to an affiliate
unless the affiliate is engaged only in activities  permissible for bank holding
companies.  Only the Federal Reserve may grant  exemptions from the restrictions
of  Sections  23A  and  23B.  The  OTS,  however,   may  impose  more  stringent
restrictions on savings associations for reasons of safety and soundness.

Qualified Thrift Lender Test

     The HOLA  requires  any savings and loan holding  company  that  controls a
savings  association that fails the QTL test, as explained under  "REGULATION OF
THE ASSOCIATION - Federal Regulation of Savings Associations -- Qualified Thrift
Lender Test," to, within one year after the date on which the association ceases
to be a QTL,  register as and be deemed a bank  holding  company  subject to all
applicable laws and regulations.

                                    TAXATION

Federal Taxation

     General.  The Company and the  Association  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.
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
Company and the Association.

     Bad  Debt  Reserve.   Historically,   savings   institutions  such  as  the
Association  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  Association'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 Association's  actual taxable income,  computed with certain
modifications  and reduced by the amount of any permitted  additions to the non-
qualifying reserve.  Each year, the Association  selected the most favorable way
to  calculate  the  deduction  attributable  to an  addition to the tax bad debt
reserve.

     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 eliminated 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 Association  has previously  recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on net income or federal  income tax  expense.  For  taxable
years  beginning after December 31, 1995, the  Association's  bad debt deduction
will be determined on the basis of net charge-offs  during the taxable year. The
new rules allow an  institution  to suspend bad debt reserve  recapture  for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's 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  (fiscal  year ending  September  30, 1999 for the  Company).  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.

                                       36
<PAGE>

     Distributions.  To the  extent  that  the  Association  makes  "nondividend
distributions" to the Company,  such  distributions will be considered to result
in  distributions  from the balance of its bad debt  reserves as of December 31,
1987 (or a lesser amount if the  Association'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  Association's  taxable  income.  Nondividend  distributions
include  distributions  in excess of the  Association'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
Association'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 Association'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.  The
Association 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 Internal  Revenue Code of 1986, as
amended ("Code"),  imposes a tax on alternative minimum taxable income ("AMTI")
at a rate of 20%.  The excess of the tax bad debt  reserve  deduction  using the
percentage  of taxable  income  method over the  deduction  that would have been
allowable  under the  experience  method is  treated  as a  preference  item for
purposes of computing  AMTI. 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  Association's  adjusted  current  earnings exceeds its AMTI
(determined  without  regard to this  preference  and prior to reduction for net
operating  losses).  For taxable years  beginning  after  December 31, 1986, and
before  January 1,  1996,  an  environmental  tax of 0.12% of the excess of AMTI
(with  certain  modification)  over $2.0  million is  imposed  on  corporations,
including the Association,  whether or not an Alternative Minimum Tax ("AMT") is
paid.

     Dividends-Received  Deduction. The Company may exclude from its income 100%
of dividends  received from the  Association 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 Association will not file a consolidated tax return,  except
that if the  Company  or the  Association  owns  more than 20% of the stock of a
corporation  distributing a dividend,  then 80% of any dividends received may be
deducted.

     Other Federal Tax Matters.  During the year ended  September 30, 2003,  the
Internal Revenue Service performed an audit of the returns for the tax year 1999
(year ended  September  30, 2000).  The audit was completed  during the year and
resulted in no change to the tax return as filed.

State Taxation

     The Company and the Association are subject to an Oregon  corporate  excise
tax at a  statutory  rate of 6.6%  of  income.  Neither  the  Company's  nor the
Association's  Oregon state income tax returns have been audited during the past
five  years.  The  Association  is  subject to  Washington  State  Business  and
Organization  tax at the rate of 1.5% of gross  receipts for the  operations  in
that state. There have not been any audits of the Company's Washington state tax
returns during the past five years.

Competition

     The  Association  originates  most of its loans to and accepts  most of its
deposits  from  residents  of its market  area.  The  Association  is the oldest
financial  institution  headquartered in Klamath Falls. The Association believes
that it is a major competitor in the markets in which it operates.  Nonetheless,
the Association faces competition in attracting  deposits and making real estate
loans from various financial institutions, including banks, savings associations
and  mortgage  brokers.  In  addition,  the  Association  has  faced  additional
significant  competition  for  investors'  funds from  short-term  money  market
securities  and  other  corporate  and  government  securities.   The  financial
institution  industry in the Association's market area is characterized by a mix
of local independent  financial  institutions and offices of larger out-of-state
financial institutions, including several multi-national bank holding companies.
The ability of the Association to attract and retain savings deposits depends on
its ability to generally  provide a rate of return and liquidity risk comparable
to that offered by competing investment opportunities.  The Association competes
for loans  principally  through the interest  rates and loan fees it charges and
the efficiency and quality of services it provides  borrowers.  Competition  may
increase as restrictions on the interstate operations of financial  institutions
continue to be reduced.

                                       37
<PAGE>

Personnel

     As of  September  30,  2003,  the  Association  had  418  full-time  and 92
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining unit. The Association believes its relationship with its employees is
good.

     Executive  Officers.  The following  table sets forth  certain  information
regarding the executive officers of the Company.
<TABLE>
<CAPTION>

Name                                Age(1)           Position

<S>                                 <C>              <C>
Kermit K. Houser                    60               President and Chief Executive Officer

Marshall J. Alexander               52               Executive Vice President and Chief Financial Officer

Ben A. Gay                          56               Executive Vice President and Chief Credit Officer

Frank X. Hernandez                  48               Senior Vice President and Chief Operations Officer

Craig M Moore                       46               Senior Vice President/Chief Auditor/Corporate Counsel/Secretary

Walter F. Dodrill                   52               Senior Vice President - Business Banking

James E. Essany                     49               Senior Vice President - Corporate Marketing Director

Nina G. Drake                       50               Vice President - Human Resource Manager
<FN>
______________
(1)      At September 30, 2003.
</FN>
</TABLE>

     Kermit K. Houser has served as President and Chief Executive Officer of the
Company and the  Association  since  November  2000.  Mr. Houser was  previously
employed  in various  capacities  by the Bank of America  from 1983 to  November
2000, as senior vice  president and manager for  commercial  banking,  executive
vice  president and senior credit  officer,  and most  recently,  as senior vice
president  and market  executive for Bank of America's  South Valley  commercial
banking,  in  Fresno,  California.  Mr.  Houser  has 32 years of  experience  in
banking,  and has  been  an  active  member  of  numerous  civic  and  community
organizations.

     Marshall J.  Alexander  has 28 years of banking  experience,  including  17
years with the Association.  He has served as Vice President and Chief Financial
Officer since August 1994 and was named an Executive  Vice President in December
2000.

     Ben A. Gay joined Klamath First in September 2001 after a 30-year career in
commercial  banking and finance,  on both the East and West coasts.  Mr. Gay has
served in a variety of  managerial  positions  in lending,  credit risk and loan
management  and has most  recently  served as a western  regional  executive for
credit risk management for Bank of America.

     Frank X.  Hernandez  has been  employed by the  Association  since 1992. He
served as Human Resources  Officer until July 1998 when he was appointed  Senior
Vice  President  and Chief  Operating  Officer.  He has 22 years'  experience in
banking operations.


                                       38
<PAGE>


     Craig M  Moore  has a  banking  career  of more than 25 years,  with six of
those years at Klamath First. He is an attorney,  a Certified  Internal  Auditor
and a Certified Financial Services Auditor.

     Walter F.  Dodrill has served as Senior Vice  President  and Manager of the
Business  Banking  Group of the Company  since  January  2002.  Mr.  Dodrill was
previously employed by Western Bank from February 1974 to December 2001. Western
Bank became a division of Washington  Mutual in January 1996. Mr. Dodrill served
as Senior  Vice  President  - Regional  Credit  Administrator  and  Senior  Vice
President  - Regional  Manager  for Western  Bank.  Mr.  Dodrill has 30 years of
experience in banking and has been active in civic and community organizations.

     James E.  Essany is a native of Gary,  Indiana  and a  graduate  of Indiana
University  with a  Bachelor's  of Science in  Marketing.  He began his  banking
career in 1979 and worked with three  financial  institutions  in Indiana before
joining Klamath First in May of 2000.

     Nina G. Drake  joined  Klamath  First in June 2002 as Vice  President-Human
Resources.  Prior to joining Klamath First, Ms. Drake attended the University of
New Mexico and earned her Master of Business  Administration  (MBA).  She has 24
years  experience in human  resource  management in financial  institutions  and
related  service  industries and  holds a  lifetime  certification  as a  Senior
Professional in Human Resource Management (SPHR).

                                       39
<PAGE>


Item 2.  Properties

     The following  table sets forth the location of the  Association's  offices
and  other  facilities  used  in  operations  as  well  as  certain   additional
information  relating to these offices and  facilities as of September 30, 2003.
See note  below  regarding  the  subsequent  sale of seven  branches  to Bank of
Eastern Oregon
<TABLE>
<CAPTION>

                                    Year                                        Square
Description/Address                 Opened         Leased/Owned                 Footage

Main Office

<S>                                 <C>              <C>                        <C>
540 Main Street                     1939             Owned                      25,660
Klamath Falls, Oregon

Branch Offices

2943 South Sixth Street             1972             Owned                       3,820
Klamath Falls, Oregon

2420 Dahlia Street                  1979             Owned                       1,876
Klamath Falls, Oregon

512 Walker Avenue                   1977             Owned                       4,216
Ashland, Oregon

1420 East McAndrews Road            1990             Owned                       4,006
Medford, Oregon

61515 S. Highway 97                 1993             Owned                       5,415
Bend, Oregon

2300 Madison Street                 1995             Owned                       5,000
Klamath Falls, Oregon

721 Chetco Avenue                   1997             Owned                       5,409
Brookings, Oregon

293 North Broadway                  1997             Owned                       5,087
Burns, Oregon (1)

111 West Main Street                1997             Owned                       1,958
Carlton, Oregon

103 South Main Street               1997             Owned                       2,235
Condon, Oregon (1)

259 North Adams                     1997             Owned                       5,803
Coquille, Oregon

106 Southwest 1st Street            1997             Owned                       4,700
Enterprise, Oregon

</TABLE>


                                       40
<PAGE>
<TABLE>
<CAPTION>


                                    Year                                        Square
Description/Address                 Opened         Leased/Owned                 Footage
<S>                                 <C>              <C>                        <C>

555 1st Street                      1997             Owned                       1,844
Fossil, Oregon (1)

708 Garibaldi Avenue                1997             Owned                       1,400
Garibaldi, Oregon

29804 Ellensburg Avenue             1997             Owned                       3,136
Gold Beach, Oregon

111 North Main Street               1997             Owned                       4,586
Heppner, Oregon (1)

810 South Highway 395               1997             Leased                      6,000
Hermiston, Oregon

200 West Main Street                1997             Owned                       4,552
John Day, Oregon (1)

1 South E Street                    1997             Owned                       5,714
Lakeview, Oregon

206 East Front Street               1997             Owned                       2,920
Merrill, Oregon

165 North 5th Street                1997             Owned                       2,370
Monroe, Oregon

217 Main Street                     1997             Owned                       6,067
Nyssa, Oregon

48257 East 1st Street               1997             Owned                       3,290
Oakridge, Oregon

227 West Main Street                1997             Owned                       2,182
Pilot Rock, Oregon

716 Northeast Highway 101           1997             Owned                       2,337
Port Orford, Oregon

178 Northwest Front Street          1997             Owned                       2,353
Prairie City, Oregon (1)

315 North Main Street               1997             Owned                       3,638
Riddle, Oregon

38770 North Main Street             1997             Owned                       2,997
Scio, Oregon

</TABLE>
                                       41
<PAGE>
<TABLE>
<CAPTION>

                                    Year                                        Square
Description/Address                 Opened         Leased/Owned                 Footage

<S>                                 <C>              <C>                        <C>
508 Main Street                     1997             Owned                       2,282
Moro, Oregon (1)

144 South Main Street               1997             Owned                       2,146
Union, Oregon

165 North Maple Street              1997             Owned                       2,192
Yamhill, Oregon

475 NE Windy Knolls Drive           1998             Owned                      3,120
Bend, Oregon

185 East California                 1998             Owned                      2,116
Jacksonville, Oregon

1217 Plaza Boulevard, Suite A       2000             Leased                     2,400
Central Point, Oregon

948 Southwest 9th Street            2001             Owned                      3,277
Redmond, Oregon

2203 SW Court Place                 2001             Leased                       540
Pendleton, Oregon

1775 East Idaho Avenue              2001             Leased                       693
Ontario, Oregon

2727 South Quillan Street           2001             Leased                       693
Kennewick, Washington

2801 Duportail Street               2001             Leased                       966
Richland, Washington

303 11th Street                     2001             Leased                     2,920
Astoria, Oregon

2245 Main Street                    2001              Owned                     4,911
Baker City, Oregon

1095 Oregon Avenue                  2001              Owned                     4,382
Bandon, Oregon

110 North Redwood Highway 199       2001              Owned                     3,091
Cave Junction, Oregon

199 North Nehalem                   2001              Owned                     2,400
Clatskanie, Oregon

</TABLE>
                                       42
<PAGE>
<TABLE>
<CAPTION>
                                    Year                                        Square
Description/Address                 Opened         Leased/Owned                 Footage
<S>                                 <C>              <C>                        <C>
212 South 5th Street                2001             Owned                      6,200
Coos Bay, Oregon

150 South Wall                      2001             Owned                      9,271
Coos Bay, Oregon

430 Highway 101                     2001             Owned                      4,783
Florence, Oregon

2212 Island Avenue                  2001             Leased                     4,616
LaGrande, Oregon

1611 Virginia Avenue                2001             Leased                     5,631
North Bend, Oregon

761 Avenue G                        2001             Owned                      2,416
Seaside, Oregon

2405 3rd Street                     2001             Leased                     4,690
Tillamook, Oregon

411 Pacific Avenue                  2001             Owned                      2,819
Tillamook, Oregon

620 Stewart Avenue                  2002             Owned                      2,721
Medford, Oregon

1350 N. First Street                2002             Leased                       693
Hermiston, Oregon

2659 Olympic Street                 2002             Leased                       528
Springfield, Oregon

4550 West 11th Avenue               2002             Leased                       528
Eugene, Oregon

3002 Stacy Allison Way              2003             Leased                       693
Woodburn, Oregon

305 NE Terry Lane                   2003             Leased                       693
Grants Pass, Oregon

Backoffice Processing Facilities

600 Main Street                     1998             Leased                     2,800
Klamath Falls, Oregon

714 Main Street                     2001             Leased                    14,532
Klamath Falls, Oregon

533 Main Street                     2000             Leased                     1,325
Klamath Falls, Oregon

706 Main Street                     2003             Leased                     5,020
Klamath Falls, Oregon
</TABLE>

                                       43
<PAGE>


     The net book value of the Company's  investment in office,  properties  and
equipment  totaled $23.3 million at September 30, 2003.  See Note 6 of the Notes
to Consolidated Financial Statements contained in the Annual Report.

(1)  As of  the  close  of  business  on  December  12,  2003,  the  Association
     successfully  completed the sale of seven branches  located in northeastern
     Oregon to the Bank of Eastern Oregon. The branches are located in the towns
     of Burns, Condon, Fossil, Heppner, John Day, Prairie City and Moro, Oregon.
     The sale included deposit accounts of approximately $65 million.  The fixed
     assets and branch locations were included in the sale, but loans were not.

Item 3.  Legal Proceedings

     Periodically,  there have been various  claims and lawsuits  involving  the
Company,  mainly as a defendant,  such as claims to enforce liens,  condemnation
proceedings on properties in which the  Association  holds  security  interests,
claims  involving  the making and  servicing  of real  property  loans and other
issues incident to the Association's business. The Company 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 Company.


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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended September 30, 2003.


                                       44
<PAGE>


                                     PART II

Item 5.   Market  for the  Registrant's  Common  Equity and  Related Shareholder
          Matters

Since  October 4, 1995,  the  Company's  common stock has traded on the National
Association of Security Dealers Automated  Quotation  ("Nasdaq") National Market
under the symbol  "KFBI".  As of September  30, 2003,  there were  approximately
1,110 shareholders of record.  This total does not reflect the number of persons
or entities who hold stock in nominee or "street" name through various brokerage
firms.

The high and low common stock prices by quarter were as follows:

                                            Year Ended September 30,
                                    ____________________________________________
                                            2003                       2002
                                    __________________        __________________
                                     High        Low            High       Low
                                    ______      ______        ______      ______
First quarter                       $16.44      $13.24        $13.71      $11.91
Second quarter                       17.75       15.86         13.67       13.00
Third quarter                        17.64       16.32         16.75       13.05
Fourth quarter                       22.24       16.71         16.25       13.35

The cash dividends declared by quarter were as follows:

                                            Year Ended September 30,
                                     ___________________________________________
                                           2003                       2002
                                     ________________          _________________

First quarter                               $0.130                     $0.130
Second quarter                               0.130                      0.130
Third quarter                                0.130                      0.130
Fourth quarter                               0.130                      0.130

Any dividend  payments by the Company are subject to the sole  discretion of the
Board of Directors and depend primarily on the ability of the Association to pay
dividends  to the  Company.  Under  Federal  regulations,  the dollar  amount of
dividends a federal  savings  association  may pay depends on the  association's
capital  surplus  position and recent net income.  Generally,  if an association
satisfies its regulatory capital requirements,  it may make dividend payments up
to the limits  prescribed in the OTS regulations.  However,  an institution that
has  converted to the 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  accordance  with OTS
regulations and the association's Plan of Conversion.  In addition,  earnings of
the  association  appropriated  to bad debt  reserves  and  deducted for federal
income tax  purposes are not  available  for payment of cash  dividends  without
payment of taxes at the then current tax rate by the  association  on the amount
removed from the  reserves  for such  distributions.  The  Association  does not
contemplate  any  distributions  that  would  limit the  Association's  bad debt
deduction or create federal tax liabilities.

<PAGE>


Item 6.  Selected Consolidated Financial Data

The following tables set forth certain  information  concerning the consolidated
financial  position and  consolidated  results of  operations  of Klamath  First
Bancorp, Inc. and its wholly owned subsidiaries (the "Company") at the dates and
for the periods indicated.  This information does not purport to be complete and
should  be read  in  conjunction  with,  and is  qualified  in its  entirety  by
reference to, the Consolidated  Financial Statements and Notes thereto appearing
elsewhere in this Annual Report.
<TABLE>
<CAPTION>



                                                                                     At September 30,
                                                          --------------------------------------------------------------------------
                                                                2003            2002            2001             2000          1999
                                                          ----------      ----------      ----------        ---------     ----------
FINANCIAL CONDITION DATA                                                              (In thousands)

<S>                                                       <C>             <C>             <C>                <C>          <C>
Assets                                                    $1,537,118      $1,513,495      $1,468,572         $995,575     $1,041,641
Cash and cash equivalents                                     47,305          45,791         118,389           29,947         24,523
Loans receivable, net                                        557,551         607,465         679,990          729,037        739,793
Investment securities held to maturity                            --              --             135              267            560
Investment securities available for sale                     140,939         119,542         154,676          116,628        158,648
Mortgage-backed & related securities held to maturity             --              --           1,621            2,160          2,601
Mortgage-backed & related securities available for sale      680,720         650,796         421,638           75,331         72,695
Stock in FHLB of Seattle, at cost                             17,190          13,510          12,698           11,877         10,957
Advances from FHLB of Seattle                                308,000         205,250         168,000          173,000        197,000
Deposit liabilities                                        1,068,063       1,142,006       1,152,824          695,381        720,401
Shareholders' equity                                         120,335         119,938         114,141          108,725        109,585
</TABLE>
<TABLE>
<CAPTION>
                                                                                    Year Ended September 30,
                                                         --------------------------------------------------------------------------
                                                                2003            2002            2001             2000          1999
                                                          ----------      ----------      ----------        -----------------------

SELECTED OPERATING DATA                                               (In thousands, except per share data)

<S>                                                          <C>             <C>             <C>              <C>            <C>
Total interest income                                        $71,291         $87,293         $70,133          $72,158        $71,691
Total interest expense                                        29,524          39,531          40,751           40,756         38,382
Net interest income                                           41,767          47,762          29,382           31,402         33,309
Provision for loan losses                                         --             156             387            1,764            932
                                                                   -               -               -                -              -
Net interest income after provision for loan losses           41,767          47,606          28,995           29,638         32,377
Non-interest income                                           17,106          12,614          11,013            4,094          3,629
Non-interest expense                                          55,899          50,171          28,720           23,773         21,186
Earnings before income taxes                                   2,974          10,049          11,288            9,959         14,820
Provision for income tax                                         577           3,260           3,717            3,533          5,665
                                                                   -               -               -                -              -
Net Earnings                                                  $2,397          $6,789          $7,571           $6,426         $9,155
                                                              ======          ======          ======           ======         ======
Basic earnings per share                                       $0.37           $1.06           $1.14            $0.94          $1.21
</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                                             At or For the Years Ended September 30,
                                                               ---------------------------------------------------------------------
                                                                2003            2002            2001             2000         1999
                                                               ---------     -----------      ---------      ----------    ---------
KEY OPERATING RATIOS

Performance Ratios

Return on average assets
<S>                                                            <C>             <C>             <C>              <C>            <C>
(net earnings divided by average assets)                       0.16%           0.46%           0.72%            0.62%          0.88%

Return on average equity
(net earnings divided by average equity)                       2.01%           5.92%           6.64%            5.82%          7.55%

Interest rate spread
(difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities)       2.67%           3.04%           2.18%            2.50%          2.73%

Net interest margin (net interest income as a
percentage of average interest-earning assets)                 3.03%           3.48%           2.93%            3.14%          3.37%

Average interest-earning assets to average
interest-bearing liabilities                                 117.12%         115.18%         118.37%          115.71%        116.47%

Net interest income after provision for loan losses
to total non-interest expenses                                74.72%          94.89%         100.96%          124.39%        152.82%

Non-interest expense to average total assets                   3.68%           3.37%           2.74%            2.29%          2.05%

Efficiency ratio (non-interest expense divided by
net interest income plus non-interest income)                 94.95%          83.10%          55.48%           66.97%         57.36%

Dividend payout ratio (dividends declared per share
divided by net earnings per share)                           140.54%          49.06%          45.61%           54.79%         38.98%

Book value per share                                          $17.86          $18.84          $17.40           $16.25         $15.52


Asset Quality Ratios

Allowance for loan losses to total loans at
end of period                                                  1.21%           1.19%           1.13%            0.54%          0.32%
Non-performing assets to total assets                          0.09%           0.12%           0.05%            0.16%          0.46%
Non-performing loans to total loans, before net items          0.11%           0.18%           0.04%            0.11%          0.43%

Capital Ratios

Equity to assets ratio                                         7.83%           7.92%           7.77%           10.92%         10.52%
Tangible capital ratio                                         6.64%           6.55%           5.16%           10.35%          8.91%
Core capital ratio                                             6.64%           6.55%           5.16%           10.35%          8.91%
Risk-based capital ratio                                      12.73%          14.01%          10.36%           20.30%         17.41%


Other Data

Number of

Real estate loans outstanding                                 10,259          11,835          12,624            8,807          9,297
Deposit accounts                                             124,420         131,001         111,542           85,706         85,112
Full service offices (1)                                          59              57              52               35             34
<FN>

(1)  As of  the  close  of  business  on  December  12,  2003,  the  Association
     successfully  completed the sale of seven branches located in tnortheastern
     Oregon to the Bank of Eastern Oregon. The branches are located in the towns
     of Burns,  Condon,  Faossil,  Heppner,  John Day,  Prairie City,  and Moro,
     Oregon.
</FN>
</TABLE>

<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

Special Note Regarding Forward-Looking Statements
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 Klamath First
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 the 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  which could
affect the collectibility of loan balances, the ability to increase non-interest
income through expansion of new lines of business, 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.

General
Klamath First  Bancorp,  Inc. (the  "Company"),  an Oregon  corporation,  is the
unitary  savings and loan holding  company for Klamath First Federal Savings and
Loan Association (the "Association").

The Association is a progressive,  community-oriented financial institution that
focuses on customer  service  within its primary market area.  Accordingly,  the
Association is primarily engaged in attracting  deposits from the general public
through  its offices  and using  those and other  available  sources of funds to
originate permanent  residential one- to four-family real estate loans and loans
on commercial real estate, multi-family residential properties, and to consumers
and businesses  within its market area.  While the Association has  historically
emphasized  fixed- rate  mortgage  lending,  it has been  diversifying  its loan
portfolio by focusing on  increasing  the number of  originations  of commercial
real estate,  multi-family  residential loans,  residential  construction loans,
commercial and industrial loans, small business loans and non-mortgage  consumer
loans.  A  significant  portion of these newer loan  products  carry  adjustable
rates,  higher  yields,  or  shorter  terms  than  the  traditional  fixed  rate
mortgages.  This  lending  strategy  is  designed  to enhance  earnings,  reduce
interest rate risk, and provide a more complete  range of financial  services to
customers and the local communities  served by the Association.  The acquisition
of 13 branches  from  Washington  Mutual Bank,  which was completed in September
2001,  moved  the  Company  strongly  in this  direction  and the  progress  has
continued through 2003.

The Company's  profitability depends primarily on its net interest income, which
is the  difference  between  interest  and dividend  income on  interest-earning
assets,  principally  loans and investment  securities,  and interest expense on
interest-bearing  deposits  and  borrowings.  Because the  Company is  primarily
dependent on net interest  income for its  earnings,  the focus of the Company's
planning  is to devise and  employ  strategies  that  provide  stable,  positive
spreads  between  the  yield  on   interest-bearing   assets  and  the  cost  of
interest-bearing  liabilities  in order to  maximize  the  dollar  amount of net
interest income.  The Company's net earnings are dependent,  to a lesser extent,
on the level of its non-interest  income,  such as service  charges,  commission
income, and other fees, and the controlling of its non-interest expense, such as
employee  compensation and benefits,  occupancy and equipment  expense,  deposit
insurance  premiums and  miscellaneous  other  expenses,  as well as federal and
state income taxes.

The Association is regulated by the Office of Thrift Supervision ("OTS") and its
deposits  are insured up to  applicable  limits  under the  Savings  Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
<PAGE>

The  Association  is a member  of the  Federal  Home  Loan  Bank  system.  As of
September 30, 2003,  the  Association  conducted its business  through 59 office
facilities,  with the main office located in Klamath Falls,  Oregon.  The branch
sale, which was completed in December 2003, reduced the number of branch offices
to 52. The  Association  considers  its  primary  market area to be the state of
Oregon,  particularly  the 26 counties in which the offices are located.  During
2001,  the Company  expanded into the  Tri-Cities  area of  Washington  state by
opening in-store branches in Kennewick and Richland.

Federal  Legislation In federal  legislation enacted in 1996, the reserve method
of accounting for thrift bad debt reserves  (including the percentage of taxable
income method) was repealed for tax years beginning after December 31, 1995. The
resulting  change in accounting  method triggers bad debt reserve  recapture for
post-1987 reserves over a six-year period,  thereby generating an additional tax
liability.  At September 30, 2003 and 2002, the Association's post-1987 reserves
amounted to $1.4 million and $2.0 million, respectively. Pre-1988 reserves would
only be subject to  recapture if the  institution  fails to qualify as a thrift.
Recapture of post-1987  reserves was required to begin during the tax year ended
September 30, 1999.

The  Sarbanes-Oxley  Act was  enacted by  Congress  during the summer of 2002 to
enhance corporate  governance  practices.  The Company's management and Board of
Directors are informed about the requirements of the  Sarbanes-Oxley Act and the
Company is actively  monitoring  regulatory  implementation of the Act. However,
due to the regulated  environment in which financial  institutions operate, many
requirements of the new legislation were already part of the Company's  internal
control  structure.  Executive  management  has taken  steps to ensure  that all
managers  are  aware of the  importance  of  controls  and that any  issues  are
reported and resolved in a timely manner.

Pending Merger. On July 15, 2003, the Company announced that it had entered into
an Agreement and Plan of Merger (the "Sterling  Merger") with Sterling Financial
Corporation a Washington  corporation  ("Sterling").  The Company will be merged
with and into  Sterling,  with Sterling  being the surviving  corporation in the
merger.  The Association  will be merged with and into  Sterling's  wholly-owned
subsidiary,  Sterling  Savings  Bank,  with  Sterling  Savings  Bank  being  the
surviving institution.

Under the terms of the Sterling Merger, each share of the Company's common stock
will be converted  into 0.77 shares of Sterling  common stock subject to certain
conditions. Based upon the closing price for Sterling on July 14, 2003 of $26.55
per share, the  consideration is equivalent to $20.44 per share of the Company's
common stock.

On December 11, 2003, the merger was approved by a vote of the  stockholders  of
both the Company and Sterling. All necessary regulatory approvals had previously
been received. The transaction is expected to close on January 2, 2004.

Sale of  Branches.  As of the  close of  business  on  December  12,  2003,  the
Association  successfully  completed  the  sale of  seven  branches  located  in
northeastern  Oregon to the Bank of Eastern Oregon.  The branches are located in
the towns of Burns, Condon,  Fossil,  Heppner,  John Day, Prairie City and Moro,
Oregon.  The sale included deposit accounts of  approximately  $65 million.  The
fixed assets and branch locations were included in the sale, but loans were not.

Critical Accounting Policies and Estimates

The "Management's  Discussion and Analysis of Financial Condition and Results of
Operations,"  as well as disclosures  included  elsewhere in this Form 10-K, are
based upon our consolidated  financial  statements,  which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial  statements  requires management to
make  estimates  and  judgments  that  affect  the  reported  amounts of assets,
liabilities,  revenues and expenses.  On an ongoing basis,  management evaluates
the  estimates  used,  including  the adequacy of the allowance for loan losses,
impairment  of  intangible   assets  and  investments,   and  contingencies  and
litigation.  Estimates are based upon historical  experience,  current  economic
conditions  and other factors that  management  considers  reasonable  under the
circumstances. These estimates result in judgments regarding the carrying values
of assets and liabilities when these values are not readily available from other
sources as well as  assessing  and  identifying  the  accounting  treatments  of
commitments  and  contingencies.  Actual results may differ from these estimates
under different  assumptions or conditions.  The following  critical  accounting
policies  involve the more  significant  judgments and  assumptions  used in the
preparation of the consolidated financial statements.
<PAGE>

The allowance for loan losses is established to absorb known and inherent losses
attributable to loans outstanding and related off-balance sheet commitments. The
adequacy  of the  allowance  is  monitored  on an ongoing  basis and is based on
management's  evaluation of numerous factors.  These factors include the quality
of the current loan portfolio,  the trend in the loan  portfolio's risk ratings,
current economic conditions,  loan concentrations,  loan growth rates,  past-due
and  non-performing  trends,  evaluation  of  specific  loss  estimates  for all
significant  problem loans,  historical  charge-off and recovery  experience and
other  pertinent  information.  Approximately  70 percent of the Company's  loan
portfolio is secured by real estate, both residential and commercial properties,
and a  significant  depreciation  in real  estate  values in Oregon  would cause
management to increase the allowance for loan and lease losses.

Retained mortgage servicing rights are measured by allocating the carrying value
of the loans  between the assets sold and the  interest  retained,  based on the
relative  fair  value  at the  date of the  sale.  The fair  market  values  are
determined  using a discounted cash flow model.  Mortgage  servicing  assets are
amortized over the expected life of the loan and are evaluated  periodically for
impairment.  The expected life of the loan can vary from management's  estimates
due to prepayments by borrowers. Prepayments in excess of management's estimates
would negatively impact the recorded value of the mortgage servicing rights. The
value of the mortgage  servicing rights is also dependent upon the discount rate
used in the model.  Management  reviews  this rate on an ongoing  basis based on
current  market  rates.  A  significant  increase  in the  discount  rate  would
negatively impact the value of mortgage servicing rights.

The extended period of low interest rates has resulted in prepayment of mortgage
loans,  including those related to the mortgage  servicing  rights.  The Company
monitors the value of the mortgage  servicing rights and recognizes  impairment,
when necessary,  on a monthly basis.  While management expects that there may be
additional impairment of the value of mortgage servicing rights in the continued
low interest rate environment,  the net balance of mortgage  servicing rights at
September  30, 2003 was less than  $500,000,  limiting the amount of  impairment
which can be  experienced.  As of September  30, 2003,  the Company had recorded
$193,443 of impairment related to mortgage servicing rights.

At  September  30,  2003 the  Company had  approximately  $36.7  million in core
deposit intangibles and goodwill as a result of business combinations.  Periodic
analysis of the fair value of recorded core deposit intangibles and goodwill for
impairment will involve a substantial  amount of judgment,  as will establishing
and monitoring  estimated  lives of other  amortizable  intangible  assets.  The
Company is party to various legal proceedings.  These matters have a high degree
of uncertainty associated with them. There can be no assurance that the ultimate
outcome will not differ  materially from our assessment of them.  There can also
be no assurance that all matters that may be brought  against us are known to us
at any point in time.

Liquidity and Capital Resources

The Company generates cash through operating  activities,  primarily as a result
of net income.  The  adjustments to reconcile net income to net cash provided by
operations during the periods presented  consisted primarily of net amortization
of premiums paid on investment and mortgage-backed securities,  depreciation and
amortization,  stock-based  compensation expense,  amortization of deferred loan
origination  fees,  net  gain on the  sale  of  investment  and  mortgage-backed
securities,  increases or decreases in various escrow  accounts and increases or
decreases in other assets and liabilities. The primary investing activity of the
Association is lending,  which is funded with cash provided from  operations and
financing  activities,  as well as proceeds from amortization and prepayments on
existing  loans and  mortgage  backed and  related  securities.  For  additional
information   about  cash  flows  from  operating,   financing,   and  investing
activities,  see the  Consolidated  Statements  of Cash  Flows  included  in the
Consolidated Financial Statements.

The Company has  borrowing  agreements  with banks that can be used if funds are
needed. (See Notes 10 and 11 to the Consolidated Financial Statements.)

OTS capital  regulations  require the Association to have: (i) tangible  capital
equal to 1.5% of  adjusted  total  assets,  (ii) core  capital  equal to 4.0% of
adjusted  total  assets,  and (iii) total  risk-based  capital  equal to 8.0% of
risk-weighted  assets.  At September 30, 2003, the Association was in compliance
with  all  regulatory  capital  requirements  effective  as of such  date,  with
tangible, core and risk-based capital of 6.64%, 6.64% and 12.73%,  respectively.
(See Note 21 to the Consolidated Financial Statements.)

Changes in Financial Condition

At September  30, 2003,  the  consolidated  assets of the Company  totaled $1.54
billion, virtually unchanged with $1.51 billion at September 30, 2002.

Total cash and cash  equivalents  increased $1.5 million,  or 3.30%,  from $45.8
million at  September  30, 2002 to $47.3  million at  September  30,  2003.  The
increase is primarily the result of the cash from loan prepayments being held in
federal  funds  at  September  30,  2003  while  other  appropriate   investment
alternatives were evaluated.

Net loans receivable  decreased by $49.9 million,  or 8.22% to $557.6 million at
September  30,  2003,  compared to $607.5  million at September  30,  2002.  The
decrease is the result of increased  prepayments  on loans  coupled with sale of
new one- to four- family loan  production  which together  exceeded the new loan
originations of $428.2 million.

Investment securities increased $21.4 million, or 17.90%, from $119.5 million at
September 30, 2002 to $140.9  million at September  30, 2003.  This increase was
the result of $50.7  million in purchases  offset by $17.6  million in scheduled
maturities  and sale of $10.2  million of  investment  securities  available for
sale.

During the year ended September 30, 2003,  $351.7 million of principal  payments
were  received  on  mortgage-backed  and related  securities  ("MBS") and $214.7
million were sold, thus reducing the

<PAGE>


balance of MBS.  This  reduction  was more than offset by the purchase of $612.5
million in MBS,  resulting in a net increase in total MBS from $650.8 million at
September  30, 2002 to $680.7  million at September  30, 2003.  The purchases of
investment  securities  and MBS were funded by cash obtained from  maturities of
securities, funds generated by loan repayments, and borrowings.

Real estate owned  decreased  from $758,663 at September 30, 2002 to $651,254 at
September  30,  2003.  The  balance  at  September  30,  2003  consisted  of one
single-family  residence and one commercial  property.  The balance at September
30, 2002 consisted of four single family residences and one commercial property.

During the year ended September 30, 2003, the Company purchased $15.8 million in
bank-owned  life  insurance.  This insurance is used to fund director  benefits,
supplemental  executive retirement  benefits,  and provide life insurance to key
employees.  Income on bank-owned life insurance, which increased the cash value,
totaled  $524,821  for the year  ended  September  30,  2003,  resulting  in the
year-end balance of $16.3 million.

Other assets  increased  $4.7 million from $3.7 million at September 30, 2002 to
$8.5  million at September  30,  2003.  The  increase  resulted  primarily  from
recognition  of a $1.7 million  receivable  for loans sold at September 30, 2003
for which payment had not been received,  a $1.4 million  receivable  related to
sale of investment  securities and a $2.4 million increase in low income housing
tax credits.

Deposit  liabilities  decreased $73.9 million,  or 6.47%,  from $1.14 billion at
September  30, 2002 to $1.07  billion at  September  30,  2003.  The decrease is
primarily  due to a  reduction  in time  deposits  as a result of a strategy  to
reduce interest expense.

Advances from the FHLB of Seattle increased from $205.3 million at September 30,
2002 to $308.0  million at September  30,  2003.  The increase was the result of
funding  purchases  of  investments  and MBS  with  short  term  borrowings,  in
anticipation of accelerated payments on loans and MBS in the portfolio.

Total  shareholders'  equity increased $397,422 from $119.9 million at September
30, 2002 to $120.3  million at September 30, 2003.  The increase is the combined
effect  of a  $3.8  million  decrease  in net  unrealized  gains  on  securities
available for sale and $3.5 million in dividends paid on common shares offset by
$2.4  million  in net  earnings  for the  year,  $1.7  million  related  to ESOP
contributions, and $3.3 million in proceeds from exercise of stock options.

Asset Quality

Non-Performing Assets
At September 30, 2003, the ratio of non-performing  assets (including nonaccrual
loans,  accruing loans greater than 90 days  delinquent,  real estate owned, and
other  repossessed  assets)  to total  assets was  0.09%,  compared  to 0.12% at
September  30, 2002.  The decrease is the result of a decrease in the balance of
nonaccrual  loans  from $1.1  million  at  September  30,  2002 to  $799,476  at
September 30, 2003 and a $107,409 decrease in real estate owned. The Association
intends to  maintain  asset  quality by  continuing  its focus on  conscientious
underwriting. With the expansion of other lending options

<PAGE>


such as commercial and multi-family  real estate loans,  equity lines of credit,
other  consumer  loan  products,  and  commercial  loans,  the  Association  has
evaluated  the trade off  associated  with  planned  loan growth and the greater
credit risk associated with such forms of lending.

Classified Assets
The Association has established a Classification  of Assets Committee that meets
at least  quarterly  to approve and  develop  action  plans to resolve  problems
associated  with  the  assets.   They  also  review   recommendations   for  new
classifications  and make any  changes  in present  classifications,  as well as
making recommendations for the adequacy of reserves.

In  accordance  with  regulatory  requirements,   the  Association  reviews  and
classifies  on a regular  basis,  and as  appropriate,  its  assets as  "special
mention,"  "substandard,"  "doubtful,"  and  "loss."  All  nonaccrual  loans and
non-performing assets are included in classified assets.

Allowance for Loan Losses
The Association has established a systematic  methodology for  determination  of
provisions for loan losses.  The methodology is set forth in a formal policy and
takes into consideration the need for an overall general valuation  allowance as
well as specific  allowances  that are tied to individual  loans.  Provision for
loan losses is recorded based on the Association's  evaluation of specific loans
in its  portfolio,  historical  loan loss  experience,  the  volume  and type of
lending,   general   economic   conditions,   and  the  existing  level  of  the
Association's allowance for loan losses.

The following  table sets forth at the dates  indicated the loan loss allowance,
charge-offs, and recoveries:
<TABLE>
<CAPTION>

                                        At or For the Year Ended September 30,
                                   ---------------------------------------------
                                     2003               2002               2001
                                   ---------------------------------------------
                                                   (In thousands)

<S>                                <C>                 <C>                <C>
General loan loss allowance        $6,932              $7,376             $7,951
Specific loss allowance                 2                   -                 -
Charge-offs                           507                 747                 90
Recoveries                             65                  16                 42
</TABLE>


<PAGE>


COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2003
AND 2002

General

During fiscal 2003, the Company operated in an economy that  experienced  record
low interest rates. Strategic decisions to lower interest rates paid on deposits
resulted in lower interest expense.  However, the effect of lower interest rates
was more  evident in the  reduction  of interest  income,  resulting in a 12.55%
decrease  in net  interest  income  from the  prior  year.  Non-interest  income
improved   significantly   over  the  prior  year.   Non-interest   expense  was
significantly  increased due to the recording of  investment  losses  related to
"other-than-temporary"  impairment of preferred stock. Net earnings decreased by
$4.4 million,  or 64.69% from $6.8 million for the year ended September 30, 2002
to $2.4 million for the year ended September 30, 2003.

Interest Income

Interest income decreased $16.0 million,  or 18.33%,  from $87.3 million for the
year ended  September 30, 2002 to $71.3 million for the year ended September 30,
2003.  Interest rates declined during the year. While efforts were continuing to
change the  composition of the loan portfolio to include a higher  percentage of
loans  with  relatively  higher  interest  rates,  this  trend was not enough to
overcome  the effect of the  decline in rates.  Rates on short term  investments
such as federal funds and interest- earning deposits  decreased sharply over the
year. The combined  result of these changes is reflected in the average yield on
interest  earning assets which decreased from 6.35% for the year ended September
30, 2002 to 5.12% for the year ended September 30, 2003.

Interest  income on loans  receivable  decreased $9.3 million,  or 17.78%,  from
$52.2  million for the year ended  September  30, 2002 to $42.9  million for the
current  year.   Average  loans  receivable   decreased  $74.5  million  due  to
prepayments  from  refinancing  activity  and sales of new loan  production.  In
addition,  the yield on loans decreased 58 basis points.  The average balance of
investment  securities  decreased $12.3 million,  or 8.10%,  however the average
rate  decreased by 90 basis  points,  resulting  in a $1.8  million  decrease in
interest income on investment securities compared with the same period in 2002.

The average  balance of MBS increased  $116.5  million,  or 22.91%;  however the
average  rate earned on MBS  decreased  168 basis  points,  resulting  in a $4.5
million decrease in interest income on MBS for the year ended September 30, 2003
compared with the same period in 2002.

Interest Expense

During the year ended  September  30,  2003,  the  Company  continued  to reduce
interest rates paid on deposit accounts as part of the strategic plan to improve
profitability. This strategic move also resulted in a reduction in time deposits
and is evidenced by the $65.0 million,  or 6.37%,  decrease in average  deposits
for the year ended  September 30, 2003 compared to the year ended  September 30,
2002.  While time  deposits  decreased,  there was a $32.7  million  increase in
balances of lower-cost transaction accounts for the year, which also contributed
to the lower cost of funds for total  deposits.  The  average  interest  paid on
interest-bearing  deposits decreased significantly from 2.92% for the year ended
September 30, 2002 to 1.90% for the year ended  September 30, 2003. As a result,
total interest expense  decreased $10.0 million,  or 25.31%,  comparing the year
ended September 30, 2003 to 2002.

<PAGE>


Interest expense on deposits decreased $11.6 million, from $29.8 million for the
year ended  September 30, 2002 to $18.2 million for the year ended September 30,
2003.

Interest  expense  on FHLB  borrowings  increased  $1.3  million  due to a $62.5
million increase in average  borrowings which was partially offset by a 98 basis
point decrease in the average rate paid.

As noted previously,  the general interest rate environment  during the year was
represented by declining or continued low rates.  The impact of this environment
is evident in the  decrease in interest  rates on  interest-earning  assets from
6.35%  for the  year  ended  September  30,  2002 to 5.12%  for the  year  ended
September 30, 2003. Decreases were noted in yields for all categories of assets.
However,  due to the  strategic  moves made by the  Company in deposit  pricing,
overall  rates on  interest-bearing  liabilities  decreased 86 basis points from
3.31%  for the  year  ended  September  30,  2002 to 2.45%  for the  year  ended
September  30,  2003.  As a result,  the  decrease in  interest  rate spread was
limited to 37 basis points,  from 3.04% for the year ended September 30, 2002 to
2.67% for the year ended  September 30, 2003. Net interest  margin (net interest
income as a percent of average  interest-earning  assets)  also  decreased  from
3.48% for the fiscal year ended  September  30, 2002 to 3.03% for the year ended
September 30, 2003.



<PAGE>


AVERAGE BALANCES, NET INTEREST INCOME and YIELDS EARNED and RATES PAID

The following table presents,  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,  resultant yields, interest rate spread,
net interest margin and the ratio of average  interest-earning assets to average
interest-bearing  liabilities.  Dividends  received  are  included  as  interest
income. The table does not reflect any effect of income taxes.  Nonaccrual loans
are reflected as carrying a zero yield.

<TABLE>
<CAPTION>

                                                                 Year Ended September 30,
                                 ---------------------------------------------------------------------------------------------------
                                               2003                               2002                                2001
                                 ------------------------------   --------------------------------    ------------------------------
                                   Average               Yield/      Average                Yield/        Average             Yield/
                                   Balance    Interest     Rate      Balance     Interest     Rate        Balance  Interest     Rate
                                 ---------    --------   ------   ------------   --------   ------     ----------  --------   ------
INTEREST-EARNING ASSETS                                            (Dollars in thousands)

<S>                               <C>          <C>        <C>       <C>           <C>        <C>         <C>        <C>        <C>
Loans receivable                  $585,737     $42,902    7.32%     $660,246      $52,179    7.90%       $611,095   $48,051    7.86%
Mortgage backed and
   related securities              625,235      21,864    3.50%        508,712     26,369    5.18%        192,976    11,611    6.02%
Investment securities              139,453       5,320    3.82%        151,749      7,159    4.72%        129,171     7,282    5.64%
Federal funds sold                   9,668         120    1.24%         21,092        440    2.09%         38,686     1,599    4.13%
Interest earning deposits           18,635         230    1.24%         19,027        333    1.75%         18,930       768    4.06%
FHLB stock                          14,346         855    5.96%         13,013        813    6.24%         12,175       822    6.75%
                                ----------     -------    -----     ----------    -------    -----     ----------   -------    -----
Total interest-earning assets    1,393,074      71,291    5.12%      1,373,839     87,293    6.35%      1,003,033    70,133    6.99%
Non-interest-earning assets        129,544                             114,405                             44,817
                                ----------     -------    -----     ----------    -------    -----     ----------   -------    -----
Total Assets                    $1,519,618                          $1,488,244                         $1,047,850
                                                =                                   =                                    =
INTEREST-BEARING LIABILITIES

Tax and insurance reserve           $1,567         $20    1.31%         $2,316        $66    2.85%       $2,952        $114    3.85%
Passbook and statement savings      89,203         384    0.43%         82,358        930    1.13%       47,278       1,067    2.26%
Interest-bearing checking          133,930         176    0.13%        122,610        907    0.74%       75,070         812    1.08%
Money market                       331,556       3,367    1.02%        319,336      6,377    2.00%      164,523       6,332    3.85%
Certificates of deposit            400,693      14,247    3.56%        496,070     21,569    4.35%      383,796      22,093    5.76%
FHLB advances/Short term
   borrowings                      232,486      10,940    4.71%        170,037      9,682    5.69%      173,786      10,333    5.95%
                                ----------     -------    -----     ----------    -------    -----     ----------   -------    -----
Total interest-bearing
   liabilities                   1,189,435      29,134    2.45%      1,192,727     39,531    3.31%      847,405      40,751    4.81%
Non-interest-bearing liabilities   210,839                             180,765                           86,406
                                ----------     -------    -----     ----------    -------    -----     ----------   -------    -----
Total liabilities                1,400,274                           1,373,492                          933,811
Shareholders' equity               119,343                             114,752                          114,039
                                ----------     -------    -----     ----------    -------    -----     ---------
Total Liabilities and
   Shareholders' Equity         $1,519,618                          $1,488,244                       $1,047,850
                                ==========                          ==========                       ==========
Net interest income                            $42,157                            $47,762                           $29,381
                                               =======                            =======                           =======
Interest rate spread                                      2.67%                              3.04%                             2.18%
                                                          =====                              =====                             =====
Net interest margin                                       3.03%                              3.48%                             2.93%
                                                          =====                              =====                             =====
Average interest-earning
assets to average
interest-bearing liabilities                            117.12%                            115.18%                           118.37%
                                                        =======                            =======                           =======
</TABLE>

<PAGE>

RATE/VOLUME ANALYSIS

The following  table sets forth the effects of changing rates and volumes on net
interest  income of the  Company.  Information  is provided  with respect to (i)
effects on interest income attributable to changes in volume (changes in average
volume multiplied by prior rate);  (ii) effects on interest income  attributable
to changes in rate (changes in rate  multiplied by prior  average  volume);  and
(iii)  changes in  rate/volume  (change in rate  multiplied by change in average
volume).

<TABLE>
<CAPTION>
                                      For the Year Ended September 30,                         For the Year Ended September 30,
                                              2002 vs 2003                                             2002 vs 2001
                            -------------------------------------------------    ---------------------------------------------------
                                 Increase(Decrease) Due To                             Increase (Decrease) Due To
                            --------------------------------     Net Increase    -------------------------------------  Net Increase
                              Rate        Volume    Rate/Vol     (Decrease)         Rate        Volume        Rate/Vol    (Decrease)
                            --------     --------   --------    -------------    --------      --------       --------  ------------
INTEREST EARNING ASSETS                                                 (In thousands)

<S>                         <C>          <C>           <C>       <C>               <C>           <C>              <C>       <C>
Loans                       ($3,819)     ($5,888)      $431      ($9,276)          $ 242         $3,864           $20       $4,126
Mortgage backed and          (8,580)       6,040     (1,965)      (4,505)         (1,608)        18,997        (2,631)      14,758
related securities
Investment securities        (1,370)        (580)       111       (1,839)         (1,187)         1,273          (208)        (122)
Federal funds sold             (179)        (238)        97         (320)           (791)          (727)          360       (1,158)
Interest bearing deposits       (98)          (7)         2         (103)           (437)             4            (2)        (435)
FHLB stock                      (37)          83         (4)          42             (61)            57            (4)          (8)
                           --------     --------   --------    -------------    --------      --------       --------  ------------
Total Interest-Earning
   Assets                  ($14,083)       ($590)   ($1,328)    ($16,001)        ($3,842)       $23,468       ($2,465)     $17,161
                           ========     ========   ========    =========        ========      =========      ========     =========

INTEREST BEARING LIABILITIES

Tax and insurance reserves     ($36)        ($21)       $12        ($45)            ($29)          ($24)           $6         ($47)
Savings                        (576)          77        (48)       (547)            (532)           791          (395)        (136)
Interest bearing checking      (746)          84        (69)       (731)            (257)           514          (163)          94
Money market                 (3,134)         244       (120)     (3,010)          (3,047)         5,959        (2,867)          45
Certificates of deposit      (3,931)      (4,147)       756      (7,322)          (5,406)         6,463        (1,581)        (524)
FHLB advances/Short term     (1,681)       3,556       (617)      1,258             (437)          (223)            9         (651)
borrowings
                           --------     --------   --------    -------------    --------      --------       --------  ------------
Total Interest-Bearing
   Liabilities             ($10,104)        $207       ($86)   ($10,397)         ($9,708)       $13,480       ($4,991)     ($1,219)
                           ========     ========   ========    =========        ========      =========       =======    ==========
Increase (Decrease) in                                          ($5,604)                                      $18,380
Net Interest Income                                            ========                                       =======
</TABLE>





<PAGE>


Provision for Loan Losses

The provision for loan losses was zero, recoveries were $65,000, and charge offs
were $507,000  during the year ended  September 30, 2003 compared to a provision
for loan losses of  $156,000,  with  $16,000 of  recoveries,  and charge offs of
$747,000 during the year ended  September 30, 2002.  Charge offs during the year
ended  September  30, 2003  included  $100,240  related to  numerous  commercial
business  loans and $400,000  related to numerous  consumer  loans.  Charge offs
during the year ended September 30, 2002 related primarily to a land development
loan and various consumer loans.

Based on analysis of the loan  portfolio,  it was determined  that the allowance
for loan  losses was  adequate  at  September  30,  2003,  without  the need for
additional  reserves,  thus no  provision  for  loan  losses  was  recorded.  In
accordance  with  contemporary  regulatory  guidance on the  allowance  for loan
losses,  the  Company is  required  to  estimate  reserves  based on the current
inherent risk in the portfolio.  Because  payoffs have reduced the one- to four-
family  mortgage  portfolio and  historical  losses have been low, the allowance
indicated has not required additional provision.

At September  30,  2002,  the  allowance  for loan losses was equal to 398.7% of
non-performing  assets compared to 477.9% at September 30, 2003. The increase in
the  coverage  ratio  at  year  end  2003  was  the  result  of  a  decrease  in
non-performing assets.

Non-Interest Income

Non-interest income continues to improve, increasing $4.5 million, or 35.61%, to
$17.1  million for the year ended  September 30, 2003 from $12.6 million for the
year ended  September 30, 2002.  Income from fees and service charges on deposit
accounts  increased by $1.7 million,  or 34.92 %, from $4.9 million for the year
ended  September 30, 2002 to $6.7 million for the year ended September 30, 2003.
While  overall  deposits  have  decreased,  checking,  money  market and savings
accounts,  which generate fees and service charges, have increased during fiscal
2003.  These  increases in account  balances  coupled with increases in fees and
service  charges have boosted non- interest  income for the year.  Brokerage and
annuity  commissions also showed significant  growth,  increasing by 42.69% from
$1.4 million for the year ended  September 30, 2002 to $2.0 million for the year
ended  September 30, 2003.  This growth is a result of the expanded  presence of
Klamath First  Financial  Services,  making  brokerage and  investment  services
available to customers in more of the Company's market areas.

With the high loan volume due to  refinancing  activity and  subsequent  sale of
single family  mortgage  loans  production,  gain on sale of mortgage  loans has
increased 98.80% from $1.1 million for the year ended September 30, 2002 to $2.1
million for the same period this year.

A $1.5  million  gain on sale of  investments  was  recorded  for the year ended
September  30, 2003 which is similar to the $1.7 million gain  recorded in prior
year. Both gain on sale of securities for fiscal 2003 and loss on sale, as noted
below,  were part of the ongoing  management of the Company's  large  investment
portfolio to reposition the portfolio for higher long term yields in the current
interest rate environment. Non-interest income increased $4.5 million to a total
of $17.1 million which included the $1.5 million gain on sale of securities.  As
noted above,  the increase is the result of  continued  improvement  in fees and
service  charges due to more  accounts  and a revised fee  structure  and a $1.1
million  increase  in gain  on sale of  mortgage  loans,  as well as  growth  in
commission income from the investment subsidiary.

<PAGE>


Non-Interest Expense

The  Company's  continued  efforts  to  control  expenses  are  evident  in  the
comparison of non-interest  expense items,  most of which show modest  increases
from the prior year.  Non-interest  expense  increased $5.7 million,  or 11.42%,
from a total of $50.2  million for the prior year to $55.9  million for the year
ended    September   30,   2003.    However,    excluding   the   $3.5   million
other-than-temporary  impairment loss on investment securities,  the increase is
only 4.95%.

Compensation,  employee benefits, and related expense increased $2.3 million, or
10.53%,  from $22.1  million  for the year  ended  September  30,  2002 to $24.5
million for the same period of 2003.  Increases in  compensation  expense  arose
from salary  increases and increases in the cost of insurance and other employee
benefits.  Occupancy  expense  increased 12.71% due to the increase in number of
branch locations and additional space leased for back office operations.

The  Company  recorded  $901,599 in loss on sale of  investments  as part of the
repositioning  of the  investment  portfolio,  as noted above.  Amortization  of
intangible  assets  decreased  as  adoption  of SFAS No.  142 and  SFAS No.  147
required  the  Company to cease  amortization  of  goodwill  related to the WAMU
branch acquisition beginning October 1, 2002. In addition, during the year ended
September  30,  2003,  the Company  recognized  a $3.5  million  loss related to
reductions in market value on certain  floating rate preferred  stocks that were
considered to have  other-than-temporary  impairment.  See further discussion in
Note 1 of the Notes to Consolidated Financial Statements.

The Company incurred $377,826 of merger-related cost associated with the pending
Sterling  Merger.  Included  in  this  amount  are  legal  expenses,  accounting
expenses, and cost of merger-related employee travel.

Other expense only increased $563,651, or 4.03%, from $14.0 million for the year
ended  September 30, 2002 to $14.5  million for the current  year.  The increase
relates to  routine  increases  related to an  increase  in  locations  and more
accounts to service.

The ratio of  non-interest  expense to average  total assets was 3.68% and 3.37%
for the years ended September 30, 2003 and 2002, respectively.

Income Taxes

The  provision  for income taxes was $577,000 for the year ended  September  30,
2003, representing an effective tax rate of 19.4% compared with $3.3 million for
the year ended September 30, 2002  representing an effective tax rate of 32.44%.
Income taxes  decreased  due partially to the lower income level for the current
year.  As part of the overall plan to reduce the  effective tax rate and enhance
the level of investments  qualifying under the Community  Reinvestment  Act, the
Company  has  increased  investment  in  low  income  housing  tax  credits  and
tax-exempt municipal securities. There are also tax benefits related to purchase
of bank-owned  life insurance and  supplemental  executive  retirement  benefits
which were added in fiscal 2003 and further reduced the effective tax rate. (See
Note 13 to the Consolidated Financial Statements.)
<PAGE>

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2002
AND 2001

General

The purchase of 13 branches from  Washington  Mutual Bank in September  2001 had
significant  impact on the  operations of the Company  during  fiscal 2002.  The
transaction  contributed  significantly to loan and deposit  balances,  added 13
locations,  and introduced 124 employees to the Klamath First family at year end
2001. Therefore,  the income and expenses related to this significant change had
little  effect on fiscal 2001,  but had a dominant  impact on fiscal  2002.  The
influence  of this change is evident in all  categories  of income and  expenses
during the current fiscal year.

During  fiscal  2002,  the  Company  operated  in an  economy  that  experienced
declining  interest  rates  and  a  relatively  normal  yield  curve.  Strategic
decisions to revise  interest rates paid on deposits to lower  interest  expense
resulted in  improvement  in both  interest rate spread and interest rate margin
over the previous year. Net earnings  decreased by $782,226,  or 10.3% from $7.6
million for the year ended September 30, 2001 to $6.8 million for the year ended
September  30, 2002.  Net earnings  for the year ended  September  30, 2001 were
enhanced by gains on sale on  securities  totaling  $5.4 million  which were not
repeated to that extent for 2002.

Interest Income

Interest income  increased $17.2 million,  or 24.5%,  from $70.1 million for the
year ended  September 30, 2001 to $87.3 million for the year ended September 30,
2002. The general  interest rate  environment  during the year showed  declining
interest rates but the branch acquisition in September 2001 included significant
commercial and consumer loan balances,  increasing the earning assets,  and also
providing  loans with somewhat  higher yields.  Rates on short term  investments
such as federal funds and  interest-earning  deposits decreased sharply over the
year. The combined  result of these changes is reflected in the average yield on
interest  earning assets which decreased from 6.99% for the year ended September
30, 2001 to 6.35% for the year ended September 30, 2002.

Average  loans  receivable  increased  $49.2  million  and the  yield  on  loans
increased  4 basis  points,  resulting  in a $4.1  million  increase in interest
income  on  loans.  Purchases  of MBS  boosted  interest  income on MBS by $14.8
million.  The average balance of investment  securities increased $22.6 million,
or 17.48%, however the average rate decreased by 92 basis points, resulting in a
$122,019 decrease in interest income on investment  securities compared with the
same period in 2001.

Interest Expense

Average  deposits  increased by $349.7 million for the year ended  September 30,
2002 compared to the year ended September 30, 2001, due to the deposit  balances
acquired in the WAMU branch  transaction in September 2001. The average interest
paid on  interest-bearing  deposits  decreased  significantly from 4.52% for the
year ended  September  30, 2001 to 2.92% for the year ended  September 30, 2002.
During the year ended  September 30, 2002,  the Company  reduced  interest rates
paid on deposit  accounts as part of a strategic plan to improve  profitability.
This strategic  move is evidenced by the decrease in interest  expense which was
coupled with a 52.14% increase in average deposit balances. As a result interest
expense decreased $48,319, or 0.2%,  comparing the year ended September 30, 2002
to 2001.  Interest expense on deposits decreased $521,672 from $30.3 million for
the year ended  September 30, 2001 to $29.8 million for the year ended September
30, 2002.

Interest expense on FHLB borrowings  decreased $650,505 due to decreased average
borrowings  of $3.7  million  which was  partially  offset  by a 25 basis  point
increase in the average rate paid..

As noted previously,  the general interest rate environment  during the year was
represented by declining rates. The impact of this environment is evident in the
decrease in interest rates on

<PAGE>


interest-earning  assets  from 6.99% for the year ended  September  30,  2001 to
6.35% for the year ended September 30, 2002.  Decreases were noted in yields for
all  categories  of  assets.  However,  due to the  strategic  moves made by the
Company  in  deposit  pricing,  overall  rates on  interest-bearing  liabilities
decreased  150 basis points from 4.81% for the year ended  September 30, 2001 to
3.31% for the year ended  September 30, 2002. As a result,  interest rate spread
increased from 2.18% for the year ended September 30, 2001 to 3.04% for the year
ended  September 30, 2002. Net interest margin (net interest income as a percent
of average  interest-earning  assets) also improved significantly from 2.93% for
the fiscal year ended  September 30, 2001 to 3.48% for the year ended  September
30, 2002.

Provision for Loan Losses

The provision for loan losses was $156,000,  recoveries were $16,224, and charge
offs were  $747,092  during the year ended  September  30,  2002  compared  to a
provision for loan losses of $387,000,  with $42,406 of  recoveries,  and charge
offs of $90,173 during the year ended September 30, 2001. Charge offs during the
year ended September 30, 2002 related  primarily to a land  development loan and
various  consumer  loans.  Charge offs during the year ended  September 30, 2001
related  primarily to construction  loans from one borrower and various consumer
loans.

The  provision  for loan losses for the year ended  September  30, 2002 was less
than for the previous year because the strategy to sell newly originated one- to
four-family  loans in the secondary  market meant that fewer loans were added to
the loan  portfolio.  The loans added in the branch  acquisition  were allocated
allowance  as part of the  purchase  accounting  and thus did not  significantly
impact the provision for fiscal years ended 2002 and 2001.

The  composition  of  the  loan  portfolio  is  monitored  on a  regular  basis.
Significant  increases in commercial and consumer loans, which are considered to
have more  associated  credit risk than the Company's  traditional  portfolio of
one- to four-family  residential mortgages,  are considered in the determination
of the  appropriate  level of allowance  for loan losses.  As part of the branch
acquisition,  a loan loss  allowance  was  allocated to the acquired  loans.  At
September  30,  2001,  the  allowance  for loan  losses was equal to 1,108.9% of
non-performing  assets compared to 398.7% at September 30, 2002. The decrease in
the  coverage  ratio  at year end 2002 was the  result  of an  increase  in non-
performing assets.

Non-Interest Income

Non-interest  income increased $1.6 million,  or 14.5%, to $12.6 million for the
year ended  September 30, 2002 from $11.0  million for the year ended  September
30, 2001.  During the year ended  September 30, 2001, the Company  realized $5.4
million  in  gains  on sales of  investments  when it sold  MBS  resulting  from
securitization of single family mortgage loans. This is compared to $1.7 million
in gain on sale of  securities  for the  year  ended  September  30,  2002.  The
increases in non-interest income items other than gain on sale of securities are
the result of  continued  improvement  in fees and  service  charges due to more
accounts and a revised fee structure and a $502,860  increase in gain on sale of
mortgage  loans.  Growth  in  the  activity  in  the  Association's   investment
subsidiary,  Klamath First Financial  Services,  increased  commission income by
over $1.0 million.

Non-Interest Expense

Non-interest  expense  increased $21.5 million,  or 74.7%, from a total of $28.7
million for the prior

<PAGE>

year to $50.2  million for the year ended  September  30, 2002.  The increase is
primarily  attributed to the expansion of the branch network  through the branch
acquisition in September  2001 and addition of de novo  branches.  Compensation,
employee  benefits,  and related expense increased $7.7 million,  or 53.1%, from
$14.4  million for the year ended  September  30, 2001 to $22.1  million for the
same period of 2002.  Increases in compensation  expense arose from the addition
of 124  employees as part of the WAMU branch  acquisition  and other back office
personnel added to handle the increased  activity  resulting from a 48% increase
in accounts,  as well as personnel  added at five de novo branches opened during
the year ended  September 30, 2002.  Other expense  increased  $5.8 million,  or
71.4%,  from $8.2 million for the year ended September 30, 2001 to $14.0 million
for  the  current  year.  Increases  were  noted  as  a  result  of  the  branch
acquisition,  opening of the second  Medford,  Oregon branch and opening of four
new  in-store  branches.  For  example,  postage and courier  expense  increased
$629,632,  and supplies expense increased $411,765.  Checking department expense
increased by $1.2 million and ATM expense increased by $274,301, both due to the
increase  in number of  locations  and  deposit  accounts.  Advertising  expense
increased  $294,808  due to the  expansion of the branch  network.  Professional
service  fees   increased   $131,468  with  items  relating  to  recruitment  of
executives,  training  enhancements,  and the hiring of a consulting  firm for a
commercial  loan  project.  The ratio of  non-interest  expense to average total
assets  was 3.28% and 2.72% for the years  ended  September  30,  2002 and 2001,
respectively.

Income Taxes

The provision for income taxes was $3.3 million for the year ended September 30,
2002, representing an effective tax rate of 32.4% compared with $3.7 million for
the year ended  September 30, 2001  representing an effective tax rate of 32.9%.
The decrease in effective  tax rate for 2002 is primarily  due to an increase in
income on  tax-exempt  municipal  securities.  (See Note 13 to the  Consolidated
Financial Statements.)


<PAGE>



Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management

The  Company's  financial  performance  is  affected  by the  success of the fee
generating products it offers to its customers,  the credit quality of its loans
and securities,  and the extent to which its earnings are affected by changes in
interest  rates.  Credit risk is the risk that  borrowers  will become unable to
repay their debts as they become due. The Company relies on strict  underwriting
standards,  loan review,  and an adequate  allowance for loan losses to mitigate
its credit risk.

Interest  rate risk is the risk of loss in  principal  value and risk of earning
less net interest income due to changes in interest rates.  Put simply,  savings
institutions solicit deposits and lend the funds they receive to borrowers.  The
difference  between the rate paid on deposits and the rate  received on loans is
the interest rate spread. If the rates paid on deposits change, or reprice, with
the same timing and magnitude as the rates change on the loans, there is perfect
matching of interest  rate changes and thus,  no change in interest  rate spread
and no interest rate risk. In  actuality,  interest  rates on deposits and other
liabilities  do not reprice at the same time and/or with the same  magnitude  as
those on loans,  investments  and other  interest-earning  assets.  For example,
historically the Company primarily originated  fixed-rate  residential loans for
its portfolio. Because fixed-rate loans do not

<PAGE>


reprice until payoff and because the majority of residential loans have terms of
15 to 30 years (with actual expected lives of seven to ten years),  the interest
rate  characteristics  of the loan  portfolio do not exactly match the Company's
liabilities,  which consist of deposits with maturities  ranging up to ten years
and  borrowings  which  mature or reprice in five years or less.  When  interest
rates  change,  this  mismatch  creates  changes in  interest  rate  spread that
influence net interest income and result in interest rate risk.

Changes  in  interest  rates  also  impact  the  fair  value of the  assets  and
liabilities  on the  Company's  balance  sheet,  expressed as changes in the net
portfolio value ("NPV"). NPV represents the market value of portfolio equity and
is equal to the market  value of assets  minus the market  value of  liabilities
plus or minus the estimated market value of off-balance sheet  instruments.  For
example,  the market  value of  investment  securities  and loans is impacted by
changes  in  interest  rates.  Fixed-  rate  loans and  investments  held in the
Company's  portfolio  increase  in  market  value  if  interest  rates  decline.
Conversely,  the market value of  fixed-rate  portfolio  assets  decreases in an
increasing  interest rate environment.  It is generally assumed that assets with
adjustable  rates are less subject to market value  changes due to interest rate
fluctuations based on the premise that their rates will adjust with the market.

The OTS Thrift  Bulletin 13a ("TB 13a") contains the prevailing  guidance on the
management  of  interest  rate  risk  and  provides  a  description  of how  the
"Sensitivity  to Market Risk" rating is to be determined.  Sensitivity to Market
Risk  represents  the  "S"  component  of the  CAMELS  rating  which  is used by
regulators  in  their  evaluation  of  financial   institutions.   The  OTS  has
established  detailed  minimum  guidelines  for two areas of interest  rate risk
management.   These  guidelines  establish  minimum  expectations  for  (1)  the
establishment  and  maintenance  of  board-approved   risk  limits  and  (2)  an
institution's  ability  to  measure  their  interest  rate risk  exposure.  Each
thrift's board of directors is responsible for establishing  risk limits for the
institution. The interest rate risk limits are expected to include limits on the
change in NPV as well as limits on earnings sensitivity.

NPV limits include  minimums for the NPV ratio,  which is calculated by dividing
the NPV by the  present  value  of the  institution's  assets  for a given  rate
scenario.  The board of  directors  should  specify  the minimum NPV ratio it is
willing to allow under  interest  rate shifts of 100 and 200 basis points up and
down. Both the NPV limits and the actual NPV forecast  calculations  play a role
in determining a thrift's Sensitivity to Market Risk. The prudence of the limits
and the compliance with board-prescribed limits are factors in the determination
of whether or not the institution's risk management is sufficient.  In addition,
the NPV ratio permitted by the institution's policies under an adverse 200 basis
point rate shift scenario is combined with the  institution's  current  interest
rate sensitivity to determine the  institution's  "Level of Interest Rate Risk."
The  level  of  interest  rate  risk is then  utilized  in  conjunction  with an
assessment  of the "Quality of Risk  Management  Practices" to determine the "S"
component of the CAMELS rating.

The Company's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors  and the Asset  Liability  Management  Committee
("ALCO"),  which includes senior management  representatives.  The ALCO monitors
and considers  methods of managing  interest rate risk by monitoring  changes in
NPV,  the NPV  ratio,  and net  interest  income  under  various  interest  rate
scenarios.  The ALCO attempts to manage the various  components of the Company's
balance

<PAGE>


sheet to minimize the impact of sudden and sustained  changes in interest  rates
on NPV  and  the NPV  ratio.  If  potential  changes  to NPV  and the NPV  ratio
resulting  from  hypothetical  interest  rate  swings  are not within the limits
established  by the Board,  the Board may direct  management to adjust its asset
and liability mix to bring interest rate risk within Board-approved limits.

NPV is  calculated  based on the net  present  value  of  estimated  cash  flows
utilizing market prepayment assumptions and market rates of interest provided by
independent   broker  quotations  and  other  public  sources.   Computation  of
forecasted  effects of hypothetical  interest rate changes are based on numerous
assumptions,   including   relative  levels  of  market  interest  rates,   loan
prepayments,  and deposit decay,  and should not be relied upon as indicative of
actual future results.  Further, the computations do not contemplate any actions
the ALCO could undertake in response to changes in interest rates.

The Company has historically  originated primarily fixed-rate residential loans.
Many of these loans have been sold to Fannie Mae (formerly, the Federal National
Mortgage  Association) with servicing retained,  and currently loans are sold to
other entities with servicing released,  while few are held in its portfolio. In
order to reduce the  exposure to  interest  rate  fluctuations,  the Company has
developed  strategies to manage its liquidity,  shorten the effective maturities
and increase the repricing of certain  interest-earning assets, and increase the
effective  maturities  of certain  interest-bearing  liabilities.  During recent
years, the Company undertook  significant projects to manage and reduce interest
rate  risk.  In  February  2001,  the  Company  securitized  $190.3  million  in
fixed-rate  single family mortgage loans. The loans were sold to Fannie Mae with
servicing  retained and the resulting FNMA  mortgage-backed  securities  ("MBS")
were  recorded  as  available  for  sale  securities  on  the  Company's  books.
Subsequently,  the MBS were sold with the  two-fold  benefit of  producing  $5.4
million in gain on sale of  investments  and  eliminating  long term  fixed-rate
assets  from the  interest  rate risk  profile.  The  second  significant  event
impacting  interest rate risk was the acquisition of 13 branches from Washington
Mutual  Bank in  September  2001.  These were  commercial  bank  branches  which
included $118.8 million of commercial loans and $50.7 million of consumer loans.
Most of these loans are adjustable rate shorter term loans. Cash obtained in the
transaction  was  primarily   invested  in  MBS  and   collateralized   mortgage
obligations  ("CMO's")  having  shorter  terms than  conventional  single-family
mortgage  loans.  All these events serve to improve the Company's  interest rate
risk position.

The  Company's  Board of  Directors  has  established  risk limits  which are in
compliance with TB 13a. NPV values for the Association are regularly  calculated
by the OTS based on  regulatory  guidelines.  The following  table  presents the
Association's  projected  change in NPV and the NPV ratio for the  various  rate
shock  levels  as  of  September  30,  2003  and  2002,   using  the  regulatory
calculations.  The assets and  liabilities  at the parent  company level are not
considered  in the  analysis.  The  exclusion  of  holding  company  assets  and
liabilities  does  not  have  a  significant  effect  on  the  analysis  of  NPV
sensitivity. All market rate sensitive instruments presented in these tables are
classified as either held-to-maturity or available-for-sale. The Association has
no trading securities.
<PAGE>
<TABLE>
<CAPTION>

PROJECTED CHANGES IN NET PORTFOLIO VALUE

                                    At September 30, 2003                       At September 30, 2002
                                   --------------------------------             ------------------------------
Change in                           NPV              Sensitivity                NPV              Sensitivity
Interest Rates                      Ratio            Measure                    Ratio            Measure
                                                     (Basis points)                              (Basis points)
                                   ------           ---------------             -----           --------------
<C>                                 <C>              <C>                        <C>                 <C>
200 basis point rise                4.57%            (281)                      6.67%               (126)
100 basis point rise                6.17%            (121)                      7.79%                (14)
Base Rate Scenario                  7.39%                --                     7.93%                 --
100 basis point decline             7.80%                41                     7.11%                (82)
200 basis point decline (1)         N/A                N/A                      N/A                  N/A
<FN>

(1) Given the abnormally low prevailing interest rate environment, information related to a 200 basis
point decline is not considered meaningful.
</FN>
</TABLE>

While interest  sensitivity  improved for the year ended September 30, 2002, the
Association became more interest sensitive during fiscal 2003. As interest rates
have continued downward,  loan refinancing  activity has remained high, lowering
rates on loans held in the portfolio.  Loan  refinancing has also contributed to
increased prepayments on MBS. In order to maintain yields, the proceeds from the
prepayments  and maturities of investments  have been  reinvested in instruments
with extended maturities,  resulting in increased  sensitivity.  Adjustable-rate
instruments have now repriced at these historical low rates,  further increasing
sensitivity.

The  preceding  table  indicates  that at September  30, 2003, in the event of a
sudden  and  sustained   increase  in  prevailing  market  interest  rates,  the
Association's  NPV and NPV  ratio  would be  expected  to  decrease,  and  would
decrease to a greater extent than under the previous year's asset/liability mix.

Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation of NPV. Actual values may differ from those  projections  presented,
should market  conditions vary from  assumptions used in the calculation of NPV.
Certain  assets,  such as  adjustable-rate  loans,  have features which restrict
changes in interest rates on a short-term basis and over the life of the assets.
In  addition,  the  proportion  of  adjustable-rate  loans in the  Association's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinance  activity.  Further, in the event
of a change in interest  rates,  prepayment  and early  withdrawal  levels would
likely deviate significantly from those assumed in the NPV. Finally, the ability
of many borrowers to repay their adjustable-rate  mortgage loans may decrease in
the event of interest rate increases.

A conventional  measure of interest rate sensitivity for savings institutions is
the   calculation  of  interest  rate  "gap."  This  measure  of  interest  rate
sensitivity is a measure of the difference  between amounts of  interest-earning
assets and interest-bearing  liabilities which either reprice or mature within a
given period of time.  The  difference,  or the interest rate  repricing  "gap,"
provides an  indication  of the extent to which an  institution's  interest rate
spread  will be  affected  by changes in  interest  rates.  A gap is  considered
positive when the amount of interest-rate  sensitive assets exceed the amount of
interest-rate sensitive liabilities,  and is considered negative when the amount
of  interest-rate  sensitive  liabilities  exceeds  the amount of  interest-rate
sensitive  assets.  Generally,  during a period  of  rising  interest  rates,  a
negative  gap  within  shorter  maturities  would  result in a  decrease  in net
interest  income.  Conversely,  during a period of  falling  interest  rates,  a
negative  gap within  shorter  maturities  would  result in an  increase  in net
interest income.

At September 30, 2003, the Association's  one-year cumulative gap was a negative
20.26% of total  assets  consistent  with a negative  20.61% of total  assets at
September 30, 2002.


<PAGE>


The following table sets forth certain  historical  information  relating to the
Company's  interest-  earning assets and  interest-bearing  liabilities that are
estimated to mature or are scheduled to reprice within one year.
<TABLE>
<CAPTION>


                                                                   At September 30,
                                           ---------------------------------------------------------------
                                            2003                       2002                      2001
                                           -----------          ----------------              ------------
                                                                   (In thousands)
Earning assets maturing
<S>                                          <C>                        <C>                       <C>
or repricing within one year                 $250,767                   $221,598                  $318,777

Interest-bearing liabilities
maturing or repricing
within one year                               562,265                    533,486                   541,016

Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets                  (20.26%)                  (20.61%)                  (15.13%)

Percent of assets to liabilities
maturing or repricing
within one year                                44.60%                    41.54%                    58.92%
</TABLE>


<PAGE>


INTEREST SENSITIVITY GAP ANALYSIS

The   following   table   presents   the   difference   between  the   Company's
interest-earning  assets  and  interest-bearing   liabilities  within  specified
maturities at September 30, 2003. This table does not  necessarily  indicate the
impact of general  interest rate movements on the Company's net interest  income
because  the  repricing  of  certain  assets  and   liabilities  is  subject  to
competitive and other limitations.  As a result,  certain assets and liabilities
indicated as maturing or otherwise  repricing within a stated period may in fact
mature or reprice at different times and at different volumes.
<TABLE>
<CAPTION>


ASSETS                      3 Months   > 3 Months   > 6 Months    > 1 to 3   > 3 to 5   > 5 to 10   > 10 to 20         > 20
                             or Less  to 6 Months    to 1 Year       Years     Years       Years        Years        Years     TOTAL
                            --------  -----------   -----------   --------  --------   ---------   ----------     --------   -------
Permanent 1-4 Mortgages:
<S>                         <C>        <C>          <C>         <C>       <C>          <C>         <C>          <C>       <C>
  Adjustable-rate             $3,819    $3,576       $9,948     $16,416     $7,133        $680          $--          $--     $41,572
  Fixed-rate                     985     1,237        1,896        (51)      1,547       8,327       37,665      110,298     161,904

Other Mortgage Loans:
  Adjustable-rate             17,437    13,652       17,806      38,418     63,097       1,144           --           --     151,554
  Fixed-rate                     292        19           91       1,235      6,928       8,060        3,497        1,247      21,369

Mortgage-Backed Securities     9,604       904          985      25,178    111,835      49,596      411,158       69,628     678,888

Non-Real Estate Loans:
  Adjustable-rate             87,938     3,580        3,884         913      3,315         337           13           --      99,980
  Fixed-rate                   1,452       546          924       6,551      9,975      13,830       53,758          170      87,206

Investment Securities         45,070    20,148        4,974       7,258     44,817       2,182       35,107        2,467     164,023
Other Interest-Bearing Assets     --        --           --          --         --         457           --           --         457
                            --------   -------   ----------  ----------   --------  ----------   ----------   ----------  ----------
     Total Rate Sensitive
      Assets                $166,597   $43,662      $40,508     $95,918   $248,647     $84,613     $543,198     $183,810  $1,406,953
                            ========   =======     ========    ========   ========    ========     ========     ========    ========
LIABILITIES

Deposits - Fixed Maturity    $70,071   $55,010      $76,209     $82,522    $31,837     $34,029         $335         $100    $350,113
Deposits - Interest Bearing
   Checking                    5,582     5,582       11,164      14,270     12,181      39,397       30,916       17,465     136,557
Deposits - Money Market       16,936    16,936       33,872      80,906     53,763      52,000       71,663          555     326,631
Deposits - Passbook and
   Statement Savings           2,368     2,368        4,736       8,006     10,609      22,283       19,903       23,038      93,311
Other Interest Bearing
   Liabilities               148,431    91,000       22,000      37,000     12,000          --           --           --     310,431
                           ---------  --------   ----------  ----------   --------  ----------   ----------   ----------  ----------
     Total Rate Sensitive
        Liabilities         $243,388  $170,896     $147,981    $222,704   $120,390    $147,709     $122,817      $41,158  $1,217,043
                            ========  ========     ========    ========   ========    ========     ========     ========    ========
Interest Rate
       Sensitivity Gap      ($76,791)($127,234)   ($107,473)  ($126,786)  $128,257   ($63,096)     $420,381     $142,652    $189,910

Cumulative Interest Rate
       Sensitivity Gap      ($76,791)($204,025)   ($311,498)  ($438,284) ($310,027)  ($373,123)     $47,258     $189,910          --

Sensitivity Gap to
       Total Assets           (4.99%)   (8.27%)      (6.99%)     (8.24%)      8.34%       4.10%       27.34%        9.28%         --

Cumulative Interest Rate
       Sensitivity Gap
       to Total Assets        (4.99%)   (13.27%)     (20.26%)    (28.50%)   (20.16%)    (24.26%)       3.07%       12.35%         --
</TABLE>



<PAGE>


Item 8.  Financial Statements and Supplementary Data

         (a)      Financial Statements

Independent Auditors' Report



Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon


     We have audited the  accompanying  consolidated  balance  sheets of Klamath
First Bancorp,  Inc. and  Subsidiaries  (the "Company") as of September 30, 2003
and 2002,  and the related  consolidated  statements of earnings,  shareholders'
equity, and cash flows for each of the three years in the period ended September
30, 2003. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
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  provide  a
reasonable basis for our opinion.

     In our opinion,  such consolidated  financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
Subsidiaries  as of  September  30,  2003  and  2002  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
September 30, 2003, in conformity with accounting  principles generally accepted
in the United States of America.



Deloitte & Touche LLP
Portland, Oregon
December 26, 2003


<PAGE>

<TABLE>
<CAPTION>

                  KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS



                                                                       September 30, 2003                    September 30, 2002
ASSETS                                                           ------------------------              ------------------------

<S>                                                                        <C>                                   <C>
Cash and due from banks                                                       $39,266,748                           $38,444,500
Interest bearing deposits with banks                                            5,838,016                             5,762,373
Federal funds sold and securities purchased under agreements to resell          2,200,000                             1,584,540
                                                                       ------------------                    ------------------
   Total cash and cash equivalents                                             47,304,764                            45,791,413

Investment securities available for sale, at fair value
  (amortized cost: $138,794,722 and $119,940,845)                             140,939,164                           119,542,052
Mortgage-backed and related securities available for sale, at fair
  value (amortized cost: $678,888,417 and $640,304,722)                       680,719,515                           650,796,164
Loans receivable, net                                                         557,551,402                           607,464,660
Real estate owned and repossessed assets                                          651,254                               758,663
Premises and equipment, net                                                    23,331,046                            23,410,847
Stock in Federal Home Loan Bank of Seattle, at cost                            17,190,400                            13,510,400
Accrued interest receivable                                                     7,164,190                             8,177,014
Deferred federal and state income taxes                                           824,844                                    --
Core deposit intangible, net                                                   13,777,700                            17,426,074
Goodwill and other intangible assets                                           22,872,915                            22,872,915
Bank-owned life insurance                                                      16,324,821                                    --
Other assets                                                                    8,465,528                             3,745,151
                                                                       ------------------                    ------------------
   Total assets                                                            $1,537,117,543                        $1,513,495,353
                                                                               ==========                            ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
  Deposit liabilities                                                      $1,068,063,030                        $1,142,005,997
  Accrued interest on deposit liabilities                                         696,596                               721,810
  Advances from borrowers for taxes and insurance                               3,062,959                             5,105,955
  Advances from Federal Home Loan Bank of Seattle                             308,000,000                           205,250,000
  Short term borrowings                                                                --                             1,700,000
  Accrued interest on borrowings                                                  949,476                               820,975
  Mandatorily redeemable preferred securities                                  27,338,107                                    --

  Pension liabilities                                                             929,022                               842,272
  Deferred federal and state income taxes                                              --                             1,466,556
  Other liabilities                                                             7,742,895                             8,438,245
                                                                       ------------------                    ------------------
    Total liabilities                                                       1,416,782,085                         1,366,351,810
                                                                       ------------------                    ------------------
Mandatorily redeemable preferred securities                                            --                            27,205,507

Commitments and contingent liabilities

Shareholders' Equity

  Preferred stock, $.01 par value, 500,000 shares authorized; none issued              --                                    --
  Common stock, $.01 par value, 35,000,000 shares authorized,
   September 30, 2003 - 6,982,634 issued, 6,739,164 outstanding
   September 30, 2002 - 6,744,040 issued, 6,366,546 outstanding                    69,826                                67,440
  Additional paid-in capital                                                   34,330,667                            30,282,059
  Retained earnings-substantially restricted                                   86,211,951                            87,265,334
  Unearned shares issued to ESOP                                               (1,956,480)                           (2,935,130)
  Unearned shares issued to MRDP                                                 (785,340)                             (999,111)
  Accumulated other comprehensive income                                        2,464,834                             6,257,444
                                                                       ------------------                    ------------------
    Total shareholders' equity                                                120,335,458                           119,938,036
                                                                       ------------------                    ------------------
    Total liabilities and shareholders' equity                             $1,537,117,543                        $1,513,495,353
                                                                              ===========                           ===========

<FN>

      See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>


                  KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>


                                                              Year Ended             Year Ended              Year Ended
                                                           September 30,          September 30,           September 30,
                                                                    2003                   2002                    2001
                                                          --------------         --------------          --------------
INTEREST INCOME
<S>                                                          <C>                    <C>                     <C>
  Loans receivable                                           $42,902,391            $52,178,747             $48,051,228
  Mortgage-backed and related securities                      21,863,936             26,368,930              11,611,184
  Investment securities - taxable                              4,088,155              6,126,126               6,599,562
  Investment securities - tax-exempt                           2,086,941              1,846,131               1,503,756
  Federal funds sold and securities purchased under
     agreements to resell                                        119,508                440,220               1,598,662
  Interest bearing deposits                                      230,567                333,019                 768,192
                                                          --------------         --------------          --------------
    Total interest income                                     71,291,498             87,293,173              70,132,584
                                                          --------------         --------------          --------------
INTEREST EXPENSE
  Deposit liabilities                                         18,173,471             29,782,599              30,304,271
  Advances from FHLB of Seattle                               10,885,897              9,608,659              10,065,991
  Mandatorily redeemable preferred securities                    390,596                     --                      --
  Other                                                           74,295                139,857                 380,579
                                                          --------------         --------------          --------------
    Total interest expense                                    29,524,259             39,531,115              40,750,841
                                                          --------------         --------------          --------------
    Net interest income                                       41,767,239             47,762,058              29,381,743

Provision for loan losses                                             --                156,000                 387,000

                                                          --------------         --------------          --------------

    Net interest income after provision for
      loan losses                                             41,767,239             47,606,058              28,994,743
                                                          --------------         --------------          --------------

NON-INTEREST INCOME
  Fees and service charges on deposit accounts                 6,669,340              4,943,213               2,339,973
  Other fees and service charges                               3,645,642              2,933,689               1,954,010
  Gain on sale of investments                                  1,457,140              1,707,172               5,374,723
  Gain on sale of real estate owned                               37,272                 25,852                  86,927
  Gain on sale of loans                                        2,140,620              1,076,745                 573,885
  Brokerage and annuity commissions                            1,952,072              1,368,057                 362,387
  Bank-owned life insurance income                               524,821                     --                      --
  Other income                                                   678,470                559,103                 321,758
                                                          --------------         --------------          --------------
    Total non-interest income                                 17,105,377             12,613,831              11,013,663
                                                          --------------         --------------          --------------
NON-INTEREST EXPENSE
  Compensation, employee benefits and related expense         24,454,759             22,125,329              14,448,997
  Occupancy expense                                            5,422,942              4,811,472               2,858,504
  Data processing expense                                      1,583,206              1,499,490               1,007,040
  Insurance premium expense                                      181,583                181,449                 133,407
  Loss on sale of investments                                    901,599                628,823                  30,632
  Impairment loss on investments                               3,530,005                     --                      --
  Loss on sale of real estate owned                               26,018                    771                  39,911
  Amortization of core deposit intangible                      3,648,374              3,895,043               1,794,330
  Amortization of goodwill                                            --              1,625,637                      --
  Mandatorily  redeemable preferred securities expense         1,229,348              1,423,774                 252,367
  Merger costs                                                   377,826                     --                      --
  Other expense                                               14,543,237             13,979,591               8,154,956
                                                          --------------         --------------          --------------
    Total non-interest expense                                55,898,897             50,171,379              28,720,144
                                                          --------------         --------------          --------------
Earnings before income taxes                                   2,973,719             10,048,510              11,288,262

Provision for income taxes                                       576,896              3,259,734               3,717,260
                                                          --------------         --------------          --------------
Net earnings                                                  $2,396,823             $6,788,776              $7,571,002
                                                               =========              =========               =========

Earnings per common share - basic                                  $0.37                  $1.06                   $1.14
Earnings per common share - fully diluted                          $0.36                  $1.05                   $1.13
Weighted average common shares outstanding - basic             6,562,515              6,411,351               6,627,200
Weighted average common shares outstanding -  with dilution    6,743,220              6,495,498               6,702,045
<FN>

     See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                  KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                                                                Unearned     Unearned    Accumulated
                              Common     Common   Additional                      shares       shares          other         Total
                               stock      stock      paid-in      Retained        issued       issued  comprehensive  shareholders'
                              shares     amount      capital      earnings       to ESOP      to MRDP  income (loss)        equity
                      --------------   --------  -----------   ------------  ------------  ----------  -------------  ------------
Balance at
<S>        <C>             <C>          <C>      <C>           <C>           <C>          <C>            <C>          <C>
   October 1, 2000         6,692,428    $73,662  $37,701,796   $79,713,255   ($4,893,250) ($2,498,378)   ($1,372,524) $108,724,561
Cash dividends                    --         --           --    (3,467,950)           --           --             --    (3,467,950)
Stock repurchased
   and retired              (550,221)    (5,502)  (7,393,921)           --            --           --             --    (7,399,423)
ESOP contribution             97,974         --      396,471            --       979,740           --             --     1,376,211
MRDP contribution             76,618         --       13,708            --            --    1,199,519             --     1,213,227
Exercise of stock
   options                   244,662      2,447    3,208,742            --            --           --             --     3,211,189
                      --------------   --------  -----------   ------------  ------------  ----------  -------------  ------------
                           6,561,461     70,607   33,926,796    76,245,305    (3,913,510)  (1,298,859)    (1,372,524)  103,657,815
Comprehensive income
   Net earnings                   --         --           --     7,571,002            --           --             --     7,571,002
   Other comprehensive
    income:
   Unrealized gain on
   securities, net of
   tax and reclassification
   adjustment (1)                 --         --           --            --            --           --      2,912,088     2,912,088
                                                                                                                    --------------
Total comprehensive income                                                                                              10,483,090
                      --------------   --------  -----------   ------------  ------------  ----------  -------------  ------------
Balance at
   September 30, 2001      6,561,461     70,607   33,926,796    83,816,307    (3,913,510)  (1,298,859)     1,539,564   114,140,905
Cash dividends                    --         --           --    (3,339,749)           --           --             --    (3,339,749)
Stock repurchased
   and retired              (345,986)    (3,460)  (4,747,387)           --            --           --             --    (4,750,847)
ESOP contribution             97,865         --      410,593            --       978,380           --             --     1,388,973

MRDP contribution             23,847         --       11,511            --            --      299,748             --       311,259
Exercise of stock
   options                    29,359        293      369,295            --            --           --             --       369,588
Tax benefit of
   stock options                  --         --      311,251            --            --           --             --       311,251
                       --------------   --------  -----------   ------------  ------------  ----------  -------------   -----------
                            6,366,546     67,440   30,282,059    80,476,558    (2,935,130)   ( 999,111)     1,539,564  108,431,380
Comprehensive income
   Net earnings                    --         --           --     6,788,776            --           --             --    6,788,776
   Other comprehensive
     income:
   Unrealized gain on
   securities,  net of
   tax and reclassification
   adjustment (2)                 --         --           --            --            --           --       4,717,880    4,717,880
                                                                                                                     --------------
Total comprehensive income                                                                                              11,506,656
                       --------------   --------  -----------   ------------  ------------  ----------  -------------  ------------
Balance at
   September 30, 2002       6,366,546     67,440   30,282,059    87,265,334    (2,935,130)    (999,111)     6,257,444  119,938,036
Cash dividends                     --         --           --    (3,450,206)           --           --             --   (3,450,206)
Stock repurchased
   and retired                (13,660)      (137)    (232,623)           --            --           --             --     (232,760)
ESOP contribution              97,865         --      734,225            --       978,650           --             --    1,712,875
MRDP contribution              36,159         --        5,514            --            --      213,771             --      219,285
Exercise of stock
   options                    252,254      2,523    3,310,876            --            --           --             --    3,313,399
Tax benefit of
   stock options                   --         --      230,616            --            --           --             --      230,616
                       --------------   --------  -----------   ------------  ------------  ----------  -------------  ------------
                            6,739,164     69,826   34,330,667    83,815,128    (1,956,480)   ( 785,340)     6,257,444  121,731,245
Comprehensive loss
   Net earnings                    --         --           --     2,396,823            --           --             --    2,396,823
   Other comprehensive
     loss:
   Unrealized loss on
   securities,  net of
   tax and reclassification
   adjustment (3)                  --         --           --            --            --           --     (3,792,610)  (3,792,610)
                                                                                                                      -------------
Total comprehensive loss                                                                                                (1,395,787)
                      --------------   --------  -----------   ------------  ------------  ----------  -------------  ------------
Balance at
   September 30, 2003      6,739,164    $69,826  $34,330,667   $86,211,951   ($1,956,480)   ($785,340)    $2,464,834  $120,335,458
                       =============  =========  ===========   ===========   ===========    =========     ==========  ============
<FN>
(1)   Net unrealized holding gain on securities of $2,893,883 (net of $1,773,670 tax expense) less reclassification  adjustment
for net gains  included in net earnings of $49,982 (net of $30,634 tax expense)
(2)   Net unrealized holding gain on securities of $5,095,497 (net of $3,123,389 tax expense) less reclassification  adjustment
for net gains  included in net earnings of $377,617 (net of $231,443 tax expense)
(3)   Net unrealized holding loss on securities of $1,369,131 (net of $839,138 tax benefit) less reclassification  adjustment
for net gains included in net earnings of $2,423,479 net of $1,485,358 tax expense)
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                  KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                  Year Ended                Year Ended                Year Ended
                                                               September 30,             September 30,             September 30,
                                                                        2003                      2002                      2001
                                                              --------------            --------------            --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                               <C>                       <C>                       <C>
    Net earnings                                                  $2,396,823                $6,788,776                $7,571,002

ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    Depreciation and amortization                                  5,856,301                 7,715,652                 3,161,017
    Deferred income taxes                                             33,104                (2,022,392)                 (956,590)
    Provision for loan losses                                             --                   156,000                   387,000
    Compensation expense related to ESOP benefit                   1,712,875                 1,388,973                 1,376,211
    Compensation expense related to MRDP Trust                       219,285                   311,259                 1,213,227
    Tax benefit associated with stock options                        230,616                   311,251                        --
    Net amortization of premiums paid on
      investment and mortgage-backed and related securities        8,609,473                 3,930,135                   249,371
   Decrease in deferred loan fees, net of amortization              (692,444)                 (688,264)               (2,848,812)
    Net (gain) loss on sale of real estate owned and
      premises and equipment                                         (23,605)                  (25,081)                   39,452
    Net gain on sale of investment and mortgage
      backed and related securities                                 (555,541)               (1,078,349)               (5,344,091)
    Impairment loss on investment securities                       3,530,005                        --                        --
    FHLB stock dividend                                             (854,700)                 (812,400)                 (821,500)
CHANGES IN ASSETS AND LIABILITIES
    Accrued interest receivable                                    1,012,824                   480,572                (2,225,513)
    Other assets                                                  (5,252,239)                3,685,333                (7,456,909)
    Accrued interest on deposit liabilities                          (25,214)                 (852,796)                  389,530
    Accrued interest on borrowings                                   128,502                    19,232                   (55,420)
    Pension liabilities                                               86,750                   (99,876)                   54,252
    Other liabilities                                               (447,467)                1,916,541                 3,194,579
                                                               --------------            --------------            --------------
Net cash provided by (used in) operating activities               15,965,348                21,124,566                (2,073,194)
                                                               --------------            --------------            --------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from maturity of investment securities
      held to maturity                                                    --                   135,000                   130,000
    Proceeds from maturity of investment securities
      available for sale                                          17,597,000                15,000,000                33,425,000
    Principal repayments received on mortgage
       backed and related securities held to maturity                     --                 1,238,278                   531,435
    Principal repayments received on mortgage
       backed and related securities available for sale          351,664,191               108,276,166                46,429,807
    Principal repayments received on loans                       375,433,075               286,803,701               145,496,311
    Loan originations                                           (420,397,256)             (281,665,175)             (136,492,447)
    Loans purchased                                               (3,875,225)               (1,683,363)                       --
    Loans sold                                                    99,100,042                68,661,105                30,708,858
    Purchase of investment securities available
      for sale                                                   (50,666,979)              (41,854,162)              (78,456,931)
    Purchase of mortgage-backed and related
      securities available for sale                             (612,548,001)             (419,414,542)             (383,198,597)
    Purchase of FHLB stock                                        (2,825,300)                       --                        --
    Proceeds from sale of investment securities
      available for sale                                          10,228,950                61,977,158                10,367,746
    Proceeds from sale of mortgage-backed and related
      securities available for sale                              214,703,334                87,131,357               187,991,361
    Proceeds from sale of real estate owned and
      premises and equipment                                         476,071                   653,574                 1,261,175
    Investment in real estate owned                                       --                        --                   (86,742)
    Purchases of premises and equipment                           (2,121,085)               (8,533,907)               (5,392,241)
    Acquisitions, net of cash acquired                                    --                        --               206,548,213
    Purchase of bank-owned life insurance                        (15,800,000)                       --                        --
                                                                -------------             -------------             -------------
Net cash provided by (used in) investing activities              (39,031,183)             (123,274,810)               59,262,948
                                                                -------------             -------------             -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                  KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)
                                                                  Year Ended                Year Ended                Year Ended
                                                               September 30,             September 30,             September 30,
                                                                        2003                      2002                      2001
                                                               --------------            --------------            --------------

CASH FLOWS FROM FINANCING ACTIVITIES

<S>                                                              <C>                      <C>                        <C>
    Net increase(decrease) in deposit liabilities                ($73,942,967)            ($10,818,147)              $33,986,127
    Proceeds from FHLB advances                                   391,300,000               99,950,000                 2,000,000
    Repayments of FHLB advances                                  (288,550,000)             (62,700,000)               (7,000,000)
    Proceeds from short term borrowings                             3,300,000                  200,000                 3,400,000
    Repayments of short term borrowings                            (5,000,000)                (200,000)               (4,700,000)
    Issuance of mandatorily redeemable preferred stock                     --               12,651,823                14,553,684
    Stock repurchase and  retirement                                 (232,760)              (4,750,847)               (7,399,423)
    Proceeds from exercise of stock options                         3,313,399                  369,588                 3,211,189
    Advances from borrowers for taxes and insurance                (2,042,996)              (1,532,039)               (3,015,382)
    Dividends paid                                                 (3,565,490)              (3,617,287)             (  3,783,983)
                                                                --------------           --------------            --------------
Net cash provided by  financing activities                         24,579,186               29,553,091                31,252,212
                                                                --------------           --------------            --------------
Net (decrease) increase in cash and cash
  equivalents                                                       1,513,351              (72,597,153)               88,441,966

Cash and cash equivalents at beginning
  of year                                                          45,791,413              118,388,566                29,946,600
                                                                --------------           --------------            --------------
Cash and cash equivalents at end of year                          $47,304,764              $45,791,413              $118,388,566
                                                                     =========                =========                 =========
SUPPLEMENTAL SCHEDULE OF INTEREST AND
  INCOME TAXES PAID
    Interest paid                                                 $30,650,318              $40,364,979               $42,020,217
    Income taxes paid                                               1,775,000                2,795,000                 3,930,000

SUPPLEMENTAL SCHEDULE OF NONCASH
  INVESTING AND FINANCING ACTIVITIES
ACTIVITIES

    Net unrealized gain (loss) on securities
      available for sale                                          ($3,792,610)              $4,717,880                $2,912,088
    Dividends declared and accrued in other
      liabilities                                                     907,742                  883,136                   934,233
   Loans transferred to real estate owned                             346,770                  949,830                   870,128
   Loans securitized and recorded as mortgage-backed
      securities available for sale                                        --                       --               190,300,518
   Mortgage-backed securities held to maturity
      transferred to available for sale, at fair value                     --                  376,335                        --


<FN>

    See notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation

The  consolidated  financial  statements  include the accounts of Klamath  First
Bancorp, Inc. (the "Company") and its wholly-owned subsidiaries, Klamath Capital
Trust  I  and  Klamath  First  Federal   Savings  and  Loan   Association   (the
"Association"),   including  the  Association's   subsidiaries,   Klamath  First
Financial  Services  and  Pacific  Cascades  Financial,  Inc.  All  intercompany
accounts and transactions have been eliminated in consolidation.

Certain  prior year  amounts have been  reclassified  to conform to current year
presentation.

Nature of Operations

The Company provides banking and limited  non-banking  services to its customers
who are  located  throughout  the  state of  Oregon  and in  adjoining  areas of
Washington State. These services primarily include attracting  deposits from the
general public and using such funds,  together with other borrowings,  to invest
in  various  real  estate  loans,  consumer  and  commercial  loans,  investment
securities and mortgage-backed and related securities.

Use of Estimates in the Presentation of the Financial Statements

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
assumptions.  These  assumptions  result in  estimates  that affect the reported
amounts of certain assets and  liabilities  and disclosure of contingent  assets
and liabilities at the date of the financial statements and the reported amounts
of related revenue and expense during the reporting period. Actual results could
differ from those estimates.

Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company considers
cash and due from  banks,  interest-bearing  deposits  held at  domestic  banks,
federal  funds  sold,  and  security  resale  agreements  to be  cash  and  cash
equivalents, all of which mature within 90 days.

Investment Securities

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting  for Certain  Investments in Debt and Equity  Securities,  investment
securities held to maturity are stated at amortized cost only if the Company has
the  positive  intent  and the  ability  to hold  the  securities  to  maturity.
Securities  available for sale,  including mutual funds, and trading  securities
are stated at fair value.  Unrealized  gains and losses from  available for sale
securities  are excluded from earnings and reported (net of tax) as a net amount
in a separate component of shareholders'  equity until realized.  Realized gains
and losses on the sale of  securities,  recognized on a specific  identification
basis, and valuation  adjustments of trading account  securities are included in
non-  interest  income  or  expense.  Unrealized  losses on  securities  held to
maturity or available for sale due to  fluctuations in fair value are recognized
when it is  determined  that an other  than  temporary  decline in the value has
occurred.

Stock Investments

The  Company  holds  stock in the  Federal  Home Loan Bank of Seattle  ("FHLB of
Seattle"). This investment is carried at historical cost.

Loans

Loans held for investment are stated at the principal amount outstanding, net of
deferred loan fees and unearned income.  Loan origination fees,  commitment fees
and certain direct loan  origination  costs are  capitalized and recognized as a
yield  adjustment  over the lives of the loans  using  the level  yield  method.
Unearned  discounts are accreted to income over the average lives of the related
loans using the level yield method, adjusted for estimated prepayments.
<PAGE>

Interest  income is recorded  as earned.  Management  ceases to accrue  interest
income on any loan that  becomes 90 days or more  delinquent  and  reverses  all
interest accrued up to that time. Thereafter, interest income is accrued only if
and when, in management's opinion, projected cash proceeds are deemed sufficient
to repay both principal and interest.  All loans for which interest is not being
accrued are referred to as loans on non accrual status.

Allowance for Loan Losses

The allowance for loan losses is established to absorb known and inherent losses
in the loan  portfolio.  Allowances  for losses on specific  problem real estate
loans are  charged to  earnings  when it is  determined  that the value of these
loans is impaired. In addition to specific reserves,  the Company 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
underlying the quality of the loan  portfolio.  These factors include changes in
the  size and  composition  of the loan  portfolio,  geographic  concentrations,
actual loan loss experience,  current 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 allowance is an estimate based upon factors
and  trends  identified  by  management  at the time  financial  statements  are
prepared. The ultimate recovery of loans is susceptible to future market factors
beyond the Company's control, which may result in losses or recoveries differing
significantly from those provided in the consolidated  financial statements.  In
addition,  various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance on loans.

Delinquent  interest  on  loans  past due 90 days or more is  charged  off or an
allowance  established  by a charge to income equal to all  interest  previously
accrued.  Interest is  subsequently  recognized only to the extent cash payments
are  received  until  delinquent  interest is paid in full and, in  management's
judgment,  the  borrower's  ability  to make  periodic  interest  and  principal
payments  is back to  normal,  in which  case the loan is  returned  to  accrual
status.

Real Estate Owned

Property acquired through  foreclosure or deed in lieu of foreclosure is carried
at the lower of  estimated  fair value,  less  estimated  costs to sell,  or the
balance of the loan on the  property at date of  acquisition,  not to exceed net
realizable  value.  Costs  excluding  interest,  relating to the  improvement of
property are  capitalized,  whereas those  relating to acquiring and holding the
property are charged to expense.

Premises and Equipment

Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation is generally computed on the straight-line basis over the estimated
useful  lives of the various  classes of assets from their  respective  dates of
acquisition.  Estimated  useful lives range up to 30 years for buildings,  up to
the lease term for  leasehold  improvements,  three years for  automobiles,  and
three to 15 years for furniture and equipment.

Mortgage Servicing

Fees earned for servicing loans are reported as income when the related mortgage
loan  payments are  collected.  Loan  servicing  costs are charged to expense as
incurred.

The Company  accounts for mortgage  servicing  rights ("MSR") in accordance with
SFAS No. 140,  Accounting  for Transfers  and Servicing of Financial  Assets and
Extinguishment of Liabilities. SFAS No. 140 requires the Company to allocate the
total cost of all mortgage loans sold, whether

<PAGE>


originated or purchased,  to the MSR and the loans  (without MSR) based on their
relative fair values if it is practicable to estimate those fair values.

MSR  are  capitalized  at  their  allocated  carrying  value  and  amortized  in
proportion to, and over the period of, estimated future net servicing income.

The  Company  assesses  impairment  of the MSR based on the fair  value of those
rights.  For purposes of measuring  impairment,  the MSR are stratified based on
interest rate characteristics  (fixed-rate and  adjustable-rate),  as well as by
coupon rate. In order to determine the fair value of the MSR, the Company uses a
model  that  estimates  the  present  value  of  expected   future  cash  flows.
Assumptions  used in the model include  market  discount  rates and  anticipated
prepayment  speeds.  In  addition,  the  Company  uses  market  comparables  for
estimates  of the cost of  servicing,  inflation  rates  and  ancillary  income.
Impairment  allowances  of $193,443 and $180,739  were recorded at September 30,
2003 and 2002.  Future  interest rate decreases  could have a negative impact on
the recorded MSR.

Intangible Assets

In conjunction  with branch  acquisitions,  the Company has recorded  intangible
assets,  including core deposit  intangible and other  intangible  assets.  Core
deposit  intangibles are amortized over the estimated  average remaining life of
the deposit base acquired.  Other intangible  assets are amortized over a period
no greater than the estimated remaining life of the long term assets acquired.

Because other intangible  assets were recorded in conjunction with a purchase of
branches, they were accounted for in accordance with SFAS No. 72, Accounting for
Certain  Acquisitions  of Bank and Thrift  Institutions.  In October  2002,  the
Financial Accounting Standards Board ("FASB") issued SFAS No. 147,  Acquisitions
of Certain Financial  Institutions,  which requires such intangible assets to be
accounted for under the provisions of SFAS No. 141, Business  Combinations,  and
SFAS No. 142, Goodwill and Other Intangible Assets.  Under this guidance,  other
intangible  assets  will be  evaluated  for  impairment  but will no  longer  be
amortized.  The  Company  adopted  SFAS No. 147 as of  October 1, 2002.  Expense
related to amortization of other  intangibles  totaled $1.1 million for the year
ended September 30, 2002.  There was no  amortization  expense in the year ended
September 30, 2001 because the transaction to which the intangible assets relate
happened in mid- September 2001 and no expense was recorded. Due to the adoption
of SFAS No. 147, no such amortization expense was recorded in fiscal year 2003.

Mandatorily Redeemable Preferred Securities

The Company adopted SFAS No. 150,  Accounting for Certain Financial  Instruments
with  Characteristics  of both  Liabilities  and  Equity,  as of  July 1,  2003.
Adoption of this statement resulted in the  reclassification  of the mandatorily
redeemable   preferred  securities  from  a  separate   classification   between
liabilities  and equity to inclusion  within  liabilities.  Restatement of prior
periods was not  permitted,  so these  securities  are  included in  liabilities
during the current  period and in mezzanine  equity for the previous  years.  In
addition,  expense related to these  securities was recorded as interest expense
for the period from July 1, 2003 to September  30, 2003 but is included in other
expense for all prior periods.

<PAGE>

Income Taxes

The Company  accounts for income taxes using the asset and  liability  method of
accounting  for  income  taxes.  Under  this  method,  deferred  tax  assets and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered or settled.

Employee Stock Ownership Plan

The Company  sponsors an Employee Stock  Ownership  Plan  ("ESOP").  The ESOP is
accounted  for in  accordance  with the American  Institute of Certified  Public
Accountants  ("AICPA")  Statement of Position  93-6,  Employer's  Accounting for
Employee Stock  Ownership  Plans.  Accordingly,  the shares held by the ESOP are
reported as unearned  shares issued to the employee stock  ownership plan in the
balance  sheets.  The plan  authorizes  release  of the  shares  over a ten-year
period,  of which  four  years  are  remaining.  As  shares  are  released  from
collateral,  compensation  expense is recorded  equal to the then current market
price of the shares,  and the shares become  outstanding  for earnings per share
calculations.

Management Recognition and Development Plan

The Company sponsors a Management Recognition and Development Plan ("MRDP"). The
MRDP  is  accounted  for  in  accordance  with  SFAS  No.  123,  Accounting  for
Stock-Based  Compensation.  The plan authorizes the grant of common stock shares
to certain  officers and directors,  which vest over a five-year period in equal
installments.  The Company recognizes  compensation expense in the amount of the
fair value of the common stock in accordance  with the vesting  schedule  during
the years in which the shares are payable.  When the MRDP awards are  allocated,
the common stock shares become common stock  equivalents  for earnings per share
calculations.  Compensation  expense  related  to the MRDP for the  years  ended
September  30, 2003,  2002 and 2001 was  $219,285,  $311,259  and $1.2  million,
respectively.

Stock Based Compensation

The Company accounts for stock option grants using the intrinsic value method as
prescribed in Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to  Employees,  and related  interpretations.  Under the  intrinsic
value  based  method,  compensation  cost for stock  options is  measured as the
excess,  if any,  of the  quoted  market  price of stock at grant  date over the
amount an employee must pay to acquire the stock.  Stock options  granted by the
Company have no intrinsic  value at the grant date and,  under APB No. 25, there
is no compensation expense to be recorded.

SFAS No. 123, Accounting for Stock-Based Compensation,  encourages, but does not
require,   companies  to  record  compensation  cost  for  stock-based  employee
compensation plans at fair value. The fair value approach measures  compensation
costs based on factors such as the term of the option, the market price at grant
date, and the option  exercise price,  with expense  recognized over the vesting
period.

As discussed above, the Company continues to account for its stock-based  awards
using the  intrinsic  value  method  in  accordance  with APB  Opinion  No.  25,
Accounting for Stock Issued to Employees

<PAGE>


and its related interpretations.  Accordingly,  no compensation expense has been
recognized in the financial statements for employee stock arrangements.

SFAS No. 123, Accounting for Stock-Based Compensation requires the disclosure of
pro forma net income and  earnings  per share had the  Company  adopted the fair
value method as of the  beginning  of fiscal 1996.  Under SFAS No. 123, 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 fair value of
freely tradable, fully transferable options without vesting restrictions,  which
significantly  differ from the Company's stock option awards.  These models also
require  subjective  assumptions,  including  future stock price  volatility and
expected time to exercise, which greatly affect the calculated values.

The weighted  average  grant-date  fair value of options  granted  during fiscal
years 2003, 2002, and 2001 was $2.71, $1.63, $2.03, respectively.  The Company's
calculations are based on a multiple option  valuation  approach and forfeitures
are  recognized  as they  occur.  Had  compensation  cost for these  awards been
determined under SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>

                                                      Year ended September 30,
                                              2003              2002            2001
                                 ----------------------------------------------------
Net earnings:
<S>                                      <C>               <C>             <C>
               As reported               $2,396,823        $6,788,776      $7,571,002
               Pro forma                  2,321,998         6,662,157       7,457,552
Earnings per common share - basic
               As reported                    $0.37             $1.06           $1.14
               Pro forma                      $0.35             $1.04           $1.13
Earnings per common share - fully
diluted:
               As reported                    $0.36             $1.05           $1.13
               Pro forma                      $0.34             $1.03           $1.11
</TABLE>


The Company's  calculations  were made using the  Black-Scholes  option  pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>

                                    2003             2002              2001
                                    Grant            Grant             Grant
                                   ---------       -------            ------
<S>                                   <C>            <C>               <C>
Risk free interest rates              2.98%          3.69%             5.09%
Expected dividend                     3.09%          4.03%             4.33%
Expected lives, in years               7.5            3.5               3.3
Expected volatility                  21.51%         20.29%            28.73%
</TABLE>
<PAGE>

Recently Issued Accounting Pronouncements

In December  2002,  the FASB issued SFAS No.  148,  Accounting  for  Stock-Based
Compensation  -  Transition  and  Disclosure.  SFAS No. 148 amends SFAS No. 123,
Accounting  for  Stock-Based  Compensation,  to provide  alternative  methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for  stock-based  employee  compensation.  The Company has adopted
this  statement  and  has  elected  to  continue  to  account  for   stock-based
compensation under the guidance in APB Opinion No. 25.

In April  2003,  the FASB issued SFAS No. 149,  Amendment  of  Statement  133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133,
Accounting  for  Derivative  Instruments  and  Hedging  Activities,  for certain
decisions made by the FASB and to incorporate  clarifications  of the definition
of a  derivative.  This  Statement is effective  for  contracts  entered into or
modified after June 30, 2003.  Management does not expect that the provisions of
SFAS No.  149 will  impact the  Company's  results of  operations  or  financial
condition.

In  January  2003,  the FASB  issued  Interpretation  No. 46,  Consolidation  of
Variable  Interest  Entities. This  Interpretation  requires a variable interest
entity to be  consolidated  by the  primary  beneficiary  of that  entity.   The
consolidation  requirements of this interpretation apply immediately to variable
interest  entities  created after  January 31, 2003,  and will apply to existing
entities for the first fiscal year or interim  period  beginning  after December
15, 2003.  Certain  disclosure  requirements  apply in all financial  statements
issued after January 31, 2003,  regardless of when the variable  interest entity
was  established.  The  Company  is  currently  evaluating  the  impact  of  the
interpretation on its financial  statements and, except for the possible effects
related to the  issuance  of its trust  preferred  securities,  and any  related
regulatory  effects,  does not currently believe the interpretation  will have a
material  impact on the results of  operations  or  financial  condition  of the
Company.

(2)      Acquisition

On September 7, 2001, the Company  completed the acquisition of 13 branches from
Washington  Mutual.  These  branches  are located  along the Oregon coast and in
northeastern  Oregon,  complementing  and expanding the existing branch network.
The  transaction,  which was accounted for as a purchase in accordance with SFAS
No. 72,  Accounting for Certain  Acquisitions  of Bank and Thrift  Institutions,
included acquisition of $179.3 million in loans and assumption of $423.5 million
in deposit  liabilities.  Income and  expense  related  to the  transaction  and
operation of the branches for the period from September 7, 2001 to September 30,
2001  are  reflected  in  the  statement  of  earnings.  As  a  result  of  this
transaction, the Company recorded core deposit intangible of $15.0 million which
will be amortized  over the estimated life of the deposit base. The Company also
recorded other intangible assets of $24.1 million related to the transaction.

(3) Cash and Due from Banks

The Company is required to maintain an average  reserve balance with the Federal
Reserve Bank, or maintain such reserve  balance in the form of cash.  The amount
of this required reserve balance was approximately $4.3 million and $4.0 million
at September  30, 2003 and 2002,  respectively,  and was met by holding cash and
maintaining an average  balance with the Federal  Reserve Bank in excess of this
amount.

<PAGE>

(4) Investments and Mortgage-backed Securities

Amortized cost and approximate  fair value of securities  available for sale and
held to maturity are summarized by type and maturity as follows:
<TABLE>
<CAPTION>

                                                                   September 30, 2003
                                             -----------------------------------------------------------------------
                                               Amortized                        Gross Unrealized                Fair
                                                   cost                      Gains         Losses             value
                                             ----------                 ----------      ----------        ----------
INVESTMENT SECURITIES AVAILABLE-FOR-SALE

  State and municipal obligations
<S>                                        <C>                          <C>               <C>           <C>
    Maturing within one year                   $485,036                     $4,188               $--        $489,224
    Maturing after five years through
     ten years                                2,181,683                     78,185             1,876       2,257,992
    Maturing after ten years                 39,575,738                  2,295,049            33,389      41,837,398

  FHLB obligations
     Maturing after one year through
      five years                             10,000,000                     87,500                --      10.087,500

  Corporate obligations
    Maturing within one year                 11,860,320                    156,958                --      12,017,278
    Maturing after one year through
     five years                              39,680,212                    953,949                --      40,634,161
    Maturing after ten years                 19,841,738                         --         1,659,238      18,182,500

  Federal agency preferred stock
     Maturing after ten years                15,169,995                    263,116                --      15,433,111
                                             ----------                 ----------        ----------      ----------
                                           $138,794,722                 $3,838,945        $1,694,503    $140,939,164
                                             ==========                 ==========        ==========      ==========
</TABLE>
<TABLE>
<CAPTION>

                                                                        September 30, 2002
                                             -----------------------------------------------------------------------

                                              Amortized                         Gross Unrealized                Fair
                                                   cost                      Gains           Losses            value
                                             ----------                 ----------        ----------      ----------
INVESTMENT SECURITIES AVAILABLE-FOR-SALE

  State and municipal obligations
<S>                                        <C>                          <C>               <C>           <C>
    Maturing within one year                   $100,000                       $565               $--        $100,565
    Maturing after one year through
     five years                                 485,300                     12,929                --         498,229
    Maturing after five years through
     ten years                                  790,110                     56,682                --         846,792
    Maturing after ten years                 38,202,338                  2,381,961             4,044      40,580,255

  Corporate obligations
    Maturing within one year                 17,890,090                         --            55,225      17,834,865
    Maturing after one year through
     five years                              23,922,805                    489,819            14,498      24,398,126
    Maturing after ten years                 19,834,958                         --         2,644,508      17,190,450

  Federal agency preferred stock
     Maturing after ten years                18,715,244                         --           622,474      18,092,770
                                             ----------                 ----------        ----------      ----------
                                           $119,940,845                 $2,941,956        $3,340,749    $119,542,052
                                             ==========                 ==========        ==========      ==========
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                                   September 30, 2003
                                             -----------------------------------------------------------------------
                                               Amortized                        Gross Unrealized                Fair
                                                   cost                      Gains           Losses           value
                                             ----------                 ----------        ----------      ----------
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE


  CMO's maturing after one year
<S>                                        <C>                          <C>              <C>            <C>
    through five years                       $7,147,206                    $95,116          $     --      $7,242,322

  FHLMC maturing after one year
    through five years                        1,726,836                     34,426                --       1,761,262

  FNMA maturing after five years
    through ten years                         5,688,474                    216,480                --       5,904,954

  CMO's maturing after five years
     through  ten years                      40,619,858                    842,027                --      41,461,885

  FHLMC maturing after five years
    through ten years                         3,287,704                     61,530                --       3,349,234

  FNMA maturing after ten years             253,431,224                  1,608,103          420,377      254,618,950

  FHLMC maturing after ten years            122,306,799                    310,664        1,540,051      121,077,412

  GNMA maturing after ten years               8,809,464                     36,581           70,730        8,775,315

  CMO's  maturing after ten years           235,870,852                  1,500,660          843,331      236,528,181
                                             ----------                 ----------       ----------       ----------
                                           $678,888,417                 $4,705,587       $2,874,489     $680,719,515
                                             ==========                 ==========      ===========       ==========
</TABLE>
<TABLE>
<CAPTION>
                                                                                   September 30, 2002
                                             -----------------------------------------------------------------------
                                               Amortized                       Gross Unrealized                 Fair
                                                   cost                      Gains          Losses            value
                                             ----------                 ----------       ----------        ----------
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE

  CMO's maturing after one year
<S>                                        <C>                         <C>                  <C>          <C>
    through five years                       $2,944,195                    $26,810             $ --        $2,971,005

  FHLMC maturing after one year
    through five years                       11,520,162                    237,265               --        11,757,427

  FNMA maturing after five years
    through ten years                        12,634,495                    231,613               --        12,866,108

  CMO's maturing after five years
     through  ten years                     133,151,422                  4,006,978               --       137,158,400

  FHLMC maturing after five year
     through ten years                        7,182,143                     83,445               --         7,265,588

  FNMA maturing after ten years             116,232,557                  1,134,165               --       117,366,722

  FHLMC maturing after ten years             37,902,266                    425,289            2,515        38,325,040

  GNMA maturing after ten years              24,346,010                    247,888              346        24,593,552

  CMO's  maturing after ten years           294,391,472                  4,108,891            8,041       298,492,322
                                             ----------                 ----------       ----------      ------------
                                           $640,304,722                $10,502,344          $10,902      $650,796,164
                                             ==========                 ==========       ==========      ============
</TABLE>

Expected  maturities of mortgage-backed  and related securities will differ from
contractual  maturities  because  borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

At September 30, 2003 and 2002, the Company pledged  securities  totaling $585.9
million and $40.5 million,  respectively,  to secure certain public deposits and
for other  purposes as required or permitted  by law. The increase  from 2002 to
2003 resulted  from pledging  investment  securities  to  collateralize  FHLB of
Seattle borrowings in replacement of collateralization with mortgage loans under
a blanket pledge.


<PAGE>


(5)  Loans receivable
<TABLE>
<CAPTION>
                                                                               September 30,
                                                                ---------------------------------------------
                                                                           2003                        2002
                                                                -----------------           -----------------
Real estate loans
<S>                                                                <C>                          <C>
  Permanent residential one- to four-family                        $195,784,922                 $339,403,368
  Multi-family residential                                           32,029,946                   21,595,322
  Construction                                                       16,650,269                   15,223,441
  Agricultural                                                        9,382,520                    4,888,861
  Commercial                                                        125,725,721                   91,703,262
  Land                                                                8,081,601                    4,164,394
                                                               -----------------           -----------------
     Total real estate loans                                        387,654,979                  476,978,648

Non-real estate loans
  Savings account                                                     1,293,776                    1,261,448
  Home improvement and home equity                                  112,248,154                   65,092,250
  Other consumer                                                     16,072,833                   16,926,304
  Commercial                                                         57,975,073                   62,102,347
                                                                ----------------           -----------------
     Total non-real estate loans                                    187,589,836                  145,382,349
                                                                ----------------           -----------------
     Total loans                                                    575,244,815                  622,360,997

Less
  Undisbursed portion of loans                                        7,540,747                    3,609,164
  Deferred loan fees                                                  3,218,917                    3,911,361
  Allowance for loan losses                                           6,933,749                    7,375,812
                                                               -----------------           -----------------
                                                                   $557,551,402                 $607,464,660
                                                               =================           =================
</TABLE>

The weighted  average  interest rate on loans at September 30, 2003 and 2002 was
6.39% and 7.36%, respectively.

Included in loans  receivable are $4.0 million of loans held for sale. All these
loans are one- to  four-family  mortgage  loans.  In the aggregate  there was no
lower of cost or market adjustment required; fair value approximates cost.

Aggregate loans to officers and directors, all of which were current, consist of
the following (in thousands):

<TABLE>
<CAPTION>

                                                      Year Ended September 30,
                                --------------------------------------------------------------
                                       2003                       2002                    2001
                                -----------             --------------             -----------
<S>                                  <C>                        <C>                     <C>
Beginning balance                    $3,220                     $2,990                  $2,089
Originations                          6,006                      1,018                   1,227
Principal repayments                 (1,716)                      (788)                   (326)
                                -----------             --------------             -----------
Ending balance                       $7,510                     $3,220                  $2,990
                                ===========             ==============             ===========
</TABLE>

The  significant  increase  in  originations  for 2003  relates  to  refinancing
activity  and to the election of a new director in January 2003 who had existing
loans with the Company.
<PAGE>

Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>

                                                                         Year Ended September 30,
                                                        -----------------------------------------------------------
                                                               2003                    2002                    2001
                                                        -----------          --------------          --------------
<S>                                                      <C>                     <C>                     <C>
Balance, beginning of year                               $7,375,812              $7,950,680              $4,082,265
Charge offs                                                (507,130)               (747,092)                (90,173)
Recoveries                                                   65,067                  16,224                  42,406
Additions                                                        --                 156,000                 387,000
Acquisitions                                                     --                      --               3,761,024
Allowance reclassified with loan securitization                  --                      --                (231,842)
                                                        -----------          --------------          --------------
Balance, end of year                                     $6,933,749              $7,375,812              $7,950,680
                                                           ========                ========                ========
</TABLE>

At September 30, 2003 and 2002,  impaired  loans totaled  $104,424 and $200,000,
respectively.  At September 30, 2003, loan loss reserves specifically  allocated
to these loans totaled $1,512.  There were no  specifically  allocated loan loss
reserves related to these loans at September 30, 2002. The average investment in
impaired loans for the years ended  September 30, 2003 and 2002 was $157,847 and
$43,590, respectively.

(6) Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                 September 30,
                                                     --------------------------------------
                                                         2003                       2002
                                                     -----------               ------------
<S>                                                  <C>                        <C>
Land                                                 $ 4,879,451                $ 4,872,673
Office buildings and construction in progress         18,696,847                 17,766,655
Furniture, fixtures and equipment                     10,711,875                  9,559,681
Automobiles                                               30,324                     20,928
Less accumulated depreciation                        (10,987,451)                (8,809,090)
                                                     ------------              ------------
                                                     $23,331,046                $23,410,847
                                                     ===========                ===========
</TABLE>

Depreciation  expense was $2.2 million,  $2.0 million,  and $1.2 million for the
years ended September 30, 2003, 2002, and 2001, respectively.

(7)   Accrued Interest Receivable

The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>

                                                                  September 30,
                                                     --------------------------------------
                                                         2003                       2002
                                                     -----------                -----------
<S>                                                  <C>                        <C>
Loans receivable                                     $ 2,954,233                $ 3,578,678
Mortgage-backed and related securities                 2,622,224                  3,028,121
Investment securities                                  1,587,676                  1,570,154
Federal funds sold and securities purchased
   under agreements to resell                                 57                         61
                                                     ------------              ------------
                                                     $ 7,164,190                $ 8,177,014
                                                     ===========               ============
</TABLE>

<PAGE>

(8)      Mortgage Servicing Rights ("MSR")

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  balance  sheets.  The unpaid  principal  balance of mortgage loans
serviced for others was $72.9  million and $140.3  million at September 30, 2003
and 2002,  respectively.  The  mortgage  servicing  rights are included in other
assets in the consolidated balance sheets.

During the quarter  ended March 31,  2001,  the Company  sold $190.3  million in
seasoned  fixed-rate  single-  family  loans to Fannie Mae. The  mortgages  were
aggregated into 14 pools and  securitized  with the resulting MBS being retained
by the Company, and classified as available for sale, and subsequently sold. The
loans were sold with servicing retained by the Company.

The fair value of MSR was determined  using a discounted cash flow model,  which
incorporates  the  expected  life of the loans,  estimated  costs to service the
loans,  servicing  fees to be received,  and other factors.  Mortgage  servicing
rights were valued at $1.7 million.  The key assumptions used to initially value
the MSR recorded in 2001 included a constant  prepayment rate ("CPR") of 20%, an
average  life of 6.3  years  and a  discount  rate of 10%.  The  Company  pays a
guarantee fee to FNMA as part of the  securitization and servicing of the loans,
thus  transferring all credit risk to FNMA. The final resulting basis in the MBS
recorded was $185.9 million. As of September 30, 2001, all the resulting MBS had
been sold with a gain of $5.4 million.

The balance of the Company's  originated MSR as of September 30, 2003, 2002, and
2001, and changes during the periods then ended, were as follows:
<TABLE>
<CAPTION>

                                                                       Year Ended September 30,
                                                             -------------------------------------------------
                                                                 2003               2002               2001
                                                             ---------------    -------------    -------------
<S>                                                           <C>               <C>                <C>
Balance, beginning of year                                    $1,035,660        $1,596,930            $95,420
Additions for loans securitized                                       --                --          1,653,830
Additions for other loans sold                                        --                --             54,693
Amortization of servicing rights for loans securitized          (597,397)         (327,542)          (167,857)
Amortization of servicing rights for other loans sold            (39,896)          (52,989)           (39,156)
Valuation allowance                                              (12,704)         (180,739)                --
                                                             ---------------    -------------    -------------
Balance, end of year                                            $385,663        $1,035,660         $1,596,930
                                                                ========        ==========         ==========
</TABLE>

The changes in the Company's  valuation  allowance for  impairment of MSR are as
follows for the periods indicated:
<TABLE>
<CAPTION>

                                                                       Year Ended September 30,
                                                              ------------------------------------------
                                                                2003            2002               2001
                                                              ----------     ----------           ------
<S>                                                           <C>                  <C>              <C>
Balance, beginning of year                                    ($180,739)           $--              $--
Additions for impairment                                        (12,704)      (180,739)              --
                                                              _________       ________            _____

Balance, end of year                                          ($193,443)     ($180,739)             $--
                                                              =========       ========            =====
</TABLE>

<PAGE>

The  Company  evaluates  MSR for  impairment  by  stratifying  MSR  based on the
predominant  risk   characteristics  of  the  underlying  financial  assets.  At
September 30, 2003 and 2002,  the fair values of the Company's MSR were $385,663
and $1,045,964 respectively,  which were estimated using a discount rate of 8.5%
and Public Securities  Association prepayment assumptions (PSA) ranging from 152
to 513 and from 217 to 679, respectively.

At September 30, 2003, the key economic  assumptions  and the sensitivity of the
current  value  for MSR to  immediate  10%  and 20%  adverse  changes  in  those
assumptions were as follows:
<TABLE>
<CAPTION>

                                                     Year Ended
                                                     September 30, 2003
                                                     ------------------
<S>                                                     <C>
Fair value of capitalized MSR                           $385,663
PSA                                                   152 to 513
Impact on fair value of 10% adverse change               (19,342)
Impact on fair value of 20% adverse change               (36,663)
Future cash flows discounted at                             8.50%
Impact on fair value of 10% adverse change                (7,774)
Impact on fair value of 20% adverse change               (15,238)
</TABLE>

These  sensitivities  are hypothetical  and should be used with caution.  As the
amounts  indicate,  changes  in fair  value  based  on a change  in  assumptions
generally  cannot be  extrapolated  because  the  relationship  of the change in
assumption  to the change in fair value may not be linear.  Also, in this table,
the effect of a variation  in a particular  assumption  on the fair value of the
retained  interest is  calculated  without  changing  any other  assumption.  In
reality,  however, changes in one factor may result in changes in another, which
might magnify or counteract the sensitivities.

(9)      Goodwill and Intangible Assets

On October 1, 2002, the Company  adopted SFAS No. 147,  Acquisitions  of Certain
Financial Institutions, which requires certain intangible assets to be accounted
for under the provisions of SFAS No. 141,  Business  Combinations,  and SFAS No.
142, Goodwill and Other Intangible Assets, which statements were also adopted on
October  1,  2002.  In  accordance  with  these  standards,  goodwill  and other
intangible  assets  with  indefinite  lives are no longer  being  amortized  but
instead will be tested for impairment at least  annually.  Upon adoption of SFAS
No. 147, $22.9 million of intangible assets related to prior branch acquisitions
were  reclassified to goodwill and amortization of these assets ceased.  Expense
related to  amortization  of goodwill  totaled  $1.6  million for the year ended
September 30, 2002. A similar expense is not being recorded in fiscal year 2003.
Core deposit  intangibles  will continue to be amortized  based on the estimated
lives of the  underlying  deposits.



<PAGE>


The  following  table  summarizes  selected information about intangible assets:
<TABLE>
<CAPTION>

                                              Gross Carrying Amount                        Accumulated Amortization
---------------------------------  --------------------------------------------  --------------------------------------------
Intangible assets                  September 30, 2003    September 30, 2002      September 30, 2003      September 30, 2002
carrying value
---------------------------------  --------------------- ----------------------  ----------------------- --------------------
<S>                                          <C>                    <C>                      <C>                  <C>
Core deposit intangible                      $28,376,467            $28,376,467              $14,598,767          $10,950,393
Mortgage servicing rights (included
in Other Assets)                               1,820,823              1,820,823                1,241,717              604,424
                                   --------------------- ----------------------  ----------------------- --------------------
Total                                        $30,197,290            $30,197,290              $15,840,484          $11,554,817
                                   ===================== ======================  ======================= ====================
</TABLE>
<TABLE>
<CAPTION>

                                               Amortization expense
                                             Year ended September 30,
                                   --------------------------------------------
Intangible assets amortization             2003                   2002
---------------------------------  --------------------- ----------------------
<S>                                           <C>                    <C>
Core deposit intangible                       $3,648,374             $3,895,043
Mortgage servicing rights                        637,293                380,531
                                   --------------------- ----------------------
Total                                         $4,285,667             $4,275,574
                                   ===================== ======================
</TABLE>

<TABLE>
<CAPTION>

Estimated amortization expense for
core deposit intangible and MSR
<S>                                           <C>
For year ended 9/30/2004                      $3,611,358
For year ended 9/30/2005                      $3,306,403
For year ended 9/30/2006                      $1,648,489
For year ended 9/30/2007                      $1,527,914
For year ended 9/30/2008                      $1,258,079
</TABLE>


<PAGE>

(10)  Deposit Liabilities

The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>

                                                                      September 30,
                                                           ---------------------------------------------------------
                                                                      2003                            2002
                                                           -------------------------       -------------------------
                                                               Amount        Percent           Amount        Percent
                                                           ----------     ----------       ----------     ----------

Checking accounts, non-interest
<S>                                                      <C>                  <C>        <C>                  <C>
 bearing                                                 $161,450,712          15.1%     $142,772,746          12.5%
                                                           ----------     ----------       ----------     ----------

Interest-bearing checking                                 136,557,381           12.8      125,866,951           11.0
                                                           ----------     ----------       ----------     ----------

Passbook and statement savings                             93,311,065            8.7       86,000,755            7.5
                                                           ----------     ----------       ----------     ----------

Money market deposits                                     326,630,686           30.6      330,646,410           29.0
                                                           ----------     ----------       ----------     ----------
Certificates of deposit
 Less than 4%                                             195,245,851           18.3      241,617,671           21.1
 4.00% to 5.99%                                            79,480,745            7.4      110,380,428            9.7
 6.00% to 7.99%                                            75,047,388            7.0      104,395,224            9.1
 8.00% to 9.99%                                               339,202            0.1          325,812            0.1
                                                       --------------      ---------   --------------      ---------
                                                          350,113,186           32.8      456,719,135           40.0
                                                       --------------      ---------   --------------      ---------
                                                       $1,068,063,030         100.0%   $1,142,005,997         100.0%
                                                       ==============      =========   ==============      =========
</TABLE>
The following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
                                                                     Year Ended September 30,
                                                           ------------------------------------------
                                                                 2003           2002             2001
                                                           ----------     ----------       ----------
<S>                                                       <C>            <C>              <C>
Interest-bearing checking                                    $175,549      $ 906,544        $ 812,210
Passbook and statement savings                                384,216        930,450        1,066,607
Money market                                                3,366,528      6,376,625        6,332,507
Certificates of deposit                                    14,331,577     21,691,878       22,199,640
                                                           ----------     ----------       ----------
                                                           18,257,870     29,905,497       30,410,964
Less early withdrawal
 penalties                                                     84,399        122,898          106,693
                                                           ----------     ----------       ----------
  Net interest on deposits                                $18,173,471    $29,782,599      $30,304,271
                                                          ===========    ===========      ===========
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
At September 30, 2003, maturities of certificates of deposit were as follows:

<S>                                                      <C>
Within 1 year                                            $201,289,820
1 year to 3 years                                          82,522,403
3 years to 5 years                                         31,837,173
Thereafter                                                 34,463,790
                                                         ------------
                                                         $350,113,186
                                                         ============
</TABLE>

<TABLE>
<CAPTION>
Weighted average interest rates at September 30,  2003 and 2002 were as follows:

                                                            2003           2002
                                                      ----------     ----------
<S>                                                        <C>            <C>
Interest-bearing checking                                  0.19%          0.44%
Passbook and statement savings                             0.25%          0.75%
Money market                                               0.88%          1.44%
Certificates of deposit                                    3.34%          4.00%
Weighted average rate for all deposits                     1.66%          2.42%
</TABLE>
     Deposits in excess of $100,000 totaled $296.3 million and $297.8 million at
September  30, 2003 and 2002,  respectively.  Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").


<PAGE>


(11)   Advances from FHLB

As a member of the FHLB of Seattle, the Association maintains a credit line that
is a percentage of its total  regulatory  assets,  subject to  collateralization
requirements.  At September 30, 2003, the credit line was 40% of total assets of
the Association.  Advances are collateralized in the aggregate,  as provided for
in the Advances,  Security and Deposit  Agreements with the FHLB of Seattle,  by
certain  mortgages or deeds of trust, and securities of the U.S.  Government and
agencies  thereof.  At  September  30, 2003 the  minimum  book value of eligible
collateral for these borrowings was $382.0 million.



Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>

                                           September 30, 2003                                             September 30, 2002
                      ---------------------------------------------------     -----------------------------------------------------
                                                Range of         Weighted                                Range of          Weighted
                                                interest          average                                interest           average
                              Amount               rates    interest rate             Amount                rates     interest rate
                      --------------      --------------   --------------     --------------       --------------     -------------
<S>                     <C>                <C>                      <C>          <C>                <C>                       <C>
Due within one year     $130,000,000       1.18% - 2.48%            1.26%        $31,250,000        1.91% - 2.20%             2.09%

After one but within
five years                60,000,000       2.22% - 4.77%            4.22%         16,000,000        2.48% - 3.58%             3.06%

After five but within
ten years                118,000,000       5.35% - 7.05%            6.23%        158,000,000        4.77% - 7.05%             5.86%
                      --------------                                          --------------
                        $308,000,000                                            $205,250,000
                        ============                                          ==============
</TABLE>
Financial  data  pertaining  to the  weighted  average  cost,  the level of FHLB
advances and the related interest expense are as follows:
<TABLE>
<CAPTION>


                                                                                  Year Ended September 30,
                                                          -----------------------------------------------------------------
                                                                    2003                       2002                    2001
                                                          --------------             --------------          --------------
<S>                                                         <C>                        <C>                     <C>
Weighted average interest rate at end of year                      3.74%                      5.07%                   5.73%
Weighted daily average interest rate during the year               4.71%                      5.71%                   5.90%
Daily average FHLB advances                                 $231,255,753               $168,332,740            $170,520,548
Maximum FHLB advances at any month end                       369,000,000                205,250,000             173,000,000
Interest expense during the year                              10,885,897                  9,608,659              10,065,991
</TABLE>


<PAGE>

(12)  Short Term Borrowings

The Company had short term  borrowings of zero and $1.7 million at September 30,
2003 and 2002, respectively.  At September 30, 2003, the borrowings consisted of
one unsecured  line of credit with Key Bank that has been paid off. The interest
rate of this line is the prime rate,  which was 4.00% at September  30, 2003. At
September 30, 2002,  the  borrowings  consisted of one unsecured  line of credit
with Key Bank that was fully  disbursed.  The interest rate on this line was the
prime rate,  which was 4.75% at  September  30,  2002.  The Company  also had an
unused line of credit  totaling $15.0 million with U.S.  National Bank of Oregon
at  September  30,  2003 and 2002.  The Company is in  compliance  with all debt
covenants imposed by the lenders.

Financial data pertaining to the weighted  average cost, the level of short term
borrowings and securities sold under  agreements to repurchase,  and the related
interest expense are as follows:
<TABLE>
<CAPTION>

                                                                   Year Ended September 30,
                                                        ----------------------------------------------
                                                              2003              2002             2001
                                                        ---------------  ---------------    ----------
<S>                                                     <C>              <C>              <C>
Weighted average interest rate at end of year                   --%            4.75%            5.58%
Weighted daily average interest rate
   during the year                                            4.43%            4.32%            8.22%
Daily average of short term borrowings                  $1,215,616       $1,704,521       $3,265,205
Maximum short term borrowings at
   any month end                                         1,700,000        1,700,000        6,400,000
Interest expense during the year                            53,870           73,690          268,447

</TABLE>

<PAGE>


(13) Taxes on Income

The following is a summary of income tax expense:
<TABLE>
<CAPTION>

                                                              Year Ended September 30,
                                             ---------------------------------------------------------------
                                                 2003                       2002                     2001
                                             ---------------          --------------            ------------
Current Taxes
<S>                                            <C>                      <C>                       <C>
Federal                                        $911,119                 $4,306,047                $3,560,966
State                                           332,482                    987,105                   835,250
Current tax provision                         1,243,601                  5,284,152                 4,396,216

Deferred Taxes
Federal                                       (555,734)                 (1,684,353)                 (564,904)
State                                         (110,971)                   (340,065)                 (114,052)
Deferred tax benefit                          (666,705)                 (2,024,418)                 (678,956)
                                             ----------                 -----------               ----------
Provision for income taxes                    $576,896                  $3,259,734                $3,717,260
                                             =========                  ==========                ==========
</TABLE>
An analysis of income tax expense,  setting  forth the reasons for the variation
from the  "expected"  federal  corporate  income tax rate and the effective rate
provided, is as follows:
<TABLE>
<CAPTION>

                                                                       Year Ended September 30,
                                                           ---------------------------------------------
                                                              2003              2002             2001
                                                           ------------       ---------        ---------

Federal income taxes computed at
<S>                                                            <C>              <C>              <C>
statutory rate                                                 35.0%            35.0%            35.0%

Tax effect of:

State income taxes, net of federal
   income tax benefit                                           4.6               4.2              4.2
Nondeductible ESOP compensation
   expense                                                     13.2               1.8              1.1
Deductible MRDP compensation
  expense                                                      (2.8)               --               --
Interest income on municipal securities                       (22.7)             (5.7)            (4.1)
Dividends received deduction                                   (4.0)             (2.0)            (0.7)
Other                                                          (3.9)             (0.9)            (2.6)
                                                              ------             ----             -----
Income tax expense included in the
statement of earnings                                          19.4%             32.4%            32.9%
                                                              =====              ====             ====
</TABLE>
Deferred  income  taxes at  September  30,  2003 and 2002  reflect the impact of
temporary  differences  between  amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.
<PAGE>

The tax  effects  of  temporary  differences  which  give rise to a  significant
portion of deferred tax assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>

                                                         September 30,
                                           -------------------------------------
                                                2003                       2002
                                           ------------             ------------
DEFERRED TAX ASSETS

<S>                                         <C>                      <C>
Allowance for losses on loans               $1,527,439               $1,679,909
Pension liability                              365,013                  330,929
Unearned ESOP shares                           276,812                  353,036
Core deposit premium                         2,954,461                2,264,290
Basis difference in fixed assets               831,215                  788,381
Other                                           78,818                       --
                                           ------------              -----------
Total gross deferred tax assets              6,033,758                5,416,545

DEFERRED TAX LIABILITIES

FHLB stock dividends                         2,169,847                1,834,035
Capitalized loan servicing income              151,527                  360,498
Unrealized gain on securities
     available for sale                      1,510,705                3,135,399
Deferred loan fees                             485,179                  485,179
Branch acquisition costs                       241,928                  241,928
Tax bad debt reserve in excess of base-
   year reserve                                226,534                  475,116
Other                                          423,194                  350,946
                                           ------------              -----------
Total gross deferred tax liabilities         5,208,914                6,883,101
                                           ------------              -----------
Net deferred tax asset (liability)            $824,844              ($1,466,556)
                                           ============             ============
</TABLE>
The Company has  qualified  under  provisions  of the  Internal  Revenue Code to
compute  federal  income  taxes after  deductions  of  additions to the bad debt
reserves.  At September 30, 2003, the Company had a taxable temporary difference
of  approximately  $10.5 million that arose before 1988 (base-year  amount).  In
accordance  with SFAS No.  109,  Accounting  for Income  Taxes,  a deferred  tax
liability has not been recognized for the temporary difference.  Management does
not expect this temporary difference to reverse in the foreseeable future.

<PAGE>
(14)   Mandatorily Redeemable Preferred Securities

In July 2001, the Company issued $15 million of mandatorily redeemable preferred
securities  through a subsidiary grantor trust. The Trust holds debt instruments
of the parent company  purchased  with the proceeds of the securities  issuance.
The capital  qualifying  securities  bear interest at a floating rate indexed to
six-month  LIBOR and mature in July 2031.  At September  30, 2003 and 2002,  the
interest  rate was 4.90% and 5.61%,  respectively.  The Company has the right to
redeem the securities after five years at a premium, and after ten years at par.

In April  2002,  the  Company  issued  $13  million  of  mandatorily  redeemable
preferred  securities  through a subsidiary  grantor trust. The Trust holds debt
instruments of the parent company  purchased with the proceeds of the securities
issuance.  The capital  qualifying  securities  bear interest at a floating rate
indexed to six-month  LIBOR and mature in April 2032.  At September 30, 2003 and
2002, the interest rate was 4.99% and 6.02%,  respectively.  The Company has the
right to redeem the securities at a premium up to five years from issuance,  and
after five years at par.

Certain changes in tax law or Office of Thrift Supervision regulations regarding
the  treatment of the capital  securities  as core capital could result in early
redemption, at par, or a shortening in the maturity of the securities.

(15)  Commitments and Contingencies

In the  ordinary  course  of  business,  the  Company  has  various  outstanding
commitments  and  contingencies  that  are  not  reflected  in the  accompanying
consolidated  financial statements.  In addition,  the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business.  In
the opinion of management,  after consultation with legal counsel,  the ultimate
disposition  of these matters is not expected to have a material  adverse effect
on the consolidated financial condition of the Company.

The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the  financing  need of its  customers.  These
financial  instruments  generally  include  commitments  to originate  mortgage,
commercial and consumer loans.  Those instruments  involve,  to varying degrees,
elements of credit and interest rate risk in excess of the amount  recognized in
the balance sheet. The Company's maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making commitments as
it does for  on-balance  sheet  instruments.  Commitments  to extend  credit are
conditional  45 day  agreements  to lend to a customer  subject to the Company's
usual terms and conditions.

At September 30, 2003, loan commitments  amounted to approximately $45.1 million
comprised of $24.8  million in variable  rate loans ranging from 1.99% to 17.00%
and $20.3 million in fixed rate loans ranging from 3.00% to 12.50%. At September
30, 2003, the Company had $5.9 million in commitments to sell loans.

The Company  originates  residential  real estate loans secured by  residential,
multi-family  and  commercial  properties  as well as  consumer  and  commercial
business loans.  Substantially all of the Company's lending portfolio resides in
the state of Oregon.  An  economic  downturn  in this area would  likely  have a
negative impact on the Company's results of operations depending on the severity
of the downturn.
<PAGE>

(16)  Shareholders' Equity

The Company's Articles of Incorporation authorize the issuance of 500,000 shares
of preferred  stock,  having a par value of $.01 per share, in series and to fix
and state the  powers,  designations,  preferences  and  relative  rights of the
shares of such series,  and the  qualifications,  limitations  and  restrictions
thereof.

(17)     Earnings Per Share

Earnings per share ("EPS") is computed in accordance with SFAS No. 128, Earnings
per Share.  Shares held by the Company's ESOP that are committed for release are
considered  contingently  issuable shares and are included in the computation of
basic EPS.  Diluted EPS is computed  using the  treasury  stock  method,  giving
effect to potential  additional  common shares that were outstanding  during the
period. Potential dilutive common shares include shares awarded but not released
under the Company's MRDP, and stock options granted under the Stock Option Plan.
Following is a summary of the effect of dilutive  securities on weighted average
number of shares (denominator) for the basic and diluted EPS calculations. There
are no resulting adjustments to net earnings.
<TABLE>
<CAPTION>

                                                          For the Year Ended September 30,
                                               --------------------------------------------------------
                                                     2003                2002               2001
                                               -----------------   ------------------   ---------------
Weighted average common
<S>                                                    <C>                  <C>               <C>
shares outstanding - basic                             6,562,515            6,411,351         6,627,200
                                               -----------------   ------------------   ---------------
Effect of dilutive securities on number of shares:
MRDP shares                                                4,264                8,108             9,252
Stock options                                            176,441               76,039            65,593
                                               -----------------   ------------------   -----------------
Total dilutive securities                                180,705               84,147            74,845
                                               -----------------   ------------------   -----------------
Weighted average common shares

 outstanding - with dilution                           6,743,220            6,495,498         6,702,045
                                               =================    =================   ===============

</TABLE>

<PAGE>


(18) Employee Benefit Plans

Employee  Retirement  Plan As of September 30, 2001, the Company  terminated its
participation in a multiple-employer trusteed pension plan ("Plan") covering all
employees  with at least one year of service and which paid  direct  pensions to
certain  retired  employees.  Benefits  were based on years of service  with the
Company and salary excluding bonuses, fees, commissions,  etc. Participants were
vested in their accrued benefits after five years of service. Pension expense of
$452,592  was  incurred  during  the year ended  September  30,  2001.  Separate
actuarial valuations, including computed value of vested benefits, were not made
with  respect  to  each  contributing  employer,  nor  are the  plan  assets  so
segregated  by the  trustee.  As  part of the  termination  of the  plan,  early
retirement  was  offered to certain  long-time  employees  of the  Company.  The
Company  recorded  expense of  $378,887  in the year ended  September  30,  2001
related to these retirements.

Effective  October  1,  2001,  the  Company  implemented  a 401(k)  plan for all
employees. The Company matches 50% of the employee contributions up to a maximum
of 6% the employee's compensation. Expense of $251,093 and $451,649 was recorded
in the years ended  September 30, 2003 and 2002,  respectively,  related to this
plan.

Postretirement  Benefit Plan

The Company had an unfunded postretirement benefit plan for certain retirees and
all currently  active  employees who retired with at least ten years of service.
The plan  provided  for payment of all or a portion of the  Medicare  Supplement
premium  for  qualified  retirees  and  their  spouses.  This  plan was  revised
effective  October  1,  2001 to limit  benefits  to those  already  retired  and
discontinue  the benefit for current  employees.  The table below  reflects  the
result of this change on the actuarial valuation of the plan.

Information  related to the years ended  September 30, 2003,  2002,  and 2001 is
presented below.
<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                            ----------------------------------------------
                                                                2003              2002             2001
                                                            -----------     -------------      -----------
Change in benefit obligation
<S>                                                           <C>               <C>              <C>
Benefit obligation at beginning of year                       $237,399          $401,461         $324,279
Service cost                                                        --                --           27,386
Interest cost                                                   13,811            13,121           25,852
Actuarial changes                                                   --          (166,365)          35,109
Benefits paid                                                  (14,428)          (10,818)         (11,165)
                                                              --------          --------         --------
Benefit obligation at end of year                             $236,782          $237,399         $401,461
                                                              ========          ========         ========
</TABLE>
<TABLE>
<CAPTION>

                                                                2003              2002             2001
                                                             ----------     -------------       ----------
Components of net periodic benefit cost
<S>                                                           <C>                <C>              <C>
Service cost                                                  $     --            $   --          $27,386
Interest cost                                                   13,811            13,121           25,852
Recognition of changes in actuarial
assumptions, prior service cost, benefit
changes, and actuarial gains and losses                             --                --            9,475
                                                             ----------          --------         -------
Net periodic benefit cost                                      $13,811           $13,121          $62,713
                                                             ==========          ========         =======
</TABLE>
For measurement of the net periodic cost of the post retirement  benefit plan, a
5.0% annual  increase in the medical  care trend rate was  assumed.  The assumed
discount rate was 6.0% for 2003 and 2002 and 7.5% for 2001.

If the assumed  medical trend rates were increased by 1%, the September 30, 2003
benefit obligation would increase from $236,782 to $267,862 and the net periodic
benefit cost for the year ended  September 30, 2003 would  increase from $13,811
to $31,770.
<PAGE>

Director Deferred Compensation Plan/Supplemental Executive Retirement Plan

The Company also had an unfunded  supplemental  benefits plan to provide members
of the Board of Directors with supplemental  retirement  benefits.  Supplemental
benefits are based on monthly fees approved by the Compensation Committee of the
Board.  In 2003,  a similar  plan was  created  to provide  benefits  to certain
employees. In addition, the Directors Deferred Compensation Plan was rolled into
a new but  substantially  similar  supplemental  retirement  plan. The projected
benefit obligation of the combined plans was $929,022, $516,170 and $942,148 for
the years ended September 30, 2003, 2002 and 2001,  respectively.  Pension costs
recognized for the years ended September 30, 2003, 2002, and 2001 were $424,654,
zero, and $71,052, respectively.

Stock Option Plan

In February  1996,  the Board of  Directors  adopted a Stock Option Plan ("Stock
Plan") for the benefit of certain  employees and  directors.  The Stock Plan was
approved by the Company's  shareholders  on April 9, 1996. The maximum number of
common shares which may be issued under the Stock Plan is 1,223,313  shares with
a maximum term of ten years for each option from the date of grant.  The initial
awards  were  granted on April 9, 1996 at the fair value of the common  stock on
that date ($13.125).  All initial awards vest in equal  installments over a five
year period from the grant date and expire during April 2006.  Unvested  options
become immediately exercisable in the event of death or disability.

Option activity under the Stock Plan is as follows:
<TABLE>
<CAPTION>
                                                                       Weighted
                                                Number of               Average
                                                   Shares        Exercise Price
                                           -------------- ---------------------

<S>                                              <C>                    <C>
Outstanding, September 30, 2000                   916,258               $13.314

Granted                                           207,500               $12.412
Exercised                                        (244,662)              $13.125
Canceled                                              --                    --
                                           --------------         --------------
Outstanding, September 30, 2001                  879,096                $13.154
Granted                                           40,000                $12.900
Exercised                                        (19,572)               $13.125
Canceled                                         (19,573)               $13,125
                                           --------------          -------------
Outstanding, September 30, 2002                  879,951                $13.144
Granted                                           23,243                 16.85
Exercised                                       (252,254)                13.14
Canceled                                         (12,000)                13.50
                                           --------------          -------------
Outstanding, September 30, 2003                  638,940                $13.28
                                           ==============          =============
</TABLE>
At September 30, 2003,  6,781 shares were  available for future grants under the
Stock Plan.

Additional information regarding options outstanding as of September 30, 2003 is
as follows:
<TABLE>
<CAPTION>
                                                                       Weighted Avg.
Range of                   Options                   Options           Remaining
Exercise Prices            Outstanding               Exercisable       Contractual Life
-------------------        -----------              -------------      ----------------
<C>                        <C>                         <C>                  <C>
$16.846                     23,243                          --              10
$12.70 - $13.100            40,000                      24,000               8.3
$11.625 - $13.144          180,500                     140,000               7.3
$20.577                     23,243                      23,243               4.1
$13.125                    371,954                     371,954               2.5
                         ---------                  ----------
                           638,940                     559,197
                         =========                   =========
</TABLE>
(19) Employee Stock Ownership Plan

As part of the stock  conversion  consummated  on October 4, 1995,  the  Company
established  an ESOP  for  all  employees  that  are age 21 or  older  and  have
completed two years of service with the Company.  The ESOP  borrowed  $9,786,500
from the  Company and used the funds to  purchase  978,650  shares of the common
stock of the Company issued in the conversion  which would be distributed over a
ten year  period.  The  loan  will be  repaid  principally  from  the  Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an  outstanding  balance of $2.0 million and $2.9 million at September  30, 2003
and 2002,  respectively,  and an interest rate of 8.75%.  The loan obligation of
the  ESOP is  considered  unearned  compensation  and,  as such,  recorded  as a
reduction of the Company's  shareholders'  equity.  Both the loan obligation and
the unearned  compensation  are reduced by the amount of loan repayments made by
the ESOP. Shares purchased with the loan proceeds are held in a suspense account
for allocation among participants as the loan is repaid.

<PAGE>


Contributions  to the ESOP and shares  released  from the  suspense  account are
allocated  among  participants  on the  basis  of  compensation  in the  year of
allocation.  Benefits are fully vested at all times under the ESOP.  Forfeitures
are  reallocated  to remaining  plan  participants  and may reduce the Company's
contributions.  Benefits may be payable on  retirement,  death,  disability,  or
separation  from  service.   Since  the  Company's  annual   contributions   are
discretionary, benefits payable under the ESOP cannot be estimated. Compensation
expense is recognized to the extent of the fair value of shares  committed to be
released.  The  Company  recorded  compensation  expense  under the ESOP of $1.7
million,  $1.4 million, and $1.4 million for the years ended September 30, 2003,
2002 and 2001,  respectively,  and  approximately  98,000 shares were  allocated
among the participants in each of those years.

In  conjunction  with the  Sterling  Merger,  it is the  Company's  intention to
terminate the ESOP. In  furtherance  of that goal, the Plan has been amended and
an IRS determination  letter has been requested.  Unallocated shares in the ESOP
will be  used to pay off the  loan  balance  and any  remaining  shares  will be
distributed to participants.


<PAGE>

(20) Fair Value of Financial Instruments

Financial  instruments  have been construed to generally mean cash or a contract
that implies an  obligation to deliver cash or another  financial  instrument to
another entity.
<TABLE>
<CAPTION>


                                                    September 30, 2003                        September 30, 2002
                                           ----------------------------------         ------------------------------
                                                Carrying                 Fair            Carrying               Fair
                                                  amount                value              amount              value
                                           --------------         -----------         ------------       -----------
Financial Assets

<S>                                        <C>                  <C>                 <C>                <C>
Cash and due from banks                      $39,266,748          $39,266,748         $38,444,500        $38,444,500
Interest earning deposits with banks           5,838,016            5,838,016           5,762,373          5,762,373
Federal funds sold and
securities purchased under
agreements to resell                           2,200,000            2,200,000           1,584,540          1,584,540
Investment securities
available for sale                           140,939,164          140,939,164         119,542,052        119,542,052
Mortgage-backed and related
securities available for sale                680,719,515          680,719,515         650,796,164        650,796,164
Loans receivable, net                        557,551,402          572,055,851         607,464,660        649,490,130
FHLB stock                                    17,190,400           17,190,400          13,510,400         13,510,400
Mortgage servicing rights                        385,663              385,663           1,035,660          1,035,660

Financial Liabilities

Deposit liabilities                        1,068,063,030        1,081,804,238       1,142,005,997      1,155,611,434
FHLB advances                                308,000,000          320,259,942         205,250,000        218,125,349
Short term borrowings                                 --                   --           1,700,000          1,700,000
Mandatorily redeemable preferred securities   27,338,107           27,338,107          27,205,507         27,205,507
</TABLE>
Fair value estimates, methods, and assumptions are set forth below :

Investments  and  Mortgage-Backed  Securities - Fair values were based on quoted
market rates and dealer quotes.

Loans  Receivable - Loans were priced using a discounted  cash flow method.  The
discount rate was the rate currently offered on similar products.

No adjustment was made to the  entry-value  interest rates for changes in credit
of performing  loans for which there are not known credit  concerns.  Management
believes that the risk factor embedded in the entry-value  interest rates, along
with the general  reserves  applicable to the loan portfolio for which there are
no  known  credit  concerns,  result  in a fair  valuation  of such  loans on an
entry-value basis.

Deposits  - The  fair  value  of  deposits  with  no  stated  maturity  such  as
non-interest-bearing  demand  deposits,  savings,  NOW accounts and money market
accounts  was equal to the  amount  payable  on  demand.  The fair value of time
deposits with stated  maturity was based on the discounted  value of contractual
cash flows.  The discount rate was estimated using rates currently  available in
the local market.

Federal Home Loan Bank  Advances - The fair value of FHLB  advances was based on
the  discounted  cash flow method.  The discount rate was estimated  using rates
currently available from FHLB.
<PAGE>

Other - The carrying value of other financial instruments was determined to be a
reasonable estimate of their fair value.

Limitations - The fair value estimates  presented herein were based on pertinent
information  available to management as of September 30, 2003 and 2002. Although
management  was not aware of any  factors  that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  for  purposes  of  these  financial  statements  on those  dates  and,
therefore,  current  estimates of fair value may differ  significantly  from the
amounts presented herein.

Fair  value  estimates  were based on  existing  financial  instruments  without
attempting to estimate the value of anticipated future business.  The fair value
has not been  estimated  for assets  and  liabilities  that were not  considered
financial instruments.

(21) Regulatory Capital Requirements

The  Company  is  not  subject  to  any  regulatory  capital  requirements.  The
Association,  however,  is subject to various  regulatory  capital  requirements
administered  by the  Office  of Thrift  Supervision  ("OTS").  Failure  to meet
minimum  capital  requirements  can  initiate  certain  mandatory  and  possibly
additional discretionary action by regulators that, if undertaken,  could have a
direct material effect on the Association's financial statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Association must meet specific capital guidelines that involve  quantitative
measures of the Association's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory  accounting  practices.  The  Association's
capital amounts and classification are 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 Association to maintain minimum amounts and ratios of total and Tier
I capital  to  risk-weighted  assets,  of Tier I capital  to total  assets,  and
tangible  capital to tangible assets (set forth in the table below).  Management
believes that the Association  meets all capital adequacy  requirements to which
it is subject as of September 30, 2003.

As of September 30, 2003, the most recent  notification from the OTS categorized
the Association as "well capitalized" under the regulatory  framework for prompt
corrective action. To be categorized as "well-capitalized," the Association must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

At periodic  intervals,  the OTS and FDIC routinely  examine the  Association as
part of their  legally  prescribed  oversight of the thrift  industry.  Based on
these examinations,  the regulators can direct that the Association's  financial
statements be adjusted in accordance with their findings.  A future  examination
by the OTS or the FDIC could include a review of certain  transactions  or other
amounts reported in the Association's 2003 financial statements.  In view of the
uncertain  regulatory  environment in which the  Association  now operates,  the
extent,  if any, to which a forthcoming  regulatory  examination  may ultimately
result in  adjustments  to the 2003  financial  statements  cannot be  presently
determined.
<PAGE>

The  Association's  actual and required  minimum capital ratios are presented in
the following table:

<TABLE>
<CAPTION>
                                                                                                             Categorized as "Well
                                                                                                               Capitalized" Under
                                                                                    For Capital                 Prompt Corrective
                                                Actual                        Adequacy Purposes                  Action Provision
                                   ----------------------------         -------------------------      ---------------------------
                                      Amount             Ratio             Amount         Ratio            Amount           Ratio
                                   -------------        -------         -----------       -------      -------------       -------
As of September 30, 2003
<S>                                <C>                   <C>            <C>                <C>          <C>                   <C>
 Total Capital:                    $105,782,022          12.7%          $66,467,920        8.0%         $83,084,900           10.0%
  (To Risk Weighted Assets)
 Tier I Capital:                     98,947,473          11.9%                 N/A         N/A           49,850,940            6.0%
  (To Risk Weighted Assets)
 Tier I Capital:                     98,947,473           6.6%           59,601,418        4.0%          74,501,773            5.0%
  (To Total Assets)
 Tangible Capital:                   98,947,473           6.6%           22,350,532        1.5%               N/A              N/A
  (To Tangible Assets)

As of September 30, 2002
 Total Capital:                    $102,759,108          14.0%          $58,696,528        8.0%         $73,370,660          10.0%
  (To Risk Weighted Assets)
 Tier I Capital:                     95,497,095          13.0%                 N/A         N/A           44,022,396            6.0%
  (To Risk Weighted Assets)
 Tier I Capital:                     95,497,095           6.6%           58,297,476        4.0%          72,871,846            5.0%
  (To Total Assets)
 Tangible Capital:                   95,497,095           6.6%           21,861,554        1.5%               N/A              N/A
  (To Tangible Assets)
</TABLE>

The following table is a reconciliation of the Association's capital, calculated
according to generally accepted  accounting  principles,  to regulatory tangible
and risk-based capital:
<TABLE>
<CAPTION>

                                         September 30, 2003          September 30, 2002
                                         ------------------         -------------------
<S>                                       <C>                            <C>
Association's equity                      $138,061,967                   $142,052,659
Unrealized securities losses                (2,463,879)                    (6,256,574)
Core deposit intangible and goodwill       (36,650,615)                   (40,298,990)
                                         -----------------          ------------------
Tangible capital                            98,947,473                     95,497,095
General valuation allowances                 6,834,549                      7,262,013
                                         -----------------          ------------------
Total capital                             $105,782,022                   $102,759,108
                                         =================          ==================
</TABLE>


<PAGE>


(22) Parent Company Financial Information

Condensed  financial  information as of September 30, 2003 and 2002 and for each
of the three years in the period ended  September  30, 2003,  for Klamath  First
Bancorp,  Inc.  is  presented  and  should  be  read  in  conjunction  with  the
consolidated financial statements and the notes thereto:


BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                         September 30,
                                                           ------------------------------------
                                                                  2003                   2002
                                                           -------------          ------------
Assets
<S>                                                        <C>                    <C>
Cash and cash equivalents                                    $7,677,155             $5,608,620
Investment and mortgage-backed securities                       142,507                149,077
Investment in wholly-owned subsidiary                       138,061,967            142,052,659
Deferred tax asset                                                   --                310,718
Other assets                                                  3,189,312              2,157,987
                                                           ------------           ------------
Total assets                                               $149,070,941           $150,279,061
                                                           ============           ============
Liabilities

Short-term borrowings                                               $--             $1,700,000
Mandatorily redeemable preferred securities                  27,338,107             27,205,507
Deferred tax Liability                                              585                     --
Other liabilities                                             1,396,792              1,435,518
Total liabilities                                            28,735,484             30,341,025

Shareholders' equity

Common stock                                                     69,826                 67,440
Additional paid-in capital                                   34,330,667             30,282,059
Retained earnings                                            88,676,785             93,522,778
Unearned ESOP shares at cost                                 (1,956,480)            (2,935,130)
Unearned MRDP shares at cost                                   (785,340)            (999,111)
 Tax benefit of stock options                                   541,867                311,251
Total shareholders' equity                                  120,335,458            119,938,036
                                                           ------------           ------------
Total liabilities and shareholders' equity                 $149,070,941           $150,279,061
                                                            ===========            ===========
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

STATEMENTS OF EARNINGS
                                                                        Year Ended September 30,
                                                             --------------------------------------------------------
                                                                   2003                   2002                   2001
                                                             -----------            -----------            ----------
<S>                                                          <C>                    <C>                    <C>
Equity in undistributed income of subsidiary                 $3,927,889             $7,868,854             $8,271,234
Total interest income                                           413,498                560,127                730,727
Total interest expense                                        1,672,998                 74,650                268,185
Non-interest income                                                  44                 11,972                     --
Non-interest expense                                          1,318,095              2,315,762              1,641,346

Earnings before income taxes                                  1,350,338              6,050,541              7,092,430
Income tax benefit                                           (1,046,485)              (738,235)              (478,572)
                                                            -----------             ----------             ----------
Net earnings                                                 $2,396,823             $6,788,776             $7,571,002
                                                            ===========             ==========             ==========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
                                                                              Year Ended September 30,
                                                             ---------------------------------------------------------
                                                                   2003                   2002                   2001
                                                             ------------           ----------             -----------
<S>                                                          <C>                    <C>                    <C>
Net cash flows from operating activities                     $3,299,747             $3,200,786             $8,229,769

Cash flows from investing activities
Investment in subsidiary                                       (139,890)           (10,264,911)           (10,306,546)
Maturity of investment and mortgage- backed securities            6,882                533,743                683,893
Sale of investment and mortgage-backed securities                    --                782,597                     --
                                                            -----------             ----------             ----------
Net cash flows used in investing activities                    (133,008)            (8,948,571)            (9,622,653)

Cash flows from financing activities
Cost of ESOP shares released                                    978,650                978,380                979,740
Proceeds from short-term borrowings                                  --              1,900,000              3,400,000
Repayments of short-term borrowings                          (1,700,000)            (1,900,000)            (4,700,000)
Issuance of mandatorily redeemable preferred securities         132,600             12,651,823             14,553,684
Stock repurchase and retirement                                (232,760)            (4,750,847)            (7,399,423)
Stock options exercised                                       3,313,399                369,588              3,211,189
Dividends paid                                               (3,590,093)            (3,530,528)            (3,746,304)
Net cash flows provided by (used in) financing activities    (1,098,204)             5,718,416              6,298,886
                                                             ----------             ----------             ----------
Net increase (decrease) in cash and cash equivalents          2,068,535                (29,369)             4,906,002

Cash and cash equivalents beginning of year                   5,608,620              5,637,989                731,987
                                                             ----------             ----------             ----------
Cash and cash equivalents end of year                        $7,677,155             $5,608,620             $5,637,989
                                                             ==========             ==========             ==========
</TABLE>

<PAGE>


Note 23           Subsequent events

Sale of Branches

On December 12, 2003,  the  Company's  wholly-owned  subsidiary,  Klamath  First
Federal Savings and Loan Association,  successfully  completed the sale of seven
branches located in northeastern Oregon to the Bank of Eastern Oregon. The seven
branches are located in the towns of Burns, Condon,  Fossil,  Heppner, John Day,
Prairie City, and Moro. The sale included deposit accounts of approximately  $65
million,  the fixed assets and branch locations.  The transaction  resulted in a
pretax gain of approximately $3.4 million.

Sterling Merger

On July 15, 2003,  the Company  announced  that it had entered into an Agreement
and Plan of Merger ("the Sterling Merger") with Sterling Financial  Corporation,
Inc., a Washington corporation ("Sterling"). The Company will be merged with and
into Sterling,  with Sterling being the surviving corporation in the merger. The
Company's  wholly-owned  subsidiary,  Klamath  First  Federal  Savings  and Loan
Association,  will be merged with and into Sterling's  wholly-owned  subsidiary,
Sterling   Savings  Bank,  with  Sterling   Savings  Bank  being  the  surviving
institution.

Under the terms of the Sterling  Merger,  each share of Klamath  First  Bancorp,
Inc.  common stock will be converted  into 0.77 shares of Sterling  common stock
subject to certain conditions.

On December 11, 2003, the merger was approved by a vote of the  stockholders  of
both the Company and Sterling. All necessary regulatory approvals had previously
been received. The transaction is expected to close on January 2, 2004.
<PAGE>

Consolidated Supplemental Data
Selected Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>

                                                             Year Ended September 30, 2003
                                                      -----------------------------------------------------------
                                                         December           March            June       September
                                                      ------------      ----------       ---------      ---------
                                                                    (In thousands, except per share data)

<S>                                                       <C>             <C>             <C>             <C>
Total interest income                                     $19,227         $17,771         $17,347         $16,946
Total interest expense                                      8,230           7,348           6,820           7,126
                                                           ------          ------          ------          ------
Net interest income                                        10,997          10,423          10,527           9,820
Provision for loan losses                                      --              --              --              --
                                                           ------          ------          ------          ------
Net interest income after provision                        10,997          10,423          10,527           9,820
Non-interest income                                         3,941           4,176           4,853           4,135
Non-interest expense                                       12,167          13,249          17,409          13,073
                                                           ------          ------          ------          ------
Earnings/loss before income taxes                           2,771           1,350         (2,029)             882
Provision (benefit) for income tax                            885             388           (667)            (29)
                                                           ------          ------          ------          ------
Net earnings (loss)                                        $1,886            $962        ($1,362)            $911
                                                           ======          ======          ======          ======
Net earnings (loss) per share - basic                       $0.29           $0.15         ($0.20)           $0.14

Net earnings (loss) per share - fully diluted               $0.29           $0.14         ($0.20)           $0.13
</TABLE>
<TABLE>
<CAPTION>

                                                                     Year Ended September 30, 2002
                                                        ----------------------------------------------------------
                                                         December           March            June       September
                                                        -----------     -----------     ----------      ----------
                                                                   (In thousands, except per share data)

<S>                                                       <C>             <C>             <C>             <C>
Total interest income                                     $22,995         $21,922         $21,530         $20,846
Total interest expense                                     11,719           9,897           9,208           8,707
                                                           ------          ------          ------          ------
Net interest income                                        11,276          12,025          12,322          12,139
Provision for loan losses                                     153               3              --              --
                                                           ------          ------          ------          ------
Net interest income after provision                        11,123          12,022          12,322          12,139
Non-interest income                                         2,282           2,921           3,054           4,356
Non-interest expense                                       12,129          12,396          12,404          13,241
                                                           ------          ------          ------          ------
Earnings before income taxes                                1,276           2,547           2,972           3,254
Provision for income tax                                      454             876           1,044             886
                                                           ------          ------          ------          ------
Net earnings                                                 $822          $1,671          $1,928          $2,368

Net earnings per share - basic                              $0.13           $0.26           $0.30           $0.37

Net earnings per share - fully diluted                      $0.13           $0.26           $0.30           $0.36
</TABLE>



<PAGE>


Klamath First Bancorp, Inc.
Corporate Information

Corporate                                     Common Stock
Headquarters                                     Traded over-the-counter/
540 Main Street                               Nasdaq National Market
Klamath Falls, OR 97601                       Nasdaq Symbol: KFBI
541-882-3444
                                              Form 10-K
Independent                                            Information
Auditors                                      Available without charge
Deloitte & Touche LLP                         to shareholders of record
Suite 3900                                    upon written request to:
111 SW Fifth Avenue                           Marshall Alexander
Portland, OR 97204-3698                       Executive Vice President -
503-222-1341                                      Chief Financial Officer
                                              Klamath First Bancorp, Inc.
Corporate Counsel                             540 Main Street
Craig M  Moore                                Klamath Falls, OR 97601
540 Main Street
Klamath Falls, OR 97601                       Because the merger of Klamath
541-882-3444                                  First Bancorp, Inc. is expected
                                              to be completed during the first
Special Counsel                               calendar quarter of 2004, no
Breyer & Associates PC                        annual meeting has been scheduled
8180 Greensboro Drive
Suite 785
McLean, Virginia 22102
703-883-1100

Transfer Agent
Registrar & Transfer Co.
10 Commerce Drive
Cranford, NJ 07016-3572
800-866-1340

         (b)      Supplementary Data



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

          There have been no changes in or  disagreements  with  Accountants  on
          accounting and financial  disclosure  during the year ended  September
          30, 2003.



                                       45
<PAGE>

Item 9A.  Controls and Procedures

     (a) Evaluation of Disclosure Controls and Procedures:  An evaluation of the
Company's  disclosure controls and procedures (as defined in Section 13(a)-14(c)
of the  Securities  Exchange  Act of 1934 (the "Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief  Financial  Officer  and several  other  members of the  Company's  senior
management  within the 90 day period preceding the filing of this annual report.
Based on such  evaluation,  the  Company's  Chief  Executive  Officer  and Chief
Financial  Officer have  concluded  that the Company's  disclosure  controls and
procedures  are  effective  in  ensuring  that the  information  required  to be
disclosed  by the  Company in  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:  There have not been any changes in the
Company's internal control over financial reporting (as defined in Section 13(a)
- 15(f) and 15d - 15(f) of the Act)  during the year ended  September  30,  2003
that have materially  affected,  or are reasonably likely to materially  affect,
the Company's internal control over financial reporting.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     The Company's Board of Directors consists of eight directors as required by
the Company's Bylaws.  The Company's Bylaws also provide that the directors will
be elected for three-year  staggered terms with  approximately  one-third of the
directors elected each year. The following table sets forth ceratin  information
regarding the directors of the Company.
<TABLE>
<CAPTION>
                                                                                                 Year First
                                                                                                 Elected or
Name                       Age (1)  Principal Occupation During Last Five Years                  Appointed (2)
-----------------------    -------  -----------------------------------------------------------  -------------
<S>                           <C>   <C>                                                                   <C>
Rodney N. Murray              75    Chairman of the Board; owner and operator, Rod Murray                 1976
                                    Ranch, Klamath Falls, Oregon; former owner and operator,
                                    Klamath Falls Creamery/Crater Lake Dairy Products.

Kermit K. Houser              60    President and Chief Executive Officer of the Company and              2000
                                    The Association, November 2000 to present. Prior to joining
                                    the Company, employed by Bank of America, 1983-2000,
                                    in various positions, including senior vice president and
                                    manager for commercial banking, executive vice president
                                    and senior credit officer, and most recently, senior vice
                                    president and market executive for Bank of America's
                                    South Valley commercial banking in Fresno, California.

Bernard Z. Agrons             81    Retired; former State Representative, Oregon State                    1974
                                    Legislature, 1983-1991; former Vice President for the
                                    Eastern Region, Weyerhaeuser Company, until 1981.

Timothy A. Bailey             57    Executive Director, KMSB Foundation; Member, Oregon                   1993
                                    State Bar; former Senior Vice President, Klamath
                                    Operations for Regence Blue Cross/Blue Shield of Oregon.

Donald N. Bauhofer            52    Founder and President, the Pennbrook Company (real                    2002
                                    estate development), Bend, Oregon; Founder and Chief
                                    Executive Officer, Pennbrook Homes, Inc. and Praxis
                                    Medical Group; Co-owner, Arrowood Development, LLC;
                                    Co-Owner and Director, Pacific Education Corporation.

James D. Bocchi               79    Retired; former President and Chief Executive Officer of              1983
                                    the Association, 1984-1994; employed by the Association,
                                    1950-1994.

William C. Dalton             72    Retired; former owner of W.C. Dalton Company (farming).               1972

Dianne E. Spires              49    Certified Public Accountant; Partner, Rusth, Spires &                 1997
                                    Menefee, LLP,  Klamath Falls, Oregon.
_________________________
<FN>
(1)      As of September 30, 2003
(2)      Includes service on the Board of Directors of the Association
</FN>
</TABLE>
                                       46

<PAGE>

                MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

     The Boards of Directors of the Company and the  Association  conduct  their
business through meetings of the Boards and through their committees. During the
year ended  September  30,  2003,  the Board of Directors of the Company held 12
regular  meetings  and six  special  meetings,  and took one  action by  written
consent.  The Board of Directors of the  Association  held 12 regular  meetings,
eight special meetings,  and took one action by written consent.  No director of
the Company or the Association  attended fewer than 75% of the total meetings of
the Boards and committees on which such person served during this period.

     The Boards of Directors of the Company and the Association have established
various  committees,  including  Executive,  Audit,  Compensation and Nominating
Committees.

     The Executive  Committee  consists of Messrs.  Bocchi,  Dalton,  Houser and
Murray. The Executive  Committee has the power and authority to act on behalf of
the Board of Directors on matters  between  regularly  scheduled  Board meetings
unless specific Board of Directors' action is otherwise required.  The Executive
Committee met six times during the year ended September 30, 2003.

     The Audit Committee consists of Messrs.  Agrons,  Dalton and Murray and Ms.
Spires.  The Audit Committee reviews the internal  auditors' reports and results
of their  examination  prior to review by and with the entire Board of Directors
and retains and establishes the scope of engagement of the Company's independent
auditors. The Audit Committee met five times during the year ended September 30,
2003,  and took one  action  by  written  consent.  For  additional  information
regarding the Audit Committee, see "Audit Committee Matters" below.

     The  Compensation  Committee,  consisting  of  Messrs.  Bailey,  Agrons and
Bauhofer, and Ms. Spires, reviews and recommends  compensation  arrangements for
management and other personnel. The Compensation Committee met five times during
the year ended September 30, 2003.

     The  Nominating  Committee,  consisting  of the  Company's  full  Board  of
Directors, selects the nominees for election as directors. During the year ended
September 30, 2003, the  Nominating  Committee met once to nominate the nominees
for directors at the annual Shareholders' Meeting.


                             DIRECTORS' COMPENSATION

     Fees. The Company and the Association  each pay fees to its directors,  and
each director of the Company is a director of the Association.  Each director of
the Company receives a quarterly fee of $1,000,  except that the Chairman of the
Board receives a quarterly fee of $1,250. Each director of the Association other
than the Chairman of the Board receives an annual  retainer of $10,900 and a fee
of $1,550 per month for attendance at regular Board meetings. In addition to the
annual  retainer,  the Chairman of the Board of the Association  also receives a
fee of $1,950 per month for  attendance at regular Board  meetings.  Mr. Houser,
President,  Chief  Executive  Officer  and a  director  of the  Company  and the
Association,  does not  receive  any fees for  attending  Board  meetings of the
Company and the Association.  The Company and the Association paid total fees to
directors of $234,717 for the fiscal year ended September 30, 2003,  $16,800 was
paid to one director  emeritus and $18,600 was paid to the surviving spouse of a
former director.

                                       47
<PAGE>


     Supplemental  Benefit  Plan.  The  Association  also  maintains an unfunded
supplemental benefit plan to provide retirement benefits to members of the Board
of Directors.  Payments are based on directors' fees paid by the Association and
continue for a period of five years  following a director's  retirement,  except
for  directors  who served at January 1, 1992,  who  receive  this fee for life.
Payments  under  this plan  have been  waived  by all  current  directors,  with
payments  under  the plan  only  being  made to one  director  emeritus  and the
surviving spouse of a former director.

     Effective  January  1, 2003,  the  Company  established  new  director  fee
continuation  agreements to provide retirement  benefits to members of the Board
of Directors.  The agreements  provide that the normal retirement age is 68, but
permit  retirement  as early as age 55 with a cut-back in  retirement  benefits.
Payments  vest  over a  period  of up to  nine  years,  and  are  payable  after
retirement for life. The maximum initial retirement benefit at normal retirement
is $36,084 per year, with  subsequent cost of living  adjustments of two percent
per year. Directors fully vested under the prior plan are fully vested under the
new  agreements.  The  agreements  also provide for full vesting in the event of
termination  as a  director, other  than for  cause, subsequent  to a change  in
control.

The Company has entered into fee  continuation  agreements with directors Rodney
N. Murray,  Bernard Z. Agrons,  Timothy A.  Bailey,  James D. Bocchi,  Donald N.
Bauhofer,  William C.  Dalton,  and Dianne E. Spires  which  entitle each of the
directors  to  payment  of  retirement   benefits  if  the  director  suffers  a
termination of service, whether voluntary or involuntary, except for cause.

Upon a change of control,  if a director  subsequently  suffers a termination of
service, voluntary or involuntary,  except for cause, then the director shall be
paid director retirement benefits of $2,834 per month,  commencing at age 65 and
continuing  until the death of the  director.  Alternatively,  the  director may
elect to receive a reduced  early  retirement  benefit as  specified  in the fee
continuation agreement,  as of the date selected for early retirement.  However,
if the director  dies before 60 monthly  payments  have been made,  such monthly
payments will continue  until a total of 60 monthly  payments have been made, or
until the death of the director's  surviving  spouse,  whichever occurs earlier.
Monthly payments increase by two percent at the end of each calendar year.

Pursuant to the terms of the proposed merger,  directors who are at least age 65
on the effective  date of the merger shall be entitled to normal  retirement age
benefits, as defined in the fee continuation  agreement, if those benefits would
be greater than the benefits that would be received  under the change of control
provision.

Assuming the service of  Company's  directors  is  terminated  in 2004 and their
retirement  payments begin at or after the directors  reach age 65, the increase
in initial annual benefits for Messrs.  Murray,  Agrons, Bocchi, Dalton, Bailey,
Bauhofer,  and Ms.  Spires would be $2,076,  $2,076,  $2,076,  $2,076,  $23,184,
$26,792 and  $23,184,  respectively,  as a result of the merger  being  deemed a
change in control under the director fee continuation agreements.

     Section  16(a)  Compliance.  Section 16(a) of the Exchange Act requires the
Company's executive officers and directors, and persons who own more than 10% of
any  registered  class of the Company's  equity  securities,  to file reports of
ownership and changes in ownership with the SEC. Executive  officers,  directors
and greater  than 10%  stockholders  are required by  regulation  to furnish the
Company with copies of all Section 16(a) forms they file.

     Based  solely on its review of the copies of such forms it has received and
written representations provided to the Company by the above referenced persons,
the Company believes that,  during the fiscal year ended September 30, 2003, all
filing requirements applicable to its reporting officers,  directors and greater
than 10%  stockholders  were  complied  with  properly  and timely,  except that
Bernard Z.  Agrons  filed a Form 4 to report the sale of shares  during 1999 for
payment taxes on vested shares under the Company's  Management  Development  and
Recognition  Plan of 1996 and to  report a small  gift of shares  that  occurred
during 2001, which transactions had not been previously reported.

                             AUDIT COMMITTEE MATTERS

     Audit Committee Charter. The Audit Committee operates pursuant to a written
charter  approved  by the  Company's  Board of  Directors.  The Audit  Committee
reports  to the  Board  of  Directors  and is  responsible  for  overseeing  and
monitoring financial  accounting and reporting,  the system of internal controls
established  by  management  and the audit  process  of the  Company.  The Audit
Committee Charter sets out the  responsibilities,  authority and specific duties
of the Audit Committee. The Charter specifies, among other things, the structure
and membership  requirements of the Audit Committee, as well as the relationship
of the Audit  Committee  to the  independent  accountants,  the  internal  audit
department and management of the Company.

     A copy of the Audit  Committee  Charter  is  attached  and filed as Exhibit
99 to this Form 10-K report.

     Report of the Audit Committee.  The Audit Committee reports as follows with
respect  to the  Company's  audited  financial  statements  for the  year  ended
September 30, 2003:

          The Audit  Committee has  completed  its review and  discussion of the
          Company's 2003 audited financial statements with management;

          The Audit  Committee  has  discussed  with the  independent  auditors,
          Deloitte  & Touche  LLP,  the  matters  required  to be  discussed  by
          Statement on Auditing  Standards  ("SAS") No. 61,  Communication  with
          Audit   Committees,   as  amended  by  SAS  No.  90,  Audit  Committee
          Communications, including, matters related to the conduct of the audit
          of the Company's financial statements;

          The Audit Committee has received written  disclosures,  as required by
          Independence Standards Board Standard No. 1, Independence  Discussions
          with Audit Committee,  indicating all  relationships,  if any, between
          the independent  auditor and its related  entities and the Company and
          its related  entities which, in the auditor's  professional  judgment,
          reasonably may be thought to bear on the auditors'  independence,  and
          the letter  from the  independent  auditors  confirming  that,  in its
          professional  judgment,  it is  independent  from the  Company and its
          related  entities,  and has discussed  with the auditors the auditors'
          independence from the Company; and

          The Audit  Committee  has,  based on its review and  discussions  with
          management  of the Company's  2003 audited  financial  statements  and
          discussions with the independent auditors, recommended to the Board of
          Directors that the Company's audited financial statements for the year
          ended September 30, 2003 be included in the Company's Annual Report on
          Form 10-K.

          Audit Committee consisting of:
                        Bernard Z. Agrons,  Chairman
                        William C. Dalton
                        Rodney N. Murray
                        Dianne E. Spires

     Independence  and Other  Matters.  Each  member of the Audit  Committee  is
"independent,"  as defined,  in the case of the Company,  under the Nasdaq Stock
Market Rules. The Audit Committee members do not have any  relationship  to  the

                                       48
<PAGE>

Company  that  may  interfere  with the  exercise  of  their  independence  from
management  and the  Company.  None of the Audit  Committee  members are current
officers or employees of the Company or its affiliates.  Dianne E. Spires,  CPA,
has been designated as the Audit Committee's financial expert.


Item 11.  Executive Compensation

     Summary Compensation Table. The following table shows the compensation paid
during the last three fiscal years to the Company's Chief Executive  Officer and
the four highest paid executive  officers of the Company who received salary and
incentive  compensation  in excess of  $100,000  during  the  fiscal  year ended
September 30, 2003.
<TABLE>
<CAPTION>

                                           Annual                      Long-Term
                                        Compensation (1)         Compensation Awards
                                ---------------------------     ---------------------------

                                                                 Restricted      Number of         All Other
Name and Position               Year      Salary      Bonus     Stock Awards    Options (3)     Compensation (4)
                                                                    (2)
----------------------------    -----    --------    -------    ------------    -----------     ----------------
<S>                             <C>      <C>         <C>            <C>            <C>            <C>
Kermit K. Houser (5)            2003     $200,000    $60,000        $ ---            ---          $32,291
President and Chief             2002      200,000    $60,000          ---            ---            6,000
Executive Officer and           2001      175,000       --          232,500        100,000
Director

Marshall J. Alexander           2003     $136,050    $30,000        $ ---           ---           $31,772
Executive Vice President        2002     $114,600    $30,000          ---           ---            26,652
and Chief Financial Officer     2001      104,220       --          147,481         20,000         34,132

Ben A. Gay (6)                  2003     $136,050    $30,000        $ ---            ---           $5,555
Executive Vice President        2002     $114,600       --            ---            ---            2,865
and Chief Credit Officer        2001       $2,571       --          143,383         20,000             --


                                       49
<PAGE>




Walter F. Dodrill (7)           2003     $126,642    $22,500        $ ---            ---           $3,519
Senior Vice President           2002      $88,794       --          131,000         20,000          1,628
Business Banking                2001        --          --            ---            ---              --

Craig M Moore                   2003     $140,166    $25,000        $ ---            ---          $27,335
Senior Vice President,          2002       95,000    $20,000          ---            ---           20,123
Chief Auditor, General          2001       81,583       --           65,315          15,000        16,377
Counsel and Secretary
<FN>

     (1)  All  compensation  is  paid  by  the  Association.  Excludes  (1)  All
          compensation is paid by the Association.  Excludes certain  additional
          benefits  which did not  exceed the lesser of $50,000 or 10% of salary
          and bonus.

     (2)  Represents the total value of the award of shares of (2)Represents the
          toal value of the award of shares of  restricted  Common  Stock on the
          award date, pursuant to the MRDP. Mr. Houser was awarded 20,000 shares
          on November 15, 2000, Mr. Alexander was awarded 11,290 shares on April
          1, 2001,  Mr. Gay was awarded 11,290 shares on September 24, 2001, Mr.
          Dodrill was awarded  10,000  shares on January 2, 2002,  and Mr. Moore
          was awarded 5,000 shares on April 1, 2001.  Dividends are paid on such
          awards if and when  declared  and paid by the  Company  on the  Common
          Stock. The restricted MRDP shares awarded to Messrs. Houser, Alexander
          and Gay vest ratably over a two-year  period and those  awarded to Mr.
          Dodrill  and Mr.  Moore  vest  ratably  over a  five-year  period.  At
          September 30, 2003,  the number and value of the aggregate  restricted
          stockholdings  were: Mr. Dodrill 8,000 shares worth $171,920;  and Mr.
          Moore, 3,000 shares worth $64,470.

     (3)  Represents  the total number of shares  granted  under the Klamath (3)
          Represents  the toal number of shares  granted under the Klamath First
          Bancorp, Inc. 1996 Stock Option Plan ("Option Plan").

     (4)  Represents  the cost to the  Company of awards  under the ESOP and (4)
          Represents  the  cost to the  Company  of  awards  under  the ESOP and
          employer  matching  contributions  to the Klamath  First  401(k) Plan.
          Messrs. Gay and Dodrill are not ESOP participants. Mr. Houser became a
          participant in the ESOP on 4/1/2003 and received his first  allocation
          as of 9/30/2003.

     (5)  Mr. Houser was appointed to his position effective November 15, 2000.

     (6)  Mr.  Gay was hired on  September  24,  2001 and was  appointed  to his
          position effective October 5, 2001.

     (7)  Mr. Dodrill was appointed to his position effective January 2, 2002.
</FN>
</TABLE>


     Option  Exercise/Value  Table.  The following  information  is provided for
Messrs. Houser, Alexander, Gay, Dodrill and Moore.
<TABLE>
<CAPTION>
                                                                                              Value of
                                                        Unexercised Options             In-the-Money Options
                                                         at Fiscal Year End            at Fiscal Year End (1)

                             Shares
                          Acquired on      Value
Name                        Exercise     Realized    Exercisable   Unexercisable    Exercisable    Unexercisable
<S>                            <C>          <C>        <C>             <C>          <C>               <C>
Kermit K. Houser               0            $0         100,000           -            $986,500            -
Marshall J. Alexander          0            $0         127,651           -          $1,069,041            -
Ben A. Gay                     0            $0          20,000            -           $175,800            -
Walter F. Dodrill              0            $0           4,000         16,000          $33,560        $134,240
Craig M Moore                  0            $0           6,000          9,000          $50,562         $75,853
<FN>

(1)  Value of  unexercised  in-the-money  options  equals market value of shares
     covered by  in-the-money  options  on  September  30,  2003 less the option
     exercise price.  Options are in-the-money if the market value of the shares
     covered by the options is greater than the option exercise price.
</FN>
</TABLE>

                                       50
<PAGE>

     Employment  Agreements.  The  Company  and the  Association  (collectively,
"Employers")  have  entered into  two-year  employment  agreements  ("Employment
Agreements")   with  Messrs.   Houser,   Alexander,   Gay,   Dodrill  and  Moore
(individually, "Executive" and collectively, "Executives").

     Under the  Employment  Agreements,  the current  annual  salary  levels for
Messrs.  Houser,  Alexander,  Gay,  Dodrill  and Moore are  $200,000,  $138,000,
$138,000, $119,000 and $117,000, respectively, which amounts will be paid by the
Association  and  which  may be  increased  at the  discretion  of the  Board of
Directors or an  authorized  committee of the Board.  In addition,  Mr.  Moore's
monthly  compensation  was increased by $8,333 monthly for six months  beginning
July 1,  2003  for  the  extra  services  he has  provided  to the  Company  and
Association to facilitate the transactions  contemplated under the Agreement and
Plan of Merger by and between the Company  and  Sterling  Financial  Corporation
dated  July 14,  2003  (the  "Merger  Agreement").  On each  anniversary  of the
commencement date of the Employment  Agreements,  the term of each agreement may
be extended for an additional  year at the discretion of the Board of Directors.
The current term for Mr. Houser's  Employment  Agreement expires on November 14,
2004, the current term for Mr. Dodrill's Employment Agreement expires on January
2,  2005,  and the  current  terms  of the  Employment  Agreements  for  Messrs.
Alexander, Gay and Moore expire on September 30, 2004. The Employment Agreements
are terminable by the Employers for just cause at anytime or upon the occurrence
of  certain  events  specified  by  federal  regulations.  Under the  Employment
Agreements, the Executives may receive bonuses at the discretion of the Board.

     The Employment  Agreements were amended on July 14, 2003 in connection with
the Merger  Agreement  which  entitle the  Executives  to severance  payments or
liquidated  damages  upon a change  of  control.  The  proposed  merger  between
Sterling and Klamath will  constitute a change of control for the purpose of the
employment agreements.

     Upon the earlier of completion  of the merger,  or December 31, 2003 if the
closing  conditions  under the merger agreement have been satisfied or waived by
that date,  the named  Executives  will be entitled to receive a cash  severance
amount as well as  continued  life,  medical,  dental and  disability  insurance
coverage for a period of 36 months, with the exception of Walter F. Dodrill, who
will not be entitled to receive continuing insurance coverage,  and will receive
cash in the  amount  of  $12,588  in lieu  thereof,  which  is  included  in his
severance payment described below.

     The  severance  amounts  to be  paid to  Messrs.  Houser,  Alexander,  Gay,
Dodrill, and Moore will be approximately $405,750, $281,750, $281,750, $196,838,
and $131,250, respectively, under their employment agreements as a result of the
merger being  constituting a change in control.  The  Association  has purchased
long-term care insurance for Messrs.  Alexander, Gay and Moore, and the employer
costs of such insurance shall reduce their respective cash severance amounts.

     If the merger is not  consummated,  the  amendment is not effective and the
regular change in control provisions of the Employment  Agreements will still be
effective.  The agreements  without the amendment provide for severance payments
and other  benefits in the event of  involuntary  termination  of  employment in
connection with any change in control of the Employers.  Severance payments also
will be provided on a similar basis in connection  with a voluntary  termination
of employment  where,  subsequent  to a change in control,  the  Executives  are
assigned duties  inconsistent with their respective  position,  responsibilities
and status  immediately  prior to such  change in control.  The term  "change in
control" is defined in the  Employment  Agreements as any time during the period
of  employment  when (a) a person  other than the  Company  purchases  shares of
Common Stock  pursuant to a tender or exchange  offer for such  shares,  (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Company  representing  25% or more of the combined voting power of the Company's
then  outstanding  securities,  (c) the  membership  of the  Board of  Directors
changes  as the  result of a  contested  election,  or (d)  stockholders  of the
Company  approve  a  merger,  consolidation,  sale  or  disposition  of  all  or
substantially  all of the  Company's  assets,  or a plan of partial or  complete
liquidation.

     The maximum value of the severance  benefits  without the amendments to the
Employment  Agreements  is 2.00 or 1.50  times the  Executive's  average  annual
compensation  during the five-year  period  preceding the effective  date of the
change in control (the "base amount").  Agreements for Messrs. Houser, Alexander
and Gay are at the 2.00 times rate,  while Messrs.  Dodrill and Moore are at the
1.50 times rate.  Such  amounts  will be paid in a lump sum within ten  business
days following the termination of employment.

     Section 280G of the Internal  Revenue  Code of 1986,  as amended  ("Code"),
provides that certain  severance  payments which equal or exceed three times the
base amount of the  individual are deemed to be "excess  parachute  payments" if
they are  contingent  upon a change in  control.  Individuals  receiving  excess
parachute  payments are subject to a 20% excise tax on the amount of such excess
payments,  and the Employers  would not be entitled to deduct the amount of such
excess payments.

     The Employment  Agreements restrict an Executive's right to compete against
the  Employers  for a period  of one year  from the date of  termination  of the
agreement if the  Executive  voluntarily  terminates  employment,  except in the
event of a change in control.

     Salary Continuation  Agreements.  The Association  ("Employer") has entered
into  Executive  Salary  Continuation   Agreements  as  supplemental   executive
retirement  plans ("SERP  Agreements")  with  Messrs.  Houser,  Alexander,  Gay,
Dodrill and Moore  (individually,  "Executive" and collectively,  "Executives").
Under the SERP  Agreements,  the  Executives  are  entitled  to receive a normal
retirement  benefit  at  age  62  (age  65  for  Mr.  Houser)  that  provides  a
continuation of salary for life, and annual increases of two percent. The salary
continuation  benefits  are  on  individual  vesting  schedules  that  generally
accelerate  the closer  each  executive  becomes to  retirement  age while still
employed with the Association. The SERP Agreements also provide for full vesting
in the event of employment  termination  within two years  following a change in
control.  The amount of normal  retirement  benefit with no break in service was
based on: 60% of  projected  salary  assuming 4% annual  increases  until normal
retirement  for Messrs.  Houser,  Alexander  and Gay;  40% of  projected  salary
assuming 4% annual increases until normal retirement for Mr. Dodrill; and 50% of
projected  salary assuming 4% annual  increases until normal  retirement for Mr.
Moore.  The annual  benefits  payable upon a normal  retirement  age for Messrs.
Houser,  Alexander,  Gay,  Dodrill and Moore are $161,642,  $149,209,  $104,446,
$88,223, and $132,982, respectively.

     In the event an  Executive's  employment  with  Klamath  is  terminated  in
connection  with a change in  control  prior to age 62 (or age 65 in the case of
Mr.  Houser),  the  Executive  shall be entitled  to receive an enhanced  annual
benefit  under his or her salary  continuation  agreement,  which  shall be paid
beginning  no sooner  than when the  Executive  attains age 55 and no later than
when the  executive  attains age 62 (with the  exception  of Mr.  Houser,  whose
benefits  will commence no later than age 65). In general,  the enhanced  annual
benefit payable is reduced if installment payments commence prior to age 62 (age
65 for Mr. Houser). Upon the commencement of payments,  the installments will be
payable until the executive's death and will increase by two percent per year.

     In lieu of the benefit  (including the enhanced  benefits  described above)
provided under the salary continuation  agreement of Messrs.  Dodrill and Moore,
the  Association  has the right at any time during  calendar year 2003 to make a
single lump sum cash payment to the Executives in complete  satisfaction  of all
of its obligations under their salary continuation  agreements.  Upon payment by
the  Association to the  Executives of such single lump sum cash payment,  their
salary continuation agreements will terminate and no longer be effective. If the
closing  conditions  under the Merger  Agreement  are  satisfied or waived on or
before December 31, 2003, the Association  intends to make cash payments in full
satisfaction  of its  obligations  under those salary  continuation  agreements.
Assuming  such  cash  payments  are made  pursuant  to the  salary  continuation
agreements,  the cash-out  amounts  required to be made to  Messrs. Dodrill  and
Moore would be  approximately  $582,214 and $606,309,  respectively.  The salary
continuation  agreements  which  Klamath has entered into with  Messrs.  Houser,
Alexander  and Gay do not  provide  for a cash-out  option.  However,  they will
receive an enhanced annual benefit on or after the later of their termination of
employment or age 55 as a result of the merger constituting a change in control.
Assuming that  retirement  payments  begin at the normal  retirement  date,  the
increase in initial annual benefits for Messrs.  Houser,  Alexander and Gay will
be $102,863, $109,167, and $69,631 respectively.

     Joint Beneficiary Agreements. The Association ("Employer") has entered into
Joint  Beneficiary  Agreements ("JB Agreements") with respect to bank-owned life
insurance policies insuring each of Messrs. Houser,  Alexander, Gay, Dodrill and
Moore  (individually,  "Executive"  and  collectively,   "Executives").  The  JB
Agreements  provide  generally for three levels of death  benefits.  The maximum
benefit is paid if death occurs while employed,  after normal retirement with no
break in service,  or after  termination  pursuant  to a change in control.  The
maximum death benefits for Messrs. Houser, Alexander, Gay, Dodrill and Moore are
$1,616,420, $1,492,090, $1,044,460, $882,230, and $1,329,820,  respectively. The
middle  benefit,  which  increases  in value with the length of the  Executive's
service,  is provided if the Executive is not employed by the Association at the
time of death,  and the termination was not for cause. The middle level of death
benefit is on individual vesting schedules that generally  accelerate the closer
each  Executive  becomes  to  retirement  age  while  still  employed  with  the
Association. The vesting schedule provides a minimum $100,000 death benefit. The
lowest  benefit is $25,000 in the event the  executive  is not  employed  by the
Association due to a termination for cause. The death benefit is reduced 30% and
70% from the original benefit if death occurs after attaining age 70 and age 80,
respectively.

     The  approval  of  the  Merger   Agreement  by  the  Company   shareholders
constitutes  a change  in  control  under  the JB  Agreements.  Messrs.  Houser,
Alexander,  Gay and Moore will become  fully  vested in the death  benefits as a
result of the merger between the Company and Sterling Financial Corporation. Mr.
Dodrill is expected to remain employed by Sterling  Financial  Corporation after
the merger,  so will remain subject to his individual  vesting  schedule  unless
subsequently  terminated  within two years of employment or for cause.  Even so,
assuming death at a normal life expectancy  before age 80, but after age 70, the
increase in death benefit  resulting from a termination  in connection  with the
change in control as compared to the benefit available for a termination  during
2004 other  than for cause  (absent a change in  control)  for  Messrs.  Houser,
Alexander,  Gay, Dodrill and Moore are $543,701,  $644,046, $382, 969, $517,561,
and $830,874, respectively.



                         COMPENSATION COMMITTEE MATTERS

     Notwithstanding anything to the contrary set forth in any of the Company 's
previous  filings under the Securities Act of 1933, as amended,  or the Exchange
Act that might incorporate  future filings,  including this Proxy Statement,  in
whole or in  part,  the  following  Report  of the  Compensation  Committee  and
Performance Graph shall not be incorporated by reference into any such filings.

     Report of the Compensation  Committee.  Under rules established by the SEC,
the Company is required to provide certain data and information in regard to the
compensation and benefits  provided to the Company's Chief Executive Officer and
other  executive  officers of the Company and the  Association.  The  disclosure
requirements  for the  Chief  Executive  officer  and other  executive  officers
include  the  use  of  tables  and  a  report   explaining   the  rationale  and
considerations  that led to the  fundamental  executive  compensation  decisions
affecting those  individuals.  Insofar as no separate  compensation is currently
payable by the  company,  the  Compensation  Committee of the  Association  (the
"Committee"),  at the  direction of the Board of  Directors of the Company,  has
prepared the following report for inclusion in this proxy statement.

     The  Compensation  Committee's  duties  are  to  recommend  and  administer
policies that govern executive compensation for the Company and the Association.
The  Compensation  Committee  evaluates  executive   performance,   compensation
policies  and  salaries  and makes  recommendations  to the  Board of  Directors
concerning the compensation of each named executive  officer and other executive
officers.   The  Board  of  Directors   reviews  the  Compensation   Committee's
recommendations and establishes compensation levels for the coming year.

     The executive  compensation  policy of the Company and the  Association  is
designed to establish an appropriate  relationship between executive pay and the
Company's and the  Association's  annual and long-term  performance,  long- term
growth objectives,  and their ability to attract and retain qualified  executive
officers. The principles underlying the program are:

     To attract and retain key executives who are vital to the long-term success
     of the Company and the Association and who are of the highest caliber;

     To provide  compensation  levels  competitive with those offered throughout
     the  financial   industry  and  consistent   with  the  Company's  and  the
     Association's level of performance;

     To motivate  executives to enhance long-term  stockholder value by building
     their personal ownership in the Company; and

     To  integrate  the   compensation   program  with  the  Company's  and  the
     Association's  annual and  long-term  strategic  planning  and  performance
     measurement processes.

     The  Compensation  Committee  also  considers a variety of  subjective  and
objective  factors  in  determining  the  compensation  package  for  individual
executives,  including (i) the performance of the Company and the Association as
a  whole  with   emphasis  on  annual  and  long-term   performance,   (ii)  the
responsibilities  assigned to each executive,  and (iii) the performance of each
executive  of  assigned  responsibilities  as  measured  by the  progress of the
Company and the Association during the year.

     The  Compensation  Committee  considers  compensation  survey  prepared  by
various  sources.  Most  recently,  the  Compensation  Committee  used a  survey
prepared by RSM McGladrey,  Inc.,  which included proxy searches and the results
of surveys by Watson Wyatt & Company and Business & Legal Reports, Inc.

     Although  the   Compensation   Committee   did  not   establish   executive
compensation  levels only on the basis of whether  specific  financial goals had
been achieved by the Company and the  Association,  the  Compensation  Committee
(and the Board of Directors) considered the overall profitability of the Company
and the Association  when making their  decisions.  The  Compensation  Committee
believes that management

                                       52
<PAGE>


compensation  levels, as a whole,  appropriately  reflect the application of the
Company's and Association's  executive  compensation  policy and the progress of
the Company and the Association.

     The compensation for the Company's  President and Chief Executive  Officer,
Kermit K. Houser, was $200,000. The Compensation Committee believes Mr. Houser's
salary is  appropriate  based on  Company  performance  and  competitive  salary
surveys.

     The Committee also  recommends to the Board of Directors the amount of fees
paid for service on the Board. The Committee did not recommend a change in Board
fees during the fiscal year ended  September  30,  2003.  However,  as described
previously,  new  director fee  continuation  agreements  to provide  retirement
benefits for board members were established during the fiscal year.

Compensation Committee consisting of:
                Timothy A. Bailey, Chairman
                Bernard Z. Agrons
                Donald N. Bauhofer
                Dianne E. Spires

     Compensation Committee Interlocks and Insider Participation.  No members of
the  Compensation  Committee were officers or employees of the Company or any of
its  subsidiaries  during the year, were formerly Company  officers,  or had any
relationship otherwise requiring disclosure.

     Reference  is  made  to the  cover  page of  this  report  for  information
regarding compliance with Section 16(a) of the Exchange Act.

                                 Code of Ethics

     The Company has adopted a Code of Conduct  which is attached as Exhibit 14.
The Code of Conduct is  distributed  to all  employees  and is  published on the
Company's website, www.klamathfirst.com.

     Performance  Table.  The  following  table  compares the  cumulative  total
stockholder  return on the  Company's  Common  Stock with the  cumulative  total
return on the Nasdaq  Index (U.S.  Companies)  and with the SNL $1 Billion to $5
Billion Thrift Index. Total return assumes the reinvestment of all dividends.


<TABLE>
<CAPTION>

                                                                       Period Ending
                                         ---------------------------------------------------------------------------
Index                                       09/30/98    09/30/99     09/30/00    09/30/01     09/30/02     09/30/03
--------------------------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>          <C>          <C>          <C>         <C>
Klamath First Bancorp, Inc.                   100.00       74.91        78.32       87.20       100.85       147.24
NASDAQ - Total US                             100.00      162.62       217.87       89.20        70.04       107.27
SNL $1B-$5B Thrift Index                      100.00      102.04       108.95      153.43       208.85       287.55
</TABLE>



                                       53
<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 Corporations'  equity compensation
     plans as of September 30, 2003.

<TABLE>
<CAPTION>
                                                                                                               (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:
<S>                                                            <C>                     <C>                          <C>
     Option...............................                     638,940                 $13.275                      6,781
     Restricted stock plan................                        --                      --                      27,735

Equity compensation plans not approved
by security holders:                                           N/A                       N/A                        N/A

                                              ------------------------    -------------------------    --------------------
          Total                                                638,940                 $13.275                    34,516
                                              ========================    =========================     ===================
</TABLE>


(a) and (b) Security Ownership of Certain Beneficial Owners and Security
            Ownership of Management

     Persons and groups who  beneficially own in excess of 5% of the outstanding
shares of the Company's  Common Stock are required to file certain  reports with
the  Securities  and  Exchange  Commission  ("SEC"),  and  provide a copy to the
Company,  disclosing such ownership  pursuant to the Securities  Exchange Act of
1934,  as  amended  ("Exchange  Act").  Based  solely  upon the  receipt of such
reports, other than as set forth in the following table,  management knows of no
person who owned more than 5% of the  outstanding  shares of Common  Stock as of
the  Record  Date for the  special  shareholders  meeting  to vote on the merger
agreement between the Company and Sterling Financial  Corporation.  In addition,
the following  table sets forth,  as of October 13, 2003,  information as to the
shares of Klamath  Common Stock  beneficially  owned by each  director and named
executive officer, and by all executive officers and directors of the Company as
a group.
                                       55
<PAGE>
<TABLE>
<CAPTION>

Beneficial Owner                                              Amount and Nature of              Percent of
                                                              Beneficial Ownership (1)         Common Stock
                                                                                                Outstanding
------------------------------------------------             --------------------------        -------------
Beneficial owners of more than 5%

<S>                                                                     <C>                     <C>
   Tontine Financial Partneres, L.P. (2)                                582,200                 8.34%
   Tontine Management, L.L.C.
   Tontine Overseas Associates, L.L.C.
   Mr. Jeffrey L. Gendell
   55 Railroad Ave., 3rd Floor
   Greenwich, CT  06830

   Dimensional Fund Advisors, Inc. (3)                                  542,900                 7.78%
   1299 Ocean Avenue, 11th Floor
   Santa Monica, CA  90401

   Bryn Mawr Capital Management, Inc. (4)                               468,361                 6.71%
   One Town Place, Suite 200
   Bryn Mawr, PA  19010-3495

Directors and Named Executive Officers (5)

   Rodney N. Murray                                                      94,129 (6)             1.35%
   Kermit K. Houser                                                     116,455 (7)             1.67%
   Bernard Z. Agrons                                                     68,495 (8)               **
   Timothy A. Bailey                                                     70,298 (9)             1.01%
   Donald A. Bauhofer                                                     6,116 (10)              **
   James D. Bocchi                                                       78,616 (11)            1.13%
   William C. Dalton                                                     41,570 (12)              **
   Dianne E. Spires                                                      29,409 (13)              **
   Marshall J. Alexander                                                177,963 (14)            2.55%
   Ben A. Gay                                                            27,175 (15)              **
   Craig M Moore                                                         14,711 (16)              **
   Walter F. Dodrill                                                     13,127 (17)              **
   All executive officers and directors as a group                      794,524 (18)           11.27%
**        Less than one percent of shares outstanding.
<FN>

(1)  In accordance with Rule 13d-3 under the Securities  Exchange Act of 1934, a
     person is deemed to be the beneficial owner, for purposes of this table, of
     any  shares  of  Klamath  common  stock  if he or  she  has  voting  and/or
     investment  power with  respect  such  security  or has a right to acquire,
     through  the  exercise  of  outstanding  options or  otherwise,  beneficial
     ownership  at any time  within  60-days  from the  record  date.  The table
     includes  shares  owned by spouses  or other  immediate  family  members in
     trust,  shares held in retirement  accounts or funds for the benefit of the
     named  individuals,  and other forms of  ownership,  over which  shares the
     persons named in the table may possess voting and/or  investment power. The
     table  excludes  shares from ESOP  allocation as of 9/30/2003,  and options
     that are  expected  to vest on or about  1/2/2004  in  connection  with the
     pending merger with Sterling Financial Corporation.

(2)  Based on an amended  Schedule 13G dated  January 6, 2003 and filed with the
     SEC on  January  8,  2003.  According  to this  filing,  Tontine  Financial
     Partners,  L.P., Tontine Management,  L.L.C.,  Tontine Overseas Associates,
     L.L.C.  and Mr.  Gendell have shared  voting  power and shared  dispositive
     power with respect to these shares.

(3)  Based on an amended Schedule 13G dated December 31, 2002 and filed with the
     SEC on February  12,  2003.  According  to this  filing,  Dimensional  Fund
     Advisors,  Inc.,  an investment  advisor  registered  under the  Investment
     Advisors Act of 1940, has sole voting power and sole dispositive power with
     respect to these shares.

(4)  Based on a Schedule  13G dated  December 31, 2002 and filed with the SEC on
     February 12,  2003.  According to this  filing,  an  investment  advisor in
     accordance  with Section  240.13d-1(b)(1)(ii)(f)  of Exchange  Act, and has
     sole voting and dispositive power with respect to these shares.

(5)  Under SEC regulations,  the term "named executive officer(s)" is defined to
     include the chief executive officer,  regardless of compensation level, and
     the four most highly compensated executive officers, other than the chief

                                       57
<PAGE>


     executive  officer,  whose  total  annual  salary  and  bonus  for the last
     completed fiscal year exceeded $100,000.  Messrs. Houser,  Alexander,  Gay,
     Moore and Dodrill were the  Company's  "named  executive  officers" for the
     fiscal year ended 9/30/2003.

(6)  Includes 61,167 shares underlying stock options  exercisable within 60 days
     of 10/13/2003.

(7)  Includes 100,000 shares underlying stock option  exercisable within 60 days
     of 10/13/2003.

(8)  Includes 45,670 shares underlying stock options  exercisable within 60 days
     of 10/13/2003.

(9)  Includes 45,670 shares underlying stock options  exercisable within 60 days
     of 10/13/2003.


(10) Includes  unvested  restricted  shares  issued  unde  Klamath's  Management
     Recognition  and  Development  Plan  ("MRDP").  Participants  in  the  MRDP
     exercise all rights incidental to ownership, including voting rights.

(11) Includes 45,670 shares underlying stock options exercisable within 60 days
     of 10/13/2003.

(12) Includes 30,670 shares underlying stock options exercisable within 60 days
     of 10/13/2003.

(13) Includes 23,243 shares underlying stock options exercisable within 60 days
     of  10/13/2003.  Excludes  shares held in trusts for which Ms.  Spires is a
     death beneficiary and for which she is not the named fiduciary.

(14) Includes 127,651 shares underlying stock option exercisable within 60 days
     of 10/13/2003.

(15) Includes 20,000 shares underlying stock options exercisable within 60 days
     of 10/13/2003.

(16) Includes 6,000 shares underlying stock options  exercisable  within 60 days
     of 10/13/2003.  Includes unvested shares in Klamath's MRDP. Participants in
     the MRDP  exercise all rights  incidental to  ownership,  including  voting
     rights.

(17) Includes 4,000 shares underlying stock options  exercisable  within 60 days
     of 10/13/2003.  Includes unvested shares in Klamath's MRDP. Participants in
     the MRDP  exercise all rights  incidental to  ownership,  including  voting
     rights.

(18) Includes 533,527 shares underlying stock options exercisable within 60 days
     of 10/13/2003.
</FN>
</TABLE>

(c)  Changes in Control

     Other  than  the  Company's  merger   agreement  with  Sterling   Financial
Corporation,   as  previously  described,  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 with the Association

     The  Association has followed the policy of granting loans to its officers,
directors and employees.  Loans to such persons are made in the ordinary  course
of  business  on  substantially  the same  terms,  including  interest  rate and
collateral,  as those  prevailing at the time for comparable  transactions  with
other  persons  (unless the loan or  extension of credit is made under a benefit
program generally  available to all other employees and does not give preference
to any insider over any other employee),  and, in the opinion of management,  do
not  involve  more than the  normal  risk of  collectability  or  present  other
unfavorable  features.  At September 30, 2003,  loans to directors and executive
officers  (excluding  available  lines of credit)  totaled  approximately  $7.75
million.

                                       58

<PAGE>

ITEM 14.  Principal Accounting Fees and Services

     Audit Fees.  Deloitte & Touche,  LLP has served as the Company's  principal
accountant  during the last two fiscal years.  The aggregate  fees billed to the
Company  for  professional  services  rendered  for the  audit of the  Company's
financial  statements  for fiscal  year 2002 and the  reviews  of the  financial
statements  included in the  Company's  Quarterly  Reports on Form 10-Q for that
year, including travel expenses, were approximately $228,000. The aggregate fees
billed to the Company for  professional  services  rendered for the audit of the
Company's  financial  statements  for  fiscal  year 2003 and the  reviews of the
financial  statements  included in the Company's  Quarterly Reports on Form 10-Q
for that year,  including travel expenses,  were  approximately  $250,000.

     Audit-Related  Fees.  During the  fiscal  year ended  September  30,  2002,
aggregate  audit-related  fees billed to the  Company by Deloitte & Touche,  LLP
were approximately  $7,000.  These fees were paid for the audit of the Company's
Employee Stock Ownership Plan.  During the fiscal year ended September 30, 2003,
aggregate   fees  billed  to  the  Company  by  Deloitte  &  Touche,   LLP  were
approximately  $20,000.  These  fees  were paid for  audits of the  Company's
Employee Stock Ownership Plan and 401(k) Plan.

     Tax Fees. The Company's  principal  accountant,  Deloitte & Touche, LLP did
not bill any fees for tax services  during the fiscal years ended  September 30,
2002 and September 30, 2003.

     All Other  Fees.  The  aggregate  fees  billed to the Company by Deloitte &
Touche, LLP for other services were approximately  $50,000 for fiscal year ended
September 30, 2003. The services were rendered for work related to the merger by
and between  the Company and  Sterling  Financial  Corporation,  including  some
consultation  regarding executive compensation plans, in fiscal year 2003. There
were no fees billed for other  services  during the fiscal year ended  September
30, 2002.

     The Company's  policies  provide that management has no authority to engage
the primary  accountant for any services without the prior approval of the Audit
Committee. Consents are documented in minutes of the Audit Committee meetings or
in separate written  unanimous  consents in lieu of an Audit Committee  meeting,
which provide the purpose of the engagement and any dollar limitations  relating
to the services.  The Audit  Committee  has pre- approved all services  rendered
during fiscal year 2003.



                                       59
<PAGE>


                                     PART IV

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

    (a)      Exhibits

        3.1(a)      Articles of Incorporation of the Registrant*
        3.1(b)      Bylaws of the Registrant*

        10.1(a)     Employment  Agreement  for Kermit K. Houser filed as Exhibit
                    10(a).1 to  Klamath's  amended  report on Form 10-Q/A  filed
                    August  15,  2003 for the  period  ended  June 30,  2003 and
                    incorporated by reference herein.

        10.1(b)     First Amendment to Employment Agreement for Kermit K. Houser
                    filed as Exhibit 10(a).2 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.1(c)     Salary Continuation  Agreement for Kermit K. Houser filed as
                    Exhibit  10(a).3 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.2(a)     Employment  Agreement  for  Marshall J.  Alexander  filed as
                    Exhibit  10(b).1 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.2(b)     First  Amendment  to  Employment  Agreement  for Marshall J.
                    Alexander  filed as  Exhibit  10(b).2 to  Klamath's  amended
                    report on Form 10-Q/A  filed  August 15, 2003 for the period
                    ended June 30, 2003 and incorporated by reference herein.

        10.2(c)     Salary  Continuation  Agreement  for  Marshall J.  Alexander
                    filed as Exhibit 10(b).3 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.3(a)     Employment Agreement for Ben A. Gay filed as Exhibit 10(c).1
                    to Klamath's  amended report on Form 10-Q/A filed August 15,
                    2003 for the period ended June 30, 2003 and  incorporated by
                    reference herein.

        10.3(b)     First Amendment to Employment Agreement for Ben A. Gay filed
                    as  Exhibit  10(c).2  to  Klamath's  amended  report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.3(c)     Salary  Continuation  Agreement  for  Ben A.  Gay  filed  as
                    Exhibit  10(c).3 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.4(a)     Employment Agreement for Frank X. Hernandez filed as Exhibit
                    10(d).1 to  Klamath's  amended  report on Form 10-Q/A  filed
                    August  15,  2003 for the  period  ended  June 30,  2003 and
                    incorporated by reference herein.

        10.4(b)     First  Amendment  to  Employment   Agreement  for  Frank  X.
                    Hernandez  filed as  Exhibit  10(d).2 to  Klamath's  amended
                    report on Form 10-Q/A  filed  August 15, 2003 for the period
                    ended June 30, 2003 and incorporated by reference herein.

        10.4(c)     Salary  Continuation  Agreement for Frank X. Hernandez filed
                    as  Exhibit  10(d).3  to  Klamath's  amended  report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.4(d)     First Amendment to Salary  Continuation  Agreement for Frank
                    X. Hernandez filed as Exhibit  10(d).4 to Klamath's  amended
                    report on Form 10-Q/A  filed  August 15, 2003 for the period
                    ended June 30, 2003 and incorporated by reference herein.

        10.5(a)     Employment  Agreement  for  Craig M Moore  filed as  Exhibit
                    10(e).1 to  Klamath's  amended  report on Form 10-Q/A  filed
                    August  15,  2003 for the  period  ended  June 30,  2003 and
                    incorporated by reference herein.

        10.5(b)     First  Amendment to  Employment  Agreement for Craig M Moore
                    filed as Exhibit 10(e).2 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.5(c)     Salary  Continuation  Agreement  for Craig M Moore  filed as
                    Exhibit  10(e).3 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.5(d)     First Amendment to Salary Continuation Agreement for Craig M
                    Moore filed as Exhibit  10(e).4 to Klamath's  amended report
                    on Form 10-Q/A  filed  August 15, 2003 for the period  ended
                    June 30, 2003 and incorporated by reference herein.

        10.6(a)     Employment  Agreement  for James E. Essany  filed as Exhibit
                    10(f).1 to  Klamath's  amended  report on Form 10-Q/A  filed
                    August  15,  2003 for the  period  ended  June 30,  2003 and
                    incorporated by reference herein.

        10.6(b)     First Amendment to Employment  Agreement for James E. Essany
                    filed as Exhibit 10(f).2 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.6(c)     Salary  Continuation  Agreement for James E. Essany filed as
                    Exhibit  10(f).3 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.6(d)     First Amendment to Salary  Continuation  Agreement for James
                    E.  Essany  filed as Exhibit  10(f).4 to  Klamath's  amended
                    report on Form 10-Q/A  filed  August 15, 2003 for the period
                    ended June 30, 2003 and incorporated by reference herein.

        10.7(a)     Employment  Agreement for Walter F. Dodrill filed as Exhibit
                    10(g).1 to  Klamath's  amended  report on Form 10-Q/A  filed
                    August  15,  2003 for the  period  ended  June 30,  2003 and
                    incorporated by reference herein.

        10.7(b)     First  Amendment  to  Employment  Agreement  for  Walter  F.
                    Dodrill filed as Exhibit 10(g).2 to Klamath's amended report
                    on Form 10-Q/A  filed  August 15, 2003 for the period  ended
                    June 30, 2003 and incorporated by reference herein.

        10.7(c)     Salary Continuation Agreement for Walter F. Dodrill filed as
                    Exhibit  10(g).3 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.7(d)     First Amendment to Salary Continuation  Agreement for Walter
                    F. Dodrill  filed as Exhibit  10(g).4 to  Klamath's  amended
                    report on Form 10-Q/A  filed  August 15, 2003 for the period
                    ended June 30, 2003 and incorporated by reference herein.

        10.7(e)     Second  Amendment  to  Employment  Agreement  for  Walter F.
                    Dodrill filed herewith.

        10.8(a)     Employment  Agreement  for Nina G.  Drake  filed as  Exhibit
                    10(h).1 to  Klamath's  amended  report on Form 10-Q/A filed
                    August  15,  2003 for the  period  ended  June 30,  2003 and
                    incorporated by reference herein.

        10.8(b)     First  Amendment to  Employment  Agreement for Nina G. Drake
                    filed as Exhibit 10(h).2 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.8(c)     Salary  Continuation  Agreement  for Nina G. Drake  filed as
                    Exhibit  10(h).3 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.8(d)     First Amendment to Salary Continuation Agreement for Nina G.
                    Drake filed as Exhibit  10(h).4 to Klamath's  amended report
                    on Form 10-Q/A  filed  August 15, 2003 for the period  ended
                    June 30, 2003 and incorporated by reference herein.

        10.9(a)     Employment  Agreement  for  Jeffery  D.  Schlenker  filed as
                    Exhibit  10(i).1 to Klamath's  amended report on Form 10-Q/A
                    filed August 15, 2003 for the period ended June 30, 2003 and
                    incorporated by reference herein.

        10.9(b)     First  Amendment  to  Employment  Agreement  for  Jeffery D.
                    Schlenker  filed as  Exhibit  10(i).2 to  Klamath's  amended
                    report on Form 10-Q/A  filed  August 15, 2003 for the period
                    ended June 30, 2003 and incorporated by reference herein.

        10.9(c)     Salary Continuation Agreement for Jeffery D. Schlenker filed
                    as  Exhibit  10(i).3  to  Klamath's  amended  report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.9(d)     First Amendment to Salary Continuation Agreement for Jeffery
                    D. Schlenker filed as Exhibit  10(i).4 to Klamath's  amended
                    report on Form 10-Q/A  filed  August 15, 2003 for the period
                    ended June 30, 2003 and incorporated by reference herein.

        10.9(e)     Second  Amendment  to  Employment  Agreement  for Jeffrey D.
                    Schlenker filed herewith.

        10.10(a)    Director  Fee  Continuation  Agreement  for Rodney N. Murray
                    filed as Exhibit 10(j).1 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.10(b)    Director Fee  Continuation  Agreement  for Bernard Z. Agrons
                    filed as Exhibit 10(j).2 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.10(c)    Director Fee  Continuation  Agreement  for Timothy A. Bailey
                    filed as Exhibit 10(j).3 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.10(d)    Director  Fee  Continuation  Agreement  for James D.  Bocchi
                    filed as Exhibit 10(j).5 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.10(e)    Director Fee  Continuation  Agreement for Donald N. Bauhofer
                    filed as Exhibit 10(j).5 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.10(f)    Director Fee  Continuation  Agreement  for William C. Dalton
                    filed as Exhibit 10(j).6 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.10(g)    Director  Fee  Continuation  Agreement  for Dianne E. Spires
                    filed as Exhibit 10(j).7 to Klamath's amended report on Form
                    10-Q/A  filed  August 15, 2003 for the period ended June 30,
                    2003 and incorporated by reference herein.

        10.11(a)    Joint  Beneficiary  Agreement  for Kermit K. Houser filed as
                    Exhibit  10(a).4 to Klamath's  amended report on Form 10-Q/A
                    filed  September 11, 2003 for the period ended June 30, 2003
                    and incorporated by reference herein.

        10.11(b)    Joint Beneficiary  Agreement for Marshall J. Alexander filed
                    as  Exhibit  10(b).4  to  Klamath's  amended  report on Form
                    10-Q/A  filed  September  11, 2003 for the period ended June
                    30, 2003 and incorporated by reference herein.

        10.11(c)    Joint Beneficiary  Agreement for Ben A. Gay filed as Exhibit
                    10(c).4 to  Klamath's  amended  report on Form 10-Q/A  filed
                    September  11,  2003 for the period  ended June 30, 2003 and
                    incorporated by reference herein.

        10.11(d)    Joint Beneficiary  Agreement for Frank X. Hernandez filed as
                    Exhibit  10(d).5 to Klamath's  amended report on Form 10-Q/A
                    filed  September 11, 2003 for the period ended June 30, 2003
                    and incorporated by reference herein.

        10.11(e)    Joint  Beneficiary  Agreement  for  Craig M Moore  filed  as
                    Exhibit  10(e).5 to Klamath's  amended report on Form 10-Q/A
                    filed  September 11, 2003 for the period ended June 30, 2003
                    and incorporated by reference herein.

        10.11(f)    Joint  Beneficiary  Agreement  for James E. Essany  filed as
                    Exhibit  10(f).e to Klamath's  amended report on Form 10-Q/A
                    filed  September 11, 2003 for the period ended June 30, 2003
                    and incorporated by reference herein.

        10.11(g)    Joint  Beneficiary  Agreement for Walter F. Dodrill filed as
                    Exhibit  10(g).5 to Klamath's  amended report on Form 10-Q/A
                    filed  September 11, 2003 for the period ended June 30, 2003
                    and incorporated by reference herein.

        10.11(h)    Joint  Beneficiary  Agreement  for  Nina G.  Drake  filed as
                    Exhibit  10(h).5 to Klamath's  amended report on Form 10-Q/A
                    filed  September 11, 2003 for the period ended June 30, 2003
                    and incorporated by reference herein.

        10.11(i)    Joint  Beneficiary  Agreement for Jeffrey D. Schlenker filed
                    as  Exhibit  10(i).5  to  Klamath's  amended  report on Form
                    10-Q/A  filed  September  11, 2003 for the period ended June
                    30, 2003 and incorporated by reference herein.

        10.12       1996 Stock Option Plan**
        10.13       1996 Management Recognition and Development Plan**
        14          Code of Ethics
        21          Subsidiaries of the Registrant
        23          Consent of Deloitte & Touche LLP with  respect to  financial
                    statements of the Registrant

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

        31.2        Certification of Chief Financial Officer pursuant to Section
                    302 of the Sarbanes-Oxley Act

        32          Certification  Pursuant to Section 906 of the Sarbanes-Oxley
                    Act

        99          Audit Committee Charter
___________________
*    Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-1, filed on June 19, 1995.
**   Incorporated by reference to the  Registrant's  Definitive  Proxy Statement
     for the 1996 Annual Meeting of Shareholders.

         (b)      Reports on Form 8-K

               The following  Current  Reports on Form 8-K were filed during the
          quarter ended September 30, 2003.



                                       60
<PAGE>


                                   SIGNATURES

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

                                          KLAMATH FIRST BANCORP, INC.

Date:  December 29, 2003                  By:           /s/ Kermit K. Houser
                                          Kermit K. Houser
                                          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/ Kermit K. Houser       President, Chief Executive          December 29, 2003
Kermit K. Houser           Officer and Director
                           (Principal Executive Officer)

/s/ Marshall J. Alexander  Executive Vice President and        December 29, 2003
Marshall J. Alexander      Chief Financial Officer
                           (Principal Financial
                            and Accounting Officer)

/s/ Rodney N. Murray       Chairman of the Board               December 29, 2003
Rodney N. Murray           of Directors

/s/ Bernard Z. Agrons      Director                            December 29, 2003
Bernard Z. Agrons

/s/ Timothy A. Bailey      Director                            December 29, 2003
Timothy A. Bailey

/s/ James D. Bocchi        Director                            December 29, 2003
James D. Bocchi

/s/ William C. Dalton      Director                            December 29, 2003
William C. Dalton

/s/ Dianne E. Spires       Director                            December 29, 2003
Dianne E. Spires

/s/ Donald N. Bauhofer     Director                            December 29, 2003
Donald N. Bauhofer


<PAGE>