FIRST MUTUAL BANCSHARES, INC.

2005 STOCK OPTION AND INCENTIVE PLAN





1.Purpose of the Plan. The Plan shall be known
as the First Mutual Bancshares, Inc. 2005 Stock Option and Incentive Plan (the
"Plan"). The purpose of the Plan is to attract and retain the best available
personnel as officers and directors and for positions of substantial
responsibility within the Company, the Company's primary subsidiary, First
Mutual Bank (the "Bank") or any other present or future Parent or Subsidiary of
the Company, and to provide additional incentive to such individuals in order to
promote the success of the Company's business by aligning employee financial
interests with long-term shareholder value. Options granted under the Plan may
be either Incentive Stock Options or Nonqualified Stock Options, at the
discretion of the Committee and as reflected in the terms of the written option
agreement. Each and every provision of the Plan relating to Incentive Stock
Options shall be interpreted to conform to the requirements of Section 422
of the Code.



This Plan also provides for (i) Awards of Options and/or
Restricted Stock to directors who are not full-time employees, (ii) Awards of
Stock Appreciation Rights and (iii) Awards of Restricted Stock.



This Plan is adopted effective January 27, 2005 to (i) increase
the number of Shares available for Awards hereunder, (ii) provide for annual
Awards of Options to Non-Employee Directors and (iii) provide for the Awards to
Employees in the form of Restricted Stock.



2. Definitions. As used herein, the following
definitions shall apply.



(a) "Award" means the grant by the Committee of an Incentive
Stock Option, a Nonqualified Stock Option, a Stock Appreciation Right, Shares of
Restricted Stock, or any combination thereof, as provided in the Plan.



(b) "Bank" shall mean First Mutual Bank, a Washington stock
bank under RCW title 32, and any successor thereto.



(c) "Board" shall mean the Board of Directors of the
Company.



(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.



(e) "Committee" shall mean the Compensation and Stock Option
Committee appointed by the Board of Directors in accordance with paragraph 4(a)
of the Company's Plan; provided, however, if the Board of Directors appoints
more than one committee pursuant to Section 4, then "Committee" shall refer to
the appropriate committee, as indicated by the context of the reference.



(f) "Common Shares" shall mean common stock of the Company.



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(g) "Company" shall mean First Mutual Bancshares, Inc., a
Washington Corporation, and any successor thereto.



(h) "Continuous Employment" or "Continuous Status as an
Employee" shall mean the absence of any interruption or termination of service
as an Employee. Continuous status as an Employee shall not be considered
interrupted in the case of sick leave, maternity leave, infant care leave,
medical emergency leave, military leave or any other leave of absence authorized
and approved by the Company or its appropriate Subsidiary; nor shall it be
interrupted in the case of transfers between payroll locations of the Company or
between the Company and any Parent or Subsidiary, or their respective
successors.



(i) "Director" means a director of the Company and/or the
Bank.



(j) "Effective Date" shall mean the date of Board adoption of
the Plan, January 27, 2005. Any Award under this Plan made prior to the date of
shareholder approval is expressly subject to such shareholder approval of the
Plan.



(k) "Employee" shall mean any person, including officers,
employed on a full-time basis by the Company or any present or future Parent or
Subsidiary of the Company.



(l) "Incentive Stock Option" shall mean any Option intended to
qualify as an Incentive Stock Option under Section 422 of the Code.



(m) "Non-Employee Director" shall have the same meaning as
defined or interpreted for purposes of Rule 16b-3 (including amendments and
successor provisions) as promulgated by the Securities and Exchange Commission
pursuant to its authority under the Exchange Act ("Rule 16b-3").



(n) "Nonqualified Stock Option" means an Option which is not
intended to qualify as an Incentive Stock Option.



(o) "Option" shall mean a stock option granted pursuant to this
Plan.



(p) "Optioned Shares" shall mean the Common Shares subject to
an Option.



(q) "Optionee" shall mean an Employee, Director or Non-Employee
Director who receives an Option.



(r) "Outside Director" shall have the same meaning as defined
or interpreted for purposes of Section 162(m) of the Code.



(s) "Parent" shall mean any present or future corporation which
would be a "parent corporation" as defined in Subsections 424(e) and (g) of the
Code.



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(t) "Participant" shall mean an eligible Employee or
Non-Employee Director who has received an Award hereunder and, to the extent
that such Award consists of Options or SARs, such Options or SARs are
unexercised, in whole or in part, and to the extent that such Award consists of
Restricted Stock, the restrictions with respect to the vesting of such
Restricted Stock have not lapsed.



(u) "Plan" shall mean this First Mutual Bancshares, Inc. 2005
Stock Option and Incentive Plan, as amended from time to time.



(v) "Related" means (i) in the case of a Stock Appreciation
Right, a Stock Appreciation Right which is granted in connection with, and to
the extent exercisable, in whole or in part, in lieu of, an Option and (ii) in
the case of an Option, an Option with respect to which and to the extent a Stock
Appreciation Right which is exercisable, in whole or in part, in lieu thereof
has been granted.



(w) "Restricted Stock" means a Common Share granted by the
Committee pursuant to Section 22 hereof.



(x) "Stock Appreciation Right" (or "SAR") means a stock
appreciation right with respect to Common Shares granted by the Committee
pursuant to Section 12 hereof.



(y) "Share" shall mean one Common Share, as adjusted in
accordance with Section 11 of the Plan.



(z) "Subsidiary" shall mean (i) in the case of an Incentive
Stock Option a "subsidiary corporation," whether now or hereafter existing, as
defined in Section 424(f) of the Code, and (ii) in the case of a Nonqualified
Stock Option, in addition to a subsidiary corporation as defined in (i), a
limited liability company, partnership or other entity in which the Company
controls 50 percent or more of the voting power or equity interests.



(aa) "1992 Plan" means the First Mutual Savings Bank 1992 Stock
Option and Incentive Plan.



(bb) "1995 Plan" means the Amended First Mutual Savings Bank
1995 Stock Option and Incentive Plan.



(cc) "2000 Plan" means the First Mutual Bancshares, Inc. 2000
Stock Option and Incentive Plan.



3. Shares Subject to the Plan. Subject to the provisions
of Section 11 of the Plan and the provisions below in this Section 3, the
maximum aggregate number of Shares which may be optioned and sold pursuant to
Options, issued or transferred pursuant to the exercise of SARs or awarded as
Restricted Stock is 600,000 Common Shares as to Awards to Employees, augmented
as stated below in this paragraph; and, separately, 122,392 Common Shares for
Awards to Non-Employee Directors under Section 21 of this Plan augmented as
stated below in this paragraph.



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These numbers include Common Shares reserved under the 1992
Plan for Awards to Employees, and Common Shares reserved under the 1992 Plan for
Awards to Non-Employee Directors as well as Common Shares reserved and available
for grant under the 1995 Plan and the 2000 Plan which are effectively
transferred to this Plan. The number of transferred Shares with respect to
Awards for Employees is 423,944 Shares, and the number of additional Shares
pursuant to the Plan is 176,056 Shares. With respect to Shares for Non-Employee
Directors, all of the 122,392 Shares are transferred from earlier versions of
the Plan. The Shares may be authorized, but unissued, or reacquired Common
Shares. For purposes of calculating this maximum aggregate number under either
portion of the Plan, Options remaining outstanding under the 1992 Plan, 1995
Plan or 2000 Plan shall not be counted as if those Options were under this Plan;
provided, however, that if such an Option terminates or is not exercised, the
Common Shares reserved therefore shall be added to the maximum aggregate number
of Shares under this Plan.



If an Option or Award under this Plan should expire or become
unexercisable for any reason without having been exercised in full, or if an
Option or Award is terminated by the mutual agreement of the Company and the
person having the Award or Option, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. In addition, Shares previously awarded as
Restricted Stock that have since been forfeited shall be available for further
Award.



Further, Common Shares optioned under the 1992 Plan, 1995 Plan
or 2000 Plan, upon such Options expiring or becoming unexercisable for any
reason without having been exercised in full, or such Options being terminated
by mutual written agreement, become available for future grant under the
corresponding Employee portion or Non-Employee Director portion of this Plan,
and accordingly increase the maximum aggregate number of Shares under this
Plan.



Shares which are subject to Stock Appreciation Rights and
related Options shall be counted only once in determining the maximum number of
Shares with respect to which Awards may be granted under the Plan at a
particular time.



An Award shall not be considered to have been made under the
Plan with respect to any Stock Appreciation Right which terminates, and new
Awards may be granted under the Plan with respect to the number of Shares as to
which such termination has occurred.



4. Administration of the Plan.



(a) Procedure.



(i) The Board of Directors shall appoint one or more Committees
each consisting of not less than three members of the Board of Directors to
administer the Plan. Once appointed, such Committees shall continue to serve
until otherwise directed by the Board of Directors.

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(ii) Any Awards to officers who are subject to Section 16 of
the Securities Exchange Act of 1934 (the "Exchange Act") shall be made by (a) a
Committee of two or more directors, each of whom is a Non-Employee Director and
an Outside Director or (b) as otherwise permitted by both Rule 16b under the
Exchange Act and Section 162(m) of the Code and other applicable
regulations.



(iii) Subject to the foregoing subparagraphs (i) and (ii) from
time to time the Board of Directors may increase the size of the Committee(s)
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefore, or fill vacancies however
caused.



(b) Powers of the Committee. Subject to the provisions
of the Plan, the Board, acting through the Committee, shall have the authority,
in its discretion: (i) to determine the Employees to whom, and the time or times
at which, Awards shall be granted and the number of Shares to be represented by
each Award; (ii) to grant Incentive Stock Options, Nonqualified Stock Options,
Stock Appreciation Rights and Restricted Stock; (iii) to determine, in
accordance with Section 8 of the Plan, the fair market value of the Shares; (iv)
to determine, in accordance with Section 8 of the Plan, the exercise price per
share of Options to be granted; (v) to interpret the Plan; (vi) to prescribe,
amend, and rescind rules and regulations relating to the Plan; (vii) to
determine the terms and provisions of each Award granted (which need not be
identical) and, with the consent of the holder thereof, modify or amend each
Award; (viii) to reduce the exercise price per share of outstanding and
unexercised Options; (ix) to accelerate or defer (with the consent of the
Optionee) the exercise date of any Option, or to accelerate or defer (with the
consent of the Employee) the date as of which restrictions on Restricted Stock
shall lapse; (x) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Award of Restricted Stock
previously granted by the Committee; and (xi) to make all other determinations
deemed necessary or advisable for the administration of the Plan.



(c) Effect of Committee's Decision. All decisions,
determinations, and interpretations of the Committee shall be final and binding
on all Participants and any other holders of any Awards granted under the
Plan.



(d) Compliance with Securities Laws.



As it determines from time to time, the Committee shall have
the right to:



(i) require a Participant to execute, as a condition of
exercise of an Option or receipt of Restricted Stock, a letter evidencing the
Participant's intent with respect to investment or sale of the Shares obtained
pursuant to Awards;



(ii) place appropriate legends upon the certificate or
certificates for the Shares; and



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(iii) take such other acts as it deems necessary in order to
cause the issuance of Shares pursuant to the Plan to comply with applicable
provisions of state and federal securities laws.



In furtherance of the foregoing and not by way of limitation
thereof, no Option shall be exercisable, and no Restricted Stock shall be
awarded, unless such Option and the Shares to be issued pursuant thereto, or
such Restricted Stock, shall be registered under appropriate federal and state
securities laws, or shall be exempt therefrom, in the opinion of the Committee
upon advice of counsel to the Company. Each Option or Restricted Stock agreement
shall contain adequate provisions to assure that there will be no violation of
such laws. This provision shall in no way obligate the Company to undertake
registration of Options or Shares hereunder. Issue, transfer or delivery of
certificates for Shares pursuant to the exercise of Options or lapse of
restrictions on Restricted Stock may be delayed, at the discretion of the
Committee, until the Committee is satisfied that the applicable requirements of
the federal and state securities laws have been met.



(e) Notice of Exercise.



The Optionee (or other person or persons, if any, entitled
hereunder) desiring to exercise an Option as to all or part of the Shares
covered thereby shall in writing notify the Company at its principal office,
specifying the number of Optioned Shares to be purchased and, if required by the
Company, representing in form satisfactory to the Company that the Shares are
being purchased for investment and not with a view to resale or distribution.
The Company from time to time may issue or specify to Optionees a written form
for use in connection with any such exercise.



5. Eligibility for Awards.



(a) All Employee Awards are discretionary. Options, other than
Options to Non-Employee Directors, may be granted only to Employees. For
avoidance of doubt, except as to Non-Employee Director Options under Section 21,
Directors are not eligible to participate in the Plan unless they are full-time
Employees.



(b) Each Option shall be stated in a written option agreement
and shall be designated in such agreement as either an Incentive Stock Option or
a Nonqualified Stock Option. However, notwithstanding such designations, to the
extent that the aggregate fair market value of the Shares with respect to which
Options designated as Incentive Stock Options are exercisable for the first time
by any Optionee during any calendar year (under all plans of the Company)
exceeds $100,000, such Options shall be treated as Nonqualified Stock
Options.



(c) For purposes of Section 5(b), Options shall be taken into
account in the order in which they were granted, and the fair market value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.



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(d) Nothing in the Plan or any Award granted hereunder shall
confer upon any Participant any right with respect to continuation of employment
with the Company, nor shall it interfere in any way with the Participant's right
or the Company's right to terminate the employment relationship at any time with
or without cause.



6. Term of Plan. The Plan shall become effective upon
its adoption by the Board on January 27, 2005. It shall continue in effect until
January 26, 2015, unless sooner terminated under Section 15 of the Plan. Any
Option duly granted under this Plan prior to the Plan's expiration or
termination shall be exercisable pursuant to its terms and the terms hereof
until expiration or earlier termination of such Option. In addition, any Award
of Restricted Stock duly granted under the plan prior to the Plan's expiration
or termination shall continue in force pursuant to its term until lapse of the
applicable restrictions or earlier termination pursuant to the Plan.



7. Term of Option. The term of each Option shall be no
more than 10 years from the date of grant. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
Shares representing more than 10% of the voting power of all classes of shares
of the Company or any Parent or Subsidiary, the term of the Option shall be no
more than five years from the date of grant.



8. Exercise Price and Consideration for Options.



(a) The per share exercise price under each Option shall be
such price as is determined by the Committee, subject to the following:



(1) In the case of an Incentive Stock Option



(i) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns shares representing more than 10% of the
voting power of all classes of shares of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the fair
market value per share on the date of grant.



(ii) granted to any other Employee, the per share exercise
price shall be no less than 100% of the fair market value per Share on the date
of grant.



(2) In the case of a Nonqualified Stock Option the per share
exercise price may be less than, equal to, or greater than the fair market value
per share on the date of grant.



(b) The fair market value per share shall be the closing price
per share of the Common Share on the Nasdaq Stock Market ("NASDAQ") on the date
of grant. If the Shares cease to be listed on NASDAQ, the Committee shall
designate an alternative method of determining the fair market value of the
Shares.



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(c) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Committee at the time of grant and may consist of cash, check, delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale proceeds
necessary to pay the exercise price, or such other payment method approved by
the Committee. If the Optionee is an officer of the Company within the meaning
of Section 16 of the Exchange Act, he or she may in addition be allowed to pay
all or part of the purchase price with Shares. Shares used by officers to pay
the exercise price shall be valued at their fair market value on the exercise
date.



(d) Prior to issuance of the Shares upon exercise of an Option,
the Optionee shall pay any federal, state, and local withholding obligations of
the Company, if applicable. If an Optionee is an officer of the Company within
the meaning of Section 16 of the Exchange Act, he or she may elect to pay such
withholding tax obligations by having the Company withhold Shares having a value
equal to the amount required to be withheld. The value of the Shares to be
withheld shall equal the fair market value of the Shares on the day the Option
is exercised. The right of an officer to dispose of Shares to the Company in
satisfaction of withholding tax obligations shall be deemed to be approved as
part of the initial grant of an Option, unless thereafter rescinded, and shall
otherwise be made in compliance with Rule 16b-3 and other applicable
regulations.



9. Exercise of Option.



(a) Procedure for Exercise, Rights as a Shareholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Committee at the time of grant, and as shall be
permissible under the terms of the Plan.



An Option may not be exercised for a fraction of a share.



An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option being exercised has been received by
the Company. Full payment may, as authorized by the Committee, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the share
certificate evidencing such Shares, or by electronic transfer to the Optionee's
brokerage account, no right to vote or receive dividends or any other rights as
a shareholder shall exist with respect to the Optioned Shares, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued) such
share certificate, or effect an electronic transfer to the Optionee's brokerage
account, promptly upon exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the share
certificate is issued, except as provided in Section 11 of the Plan.



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Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.



(b) Termination of Status as Employee. In the event of
termination of an Optionee's Continuous Status as an Employee, such Optionee may
exercise stock options to the extent exercisable on the date of termination.
Such exercise must occur within three months (or such shorter time as may be
specified in the grant), after the date of such termination (but in no event
later than the date of expiration of the term of such Option as set forth in the
Option Agreement). To the extent that the Optionee was not entitled to exercise
the Option at the date of such termination, or does not exercise such Option
within the time specified herein, the Option shall terminate.



(c) Disability of Optionee. Notwithstanding the
provisions of Section 9(b) above, in the event of termination of an Optionee's
Continuous Status as an Employee as a result of total and permanent disability
(i.e., the inability to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of 12 months), the Optionee may exercise the Option, but only
to the extent of the right to exercise that would have accrued had the Optionee
remained in Continuous Status as an Employee for a period of 12 months after the
date on which the Employee ceased working as a result of the total and permanent
disability. Such exercise must occur within 18 months (or such shorter time as
is specified in the grant) from the date on which the Employee ceased working as
a result of the total and permanent disability (but in no event later than the
date of expiration of the term of such Option as set forth in the option
agreement). To the extent that the Optionee was not entitled to exercise such
Option within the time specified herein, the Option shall terminate.



(d) Death of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of the death of an Optionee:



(i) who is at the time of death an Employee of the Company, the
Option may be exercised, at any time within six months following the date of
death (but in no event later than the date of expiration of the term of such
Option as set forth in the option agreement), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee 12
months after the date of death; or



(ii) whose Option has not yet expired but whose Continuous
Status as an Employee terminated prior to the date of death, the Option may be
exercised, at any time within six months following the date of death (but in no
event later than the date of expiration of the term of such Option as set forth
in the option agreement), by the Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of termination.



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(e) Notwithstanding subsections (b), (c), and (d) above, the
Committee shall have the authority to extend the expiration date of any
outstanding Option in circumstances in which it deems such action to be
appropriate (provided that no such extension shall extend the term of an Option
beyond the date on which the Option would have expired if no termination of the
Employee's Continuous Status as an Employee had occurred).



10. Non-Transferability of Options. The Option may not
be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee; provided
that the Committee may permit further transferability, on a general or specific
basis, and may impose conditions and limitations on any permitted
transferability.



11. Adjustments Upon Changes in Capitalization or
Merger.



(a) Adjustments. Subject to any required action by the
shareholders of the Company, the number of Shares covered by each outstanding
Option or awarded as Restricted Stock, and the number of Shares which have been
authorized for issuance under the Plan but as to which no Awards have been made
or which have been returned to the Plan upon cancellation or expiration of an
Option or forfeiture of an Award of Restricted Stock, as well as the price per
share covered by each such outstanding Option, shall be proportionately adjusted
for any increase or decrease in the number of issued Shares resulting from a
stock split, reverse stock split, stock dividend, combination, or
reclassification of the Shares, or any other increase or decrease in the number
of issued Shares effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Except as expressly provided herein, no issuance by the Company of shares of any
class, or securities convertible into shares of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Option or awarded as Restricted Stock.



In the event of the proposed dissolution or liquidation of the
Company, the outstanding Awards will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the Board.
The Board may, in the exercise of its sole discretion in such instances, declare
that any Award shall terminate as of a date fixed by the Board and give each
Optionee the right to exercise an Option as to all or any part of the Optioned
Shares, including Shares as to which the Option would not otherwise be
exercisable, and cancel restrictions with respect to Restricted Stock. In the
event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, each
Option shall be assumed or an equivalent Option shall be substituted by such
successor corporation or a Parent or Subsidiary of such successor corporation,
unless such successor corporation does not agree to assume the Option or to
substitute an equivalent Option. Similarly, an Award of Restricted Stock shall
be replaced by an Award from the successor corporation, unless the successor
corporation does not agree to do so. If the successor corporation does not agree
to assume or substitute Awards under the Plan, the Board shall, in lieu of such
assumption or substitution, provide for the Optionee to have the right to
exercise the Option as to all of the Optioned Shares, including Shares as to
which the Option would not



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otherwise be exercisable, and shall cancel restrictions on any
Restricted Stock Awards. If the Board makes an Option fully exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of 15 days from the date of such notice, and the Option will terminate
upon the expiration of such period.



(b) Change in Control. In the event of a change in
control of the Company, the Optionee at his or her option may receive on the
date immediately prior to the consummation of such change in control, in lieu of
stock, cash in an amount equal to the aggregate difference between the exercise
price per share and the market price per share of the stock underlying such
outstanding Options on the date immediately prior to the consummation of such
change in control of the Company. Restrictions with respect to Restricted Stock
Awards shall lapse on the day immediately prior to the consummation of any
change in control of the Company. For purposes of this Section, "change in
control" shall mean: the acquisition of the "beneficial ownership" (as that term
is defined in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934) of 25% or more of the voting securities of the
Company by any person or by persons acting as a group within the meaning of
Section 13(d)of the Securities Exchange Act of 1934; provided, however,
that for the purposes of the Plan no change in control shall be deemed to have
occurred if prior to the acquisition of, or offer to acquire 25% or more of the
voting securities of the Company, the full Board of Directors of the Company
shall have adopted by not less than a two-thirds vote a resolution specifically
approving such acquisition or offer. The term "person" refers to an individual
or a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any form of
entity not specifically listed herein.



(c) Extraordinary Corporate Action. Subject to any
required action by the shareholders of the Company, in the event of any Change
in Control, recapitalization, merger, consolidation, exchange of shares,
spin-off, reorganization, tender offer, liquidation or other extraordinary
corporate action or event, the Committee, in its sole discretion, shall have the
power, prior or subsequent to such action or event, in order to avoid economic
detriment to the Participant, to:



(i) appropriately adjust the number of Shares of Common Stock
subject to each Award, the exercise price per share of Common Stock subject to
an Option, and the consideration to be given or received by the Company upon the
exercise of any outstanding Option;



(ii) cancel any or all previously granted Awards, provided that
appropriate consideration is paid to the Participant in connection therewith;
and/or



(iii) make such other adjustments in connection with the Plan
as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be taken by
the Committee which would cause Incentive Stock Options granted pursuant to the
Plan to fail to meet the requirements of Section 422 of the Code.



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Except as expressly provided in Section 11(a) and 11(b) hereof,
no Participant shall have any rights by reason of the occurrence of any of the
events described in this Section 11.



(d) Acceleration. The Committee shall at all times have
the power to accelerate the exercise date of Options previously granted under
the Plan or the date as of which restrictions lapse with respect to Awards of
Restricted Stock.



12. Stock Appreciation Rights. A Stock Appreciation
Right shall, upon its exercise, entitle the person to whom such Stock
Appreciation Right was granted to receive a number of Shares or cash or
combination thereof, as the Committee in its discretion, shall determine, the
aggregate value of which (i.e., the sum of the amount of cash and/or the fair
market value of such Shares on date of exercise) shall equal (as nearly as
possible, it being understood that the Company shall not issue any fractional
shares) the amount by which the fair market value per share on the date of such
exercise shall exceed the exercise price of such Stock Appreciation Right,
multiplied by the number of Shares with respect of which such Stock Appreciation
Right shall have been exercised. A Stock Appreciation Right may be related to an
Option or may be granted independently of any Option as the Committee shall
determine whether and to what extent a Related Stock Appreciation Right shall be
granted with respect thereto; provided, however and notwithstanding any other
provision of the Plan, that if the Related Option is an Incentive Stock Option,
the Related Stock Appreciation Right shall satisfy all the restrictions and
limitations of this Plan and applicable laws as if such Related Stock
Appreciation Right were an Incentive Stock Option. In the case of a Related
Option, such Related Option shall cease to be exercisable to the extent of the
Shares with respect to which the Related Stock Appreciation Right was exercised.
Upon the exercise or termination of a Related Option, any Related Stock
Appreciation Right shall terminate to the extent to the Shares with respect to
which the Related Option was exercised or terminated.



13. Time of Granting. The date of grant of an Award
shall, for all purposes, be the date on which the Company completes the
corporate action relating to the grant of an Option, Stock Appreciation Right or
Restricted Stock and all conditions to the grant have been satisfied, provided
that conditions to the exercise of an Award shall not defer the date of grant.
Notice of a grant shall be given to each person to whom an Award is so granted
within a reasonable time after the determination has been made.



14. Substitutions and Assumptions. The Committee shall
have the right to substitute or assume Options in connection with mergers,
reorganizations, separations, or other transactions to which Section 424(a) of
the Code applies, provided such substitutions and assumptions are permitted by
Section 424 of the Code and the regulations promulgated thereunder. The number
of Shares reserved pursuant to Section 3 may be increased by the corresponding
number of Options assumed and, in the case of a substitution, by the net
increase in the number of Shares subject to Options before and after the
substitution.



15. Amendment and Termination of the Plan.



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(a) Amendment and Termination. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable (including, but not limited to amendments which the Board deems
appropriate to enhance the Company's ability to claim deductions related to
stock option exercises or the lapse in restrictions with respect to Restricted
Stock); provided that any increase in the number of Shares subject to the Plan,
other than in connection with an adjustment under Section 11 of the Plan, shall
require approval of, or ratification by, the shareholders of the Company by
majority vote.



(b) Employees in Foreign Countries. The Board shall have
the authority to adopt such modifications, procedures, and subplans as may be
necessary or desirable to comply with provisions of the laws of foreign
countries in which the Company or its Subsidiaries may operate to assure the
viability of the benefits from Awards granted to Employees employed in such
countries and to meet the objectives of the Plan.



(c) Effect of Amendment or Termination. Any such
amendment or termination of the Plan shall not affect Awards already granted,
and such Awards shall remain in full force and effect as if this Plan had not
been amended or terminated, unless mutually agreed otherwise between the
Participant and the Committee, which agreement must be in writing and signed by
such Participant and the Company.



(d) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any federal or
state law, rule or regulation whichwould make the exercise of all or
part of any previously granted Award unlawful or subject the Company to any
penalty, the Committee may restrict any such exercise without the consent of the
Participant holding such Award in order to comply with any such law, rule or
regulation or to avoid any such penalty.



16. Conditions Upon Issuance of Shares. Shares shall not
be issued or delivered pursuant to an Award unless the Award and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.



17. Reservation of Shares. The Company, during the term
of this Plan, will at all times reserve and keep available such number of Shares
as shall be sufficient to satisfy the requirements of the Plan.



18. Shareholder Approval. The 2005 restatement of the
Plan is subject to majority approval by the shareholders of the Company at the
annual meeting of shareholders to be held on April 28, 2005. If the restated
Plan is not so approved by the shareholders, the Company's 2000 Plan nonetheless
shall continue in effect.



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19. Withholding Tax. The Company shall have the right to
deduct from all amounts paid in cash with respect to the exercise of a Stock
Appreciation Right under the Plan any taxes required by law to be withheld with
respect to such cash payments. Where a Participant or other person is entitled
to receive Shares pursuant to the exercise of an Option of Stock Appreciation
Right pursuant to the Plan, or restrictions with respect to Shares of Restricted
Stock awarded under the Plan lapse, the Company shall have the right to require
the Participant or such other person to pay the Company the amount of any taxes
which the Company is required to withhold with respect to such Shares, or, in
lieu thereof, in the case of an Option or Stock Appreciation Right, to retain,
or sell without notice, a number of such Shares sufficient to cover the amount
required to be withheld.



20. Governing Law. The Plan shall be governed by and
construed in accordance with the laws of the State of Washington.



21. Director Options.



(a) General. In order to attract and retain qualified
Directors and to provide incentive for their efforts, Shares as specified below
in this Section 21, subject to adjustment as provided in Section 11, are
reserved for Director Options granted and to be granted, and Restricted Stock to
be awarded, to Non-Employee Directors as follows:



(i) These Director Options do not apply to Directors who are
also full-time paid Employees of the Company or any Parent or Subsidiary of the
Company. Other Directors now serving and those hereafter appointed or elected as
Directors of the Company shall be eligible.



(ii) The further addition of Shares to this Director portion of
the Plan, beyond the Shares described above in this Section 21, is subject to
shareholder approval.



(iii) Within the limits of Shares available within this
Director portion of the Plan, each eligible Director, now or hereafter serving,
shall be granted, at the beginning of each year of service as a director, an
Option to acquire 2,000 Shares of stock of the Company adjusted for changes in
the Company's Shares after the Effective Date, and subject to further adjustment
hereafter as provided in Section 11, at a price equal to the fair value of the
Shares (under the methodology of Section 8) at the time of the grant of the
Option, which Option shall be exercisable one-half upon completion of one full
year of service after the grant of the Option, and a like amount at the end of
the second year so that the Option becomes fully exercisable after two years of
completed service following the grant of the Option.



(iv) If, after receiving a grant of an Option, a Director
ceases to be a Director during the term of the Option, the portion of the Option
which has not become exercisable shall be forfeited unless the reason the
Director left office was death, disability or retirement from the Board of
Directors under mandatory age retirement provisions applicable to the Company.
In each of these latter instances, the Option shall become fully vested and
exercisable.



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(v) The period during which the Option may be exercised is
limited to the period of six years after the grant of Option, subject, of
course, to nonvesting and forfeiture rules as provided above.



(b) The issuance of these Options to Non-Employee Directors is
not discretionary and shall occur as a matter of course under the supervision of
the President of the Company; provided, however, if the Board decides to do so
in the future, it may change this Section 21 so that Non-Employee Director
Options granted after the date of such change are discretionary, and if that
change is made, Awards thereafter made under this Section 21 shall be subject to
approval of the Board. These Non-Employee Director Options are not Incentive
Stock Options under Internal Revenue Code Section 422. Except as provided
otherwise within this Section 21, the balance of the terms of the Plan
shall apply to Non-Employee Director Options as appropriate in the context of
these Options which are to Directors and not to Employees.



(c) The Board may award Restricted Stock to Non-Employee
Directors in lieu of or in addition to the Award of Options pursuant to this
Section 21. Such Award of Restricted Stock shall be subject to vesting and other
conditions of forfeiture similar to the conditions applicable to Options as set
forth in Section 21(a)(iii)-(v).

22. Restricted Stock.



(a) The Committee may from time to time, in its sole and
absolute discretion, award Shares of Restricted Stock to such persons as it
shall select from among those persons who are eligible under Section 5 of the
Plan to receive Awards of Restricted Stock. Any Award of Restricted Stock shall
be made from Shares subject hereto as provided in Section 3 of the Plan.



(b) A Share of Restricted Stock shall be subject to such
restrictions, terms and conditions, including forfeitures, if any, as may be
determined by the Committee, which may include, without limitation, the
rendition of services to the Company, or any Parent or Subsidiary, for a
specified time or the achievement of specific goals, and to the further
restriction that no such Share may be sold, assigned, transferred, discounted,
exchanged, pledged or otherwise encumbered or disposed of until the terms and
conditions set by the Committee at the time of the Award of the Restricted Stock
have been satisfied; provided, however, that the minimum restriction period
shall be three years from the date of Award (one year in the case of Shares of
Restricted Stock awarded with performance-based conditions). Each recipient of
an Award of Restricted Stock shall enter into an agreement with the Company, in
such form as the Committee shall prescribe, setting forth the restrictions,
terms and conditions of such Award, whereupon such recipient shall become a
Participant in the Plan.



If a person is awarded Shares of Restricted Stock, whether or
not escrowed as provided below, the person shall be the record owner of such
Shares and shall have all the rights of a shareholder with respect to such Share
(unless the escrow agreement, if any, specifically provides otherwise),
including the right to vote and the right to receive dividends or other



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distributions made or paid with respect to such Shares. Any
certificate or certificates representing Shares of Restricted Stock shall bear a
legend similar to the following:



The shares represented by this certificate have been issued
pursuant to the terms of the First Mutual Bancshares, Inc. 2005 Stock Option and
Incentive Plan and may not be sold, assigned, transferred, discounted,
exchanged, pledged or otherwise encumbered or disposed of in any manner except
as set forth in the terms of the agreement embodying the award of such shares
dated ____________, 20__.



In order to enforce the restrictions, terms and conditions that
may be applicable to a person's Shares of Restricted Stock, the Committee may
require the person, upon the receipt of a certificate or certificates
representing such Shares, or at any time thereafter, to deposit such certificate
or certificates, together with stock powers and other instruments of transfer,
appropriately endorsed in blank, with the Company or an escrow agent designated
by the Company under an escrow agreement in such form as the Committee shall
prescribe.



After the satisfaction of the restrictions, terms and
conditions set by the Committee at the time of an Award of Restricted Stock to a
person, a new certificate, without the legend set forth above, for the number of
Shares that are no longer subject to such restrictions, terms and conditions
shall be delivered to the person.



If a person to whom Restricted Stock has been awarded dies
after satisfaction of the restrictions, terms and conditions for the payment of
all or a portion of the Award but prior to the actual payment of all or such
portion thereof, such payment shall be made to the person's beneficiary or
beneficiaries at the time and in the same manner that such payment would have
been made to the person.



The Committee shall have the authority (and the agreement
evidencing an Award of Restricted Stock may so provide) to cancel all or any
portion of any outstanding restrictions prior to the expiration of such
restrictions with respect to any or all of the Shares of Restricted Stock
awarded to a person hereunder on such terms and conditions as the Committee may
deem appropriate.



(c) Without limiting the provisions of the first paragraph of
subsection (b) of this Section 22, if a person to whom Restricted Stock has been
awarded ceases to be employed by at least one of the employers in the group of
employers consisting of the Company and any Parent or Subsidiary, for any
reason, prior to the satisfaction of any terms and conditions of an Award, any
Restricted Stock remaining subject to restrictions shall thereupon be forfeited
by the person and transferred to, and reacquired by, the Company or an Affiliate
at no cost to the Company or the Affiliate; provided, however, if the cessation
is due to the person's death, disability or retirement, the Committee may, in
its sole and absolute discretion, deem that the terms and conditions have been
met for all or part of such remaining portion. In the event of such forfeiture,
the person, or in the event of his or her death, his or her personal
representative, shall forthwith deliver to the Secretary of the Company the
certificates for the Shares of



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Restricted Stock remaining subject to such restrictions,
accompanied by such instruments of transfer, if any, as may reasonably be
required by the Secretary of the Company.



(d) In case of any consolidation or merger of another
corporation into the Company in which the Company is the surviving corporation
and in which there is a reclassification or change (including a change to the
right to receive cash or other property) of the Shares (other than a change in
par value or from par value to no par value, or as a result of a subdivision or
combination, but including any change in such shares into two or more classes or
series of shares), the Committee may provide that payment of Restricted Stock
shall take the form of the kind and amount of shares of stock and other
securities (including those of any new direct or indirect parent of the
Company), property, cash or any combination thereof receivable upon such
consolidation or merger.







































































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