(1) Interest rates on the interest rate swaps are as of June 30, 2004.

The new FHLB advances have an average cost of 3.78% which reduces the cost of FHLB advances that are not hedged by 2.35% until the FHLB advances scheduled to mature in fiscal year 2005 reprice. The change in the term structure of the FHLB advances has the effect of shortening the average maturity of the refinanced FHLB advances to a weighted average life of 43 months from 67 months. The effective tax rate for the nine months ended June 30, 2004 was 40.4%. After recording the $236.1 million prepayment cost associated with the refinancing, the composite effective tax rate for fiscal year 2004 is estimated to be a benefit of 37.1%.

The Bank's regulatory core and tier one capital ratios were 8.5% after the transaction, which continues to be above the levels required by the Office of Thrift Supervision ("OTS") to be classified as a well capitalized institution. This transaction will not affect the Company's current dividend policy.

Capitol Federal Financial, and its wholly owned subsidiary, Capitol Federal Savings, may from time to time make written or oral "forward-looking statements", including statements contained in their filings with the Securities and Exchange Commission ("SEC").

Except for the historical information contained in this filing, the matters discussed may be deemed to be forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including changes in economic conditions in the Company's market areas, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market areas, competition, and other risks detailed from time to time in the Company's SEC reports. Actual strategies and results in future periods may differ materially from those currently expected. These forward-looking statements represent the Company's judgment as of the date of this filing. The Company disclaims, however, any intent or obligation to update these forward-looking statements.

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company. The discussion includes comments relating to the Bank, since the Bank is wholly owned by the Company and comprises the majority of assets and principal source of income for the Company.

Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of mortgage servicing rights and our policy regarding derivative instruments are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could cause reported results to differ materially. These critical accounting policies and their application are reviewed at least annually with our Audit Committee and Board of Directors. Following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.

Allowance for Loan Losses We maintain an allowance for loan losses to absorb losses known and inherent in the loan portfolio based upon ongoing, quarterly assessments of the loan portfolio. Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include a formula allowance, specific allowances for identified problem loans and portfolio segments and economic conditions that may lead to a concern about the loan portfolio or segments of the loan portfolio. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

The formula allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations of both performing and non-performing loans affect the amount of the formula allowance. Loss factors are based both on our historical loss experience and on significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Loss factors for loans on residential properties with greater than four units and loans on construction and development and commercial properties are computed based on an evaluation of inherent losses on these loans. Loan loss factors for portfolio segments are representative of the credit risks associated with loans in those segments. The greater the credit risks associated with a particular segment, the greater the loss factor. Loss factors increase within each portfolio segment as loans become classified, delinquent, the foreclosure process begins or as economic conditions warrant.

The appropriateness of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas. Other conditions that management considers in determining the appropriateness of the allowance include, but are not limited to, changes to our underwriting standards, credit quality trends (including changes in non-performing loans expected to result from existing conditions), trends in collateral values, loan volumes and concentrations, and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility of those loans.

Senior management reviews these conditions quarterly in discussions with our senior credit officers. To the extent that any of these conditions are evidenced by a specifically identifiable problem loan or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance applicable to such loan or portfolio segment. Where any of these conditions are not evidenced by a specifically identifiable problem loan or portfolio segment as of the evaluation date, management's evaluation of the loss related to these conditions is reflected in the unallocated allowance associated with our homogeneous population of mortgage loans. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem loans or portfolio segments.

The amounts actually observed in respect to these losses can vary significantly from the estimated amounts. Our methodology permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management's judgment, significant factors which affect the collectibility of the portfolio, as of the evaluation date, are not reflected in the current loss factors. By assessing the estimated losses inherent in our loan portfolios on a quarterly basis, we can adjust specific and inherent loss estimates based upon more current information.

Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans or changes in the market value of collateral securing loans, that may be susceptible to significant change. In the opinion of management, the allowance when taken as a whole, is adequate to absorb reasonable estimated loan losses inherent in our loan portfolios.

Valuation of Mortgage Servicing Rights ("MSR") The Bank records MSR as a result of retaining the servicing on loans that are sold. Impairment exists if the carrying value of MSR exceeds the estimated fair value of the MSR. MSR are stratified by the underlying loan term and by interest rate. Individual impairment allowances for each stratum are established when necessary and then adjusted in subsequent periods to reflect changes in the measurement of impairment. The estimated fair value of each MSR stratum is determined through analysis of future cash flows incorporating numerous assumptions including: servicing income, servicing costs, market discount rates, prepayment speeds and other market driven data.

The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSR. Generally, as interest rates decline, prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, prepayments slow down which generally results in an increase in the fair value of MSR. All assumptions are reviewed for reasonableness on a quarterly basis and adjusted as necessary to reflect current and anticipated market conditions. Thus, any measurement of the fair value of MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if applied at a different point in time.

Derivative Instruments The Bank has entered into interest rate swap agreements to hedge certain FHLB advances. The Bank pays a variable rate of interest tied to the one month LIBOR and receives a fixed-rate of interest matching the hedged FHLB advances. When the Bank entered into the interest rate swap agreements, they were designated as fair value hedges. All terms in the interest rate swap agreements relating to the pay-fixed rate components and timing of cash flows match the terms of the hedged FHLB advances. Therefore, the Bank has assumed no ineffectiveness in the hedging relationship and accounts for the interest rate swaps using the shortcut method. Any gain or loss in the fair value of the interest rate swaps is offset by a gain or loss on the hedged FHLB advances.

Before undertaking the hedge, management formally documented its risk management objectives, strategy and the relationship between the interest rate swap agreements and the hedged FHLB advances. To qualify for hedge accounting, the interest rate swaps and the related FHLB advances must be designated as a hedge. Both at the inception of the hedge and on an ongoing basis, management assesses whether the hedging relationship is expected to be highly effective in offsetting changes in fair values of the hedged FHLB advances. If at some point it is determined that the interest rate swaps are not highly effective as a hedge, hedge accounting will be discontinued. If hedge accounting is discontinued, changes in the fair value of the interest rate swaps will be recorded in earnings and the hedged FHLB advances will no longer be adjusted for changes in fair value.

Our strategy is to operate a retail oriented financial institution dedicated to serving the needs of customers in our market areas. Our commitment is to provide the broadest possible access to home ownership through our residential lending programs and to offer a complete set of personal financial products and services through our network of branch offices.

As a result of providing customers products they desire, the Bank's primary focus becomes one of managing cash flows. This is done through the setting of interest rates on loan and deposit products and the investment of cash flows not placed in our local markets through the origination of loans into investments that meet the long term objectives of earnings and liquidity management or to increase cashflow deficiencies if locally generated cash flows are not sufficient from deposits to meet local loan demand. The Bank manages all of its portfolios, both asset and liability portfolios, essentially as held-to-maturity portfolios. As such, changes in the balance or mix of products in these portfolios does not typically occur quickly, especially in a rising rate environment. Because of this, management looks at changes over a period of time to determine trends that can be changed through various strategies in our local markets or by the investments we make or borrowings we incur.

The primary components of our strategy include:

• Single-Family Portfolio Lending. We are one of the largest originators of one- to four-family residential mortgage loans in the State of Kansas. We have primarily originated these loans for our own portfolio, rather than for sale, and we generally service the loans we originate. We provide retail customers with alternatives for their borrowing needs by offering both fixed- and adjustable-rate products with various terms to maturity and pricing alternatives. We combine with our lending products underwriting standards designed to limit our exposure to credit risk which has resulted in minimal levels of delinquent and non-performing loans. We offer special programs to individuals who may be first time home buyers, have low or moderate incomes or may have certain credit risk concerns in order to maximize our ability to deliver home ownership opportunities. We attract customers through our strong relationships with real estate agents, loan agents, reputation, pricing, walk-in customers and customers th at apply on the internet.
• Retail Financial Services. We offer a wide array of deposit products and retail services for our customers. These products include checking, savings, money market accounts, certificates of deposit and retirement accounts. These are provided through a branch network of 36 locations, offering traditional branch locations and locations in retail stores, our call center which operates on extended hours, telephone bill payment services and internet based transaction services.
• Commitment to Cost Control. We are very effective at controlling our costs of operations outside of the expense portion of our employee benefit plans that are tied to our stock price since we have no control over the stock market. By using technology, we are able to increase productivity and centralize our lending and deposit support functions for efficient processing. Our retail orientation allows us to serve a broad range of customers through relatively few branch locations. Our average deposit base per traditional branch at June 30, 2004 was over $149.1 million. This helps to control costs. Our single-family residential lending process, through effective management of credit risk, allows us to service a large portfolio of loans at efficient levels because there are reduced costs with servicing a portfolio of performing loans.
• Strong Capital Position. Our policy has always been to protect the safety and soundness of Capitol Federal Savings through conservative credit and operational risk management, balance sheet strength, consistent earnings and sound operations. The end result of these activities is a capital ratio that is in excess of the well-capitalized standards set by the OTS. We believe that by maintaining a strong capital position we can best safeguard the long-term interests of the Bank, Company and stockholders.
• Shareholder Value. We strive to enhance shareholder value while maintaining a strong capital position. We continue to provide returns to shareholders through our dividend payments. In November 2003, the Board adjusted its dividend policy for calendar year 2004 with the intent to pay its calendar year dividend in four equal quarterly installments. No dividend payout ratio has been targeted and one is not currently contemplated. On July 27, 2004, the Board approved a dividend of $0.50 per share which will be paid on August 20, 2004 to holders of record as of August 6, 2004. Excluding the August 20, 2004 dividend payment, the Company has paid dividends of $2.31 per share during fiscal year 2004.
• Risk Management. Changes in interest rates is our primary risk as our consolidated balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact on not only our net income but also on the cashflows of those assets and liabilities and the market value of our assets and liabilities. The interest rate environment during fiscal year 2003 and continuing into fiscal year 2004 was one generally of historical lows which caused compression in our net interest margin. To manage interest rate risk, our Asset and Liability Committee ("ALCO") meets weekly to discuss and monitor the current interest rate environment compared to interest rates offered on our loan and deposit products. Additionally, ALCO meets once a month to review reports that present the effects that changes in interest rates will have on our earnings, the present market value of our equity and cashflows. The members of ALCO are the Chai rman, the Chief Executive Officer, the Chief Financial Officer (chair of ALCO), the Executive Vice President for Corporate Services, the Chief Lending Officer, the Executive Vice President for Retail Operations and the Controller.

Our results of operations depend primarily on net interest income, which is a direct result of the interest rate environments over time. Net interest income is the difference between the interest income earned on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Net interest income is directly impacted by the spread between long-term interest rates and short-term interest rates.

We generally price our loan and deposit products based upon an analysis of our competition and changes in market rates. While we do not explicitly price our products at a margin to a specific market rate or index, our products do tend to be priced at a margin to general market rates or indices. While national market rates change constantly, and rates offered by competitors with nationwide delivery channels may change during a business day, we generally allow our rates to remain available to customers for up to a week on deposit products and several days to a week on loan products. Our loans are generally priced based upon the 10 year Treasury rate while the rates on our deposits are generally priced based upon short-term Treasury interest rates. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our deposits have maturity/reprice dates of less than 2 years. The recent increase in the Fed Funds rate by the Federal Reserve Board of 25 basis points has had almost no effect on the pricing of our deposits or loans. However, additional increases by the Federal Reserve Board could influence local deposit rates such that we will have to increase deposit rates.

Interest rates during the first nine months of fiscal year 2004 generally remained at historical lows while fluctuating during the period. Long-term interest rates during the first quarter of fiscal year 2004 were gradually increasing, followed by a second quarter of gradually decreasing long-term interest rates. By the beginning of the third quarter of fiscal year 2004, long-term interest rates reached early January 2004 levels and increased during the quarter. The spread between long-term and short-term rates remained largely unchanged during the third quarter while the spread between two year and five year treasuries and long-term treasuries narrowed. Generally, an increase in long-term interest rates and a steeper yield curve should have a positive impact on our interest income in future periods.

Changes in interest rates affect the prepayment activity on our mortgage-related assets which has a direct impact on the yields of our interest-earning assets. Generally, prepayments increase during periods of decreasing interest rates and decrease during periods of increasing interest rates. When prepayments increase, the yield earned on our mortgage-related assets decrease as prepayments received are reinvested at the then current lower market interest rates and there is generally an increase in premium amortization. Prepayment activity has been extraordinarily high over the past two years on our mortgage-related assets due to the historically low interest rate environment. The net premium amortized on our mortgage-related securities during the third quarter of fiscal year 2004 was $7.1 million compared to $8.7 million during the same period one year ago. During the first nine months of fiscal year 2004 net premium amortization was $17.5 million compared to $16.1 million during the same period last year . Prepayments have continued to keep the yield on our mortgage-related securities low.

Slightly over half of our interest-bearing liabilities are deposits and well over half of our deposits are certificates of deposit. Deposits have a much shorter term to maturity/reprice than our interest-earning assets, therefore they reprice much quicker than our interest-earning assets. The average cost of our deposits has steadily decreased during the past two years due to our deposits repricing to current rates. During the second and third quarters of fiscal year 2004, the average cost of our deposits remained relatively flat due to the stabilization of short-term interest rates.

Slightly over 40% of our interest-bearing liabilities are FHLB advances. Our FHLB advances have a weighted average cost of 6.14%. We have interest rate swaps on 25% of our FHLB advances which effectively lowered the weighted average cost on our FHLB advances to 5.49% at June 30, 2004. As discussed in the notes to the consolidated financial statements, the Bank refinanced $2.40 billion of its FHLB advances that were not hedged by interest rate swaps during July 2004. The refinancing lowered the weighted average cost on our new refinanced FHLB advances to 3.78% from 6.13%. The refinance was undertaken at this time because the amount of the prepayment cost and the rates that would be paid on the new borrowings would significantly impact operations immediately by reducing the amount of cash paid to FHLB which can then be used to fund the operations of the Bank. The Bank's regulatory capital ratios, after the completion of the refinance, were an important factor when management analyzed thi s transaction. After the refinance, the Bank's regulatory capital ratios continued to be above the levels required by the OTS to be classified as a well-capitalized institution.

During the first nine months of fiscal year 2004, total assets decreased $135.5 million to $8.45 billion at June 30, 2004. The decrease in assets was mainly attributed to the decrease in investment securities of $359.1 million, partially offset by an increase in loans receivable of $229.3 million. During fiscal year 2004, $445.2 million of our agency bonds matured and $60.0 million were called. These maturing agency bonds were short-term agency bonds purchased during the quarter ended December 31, 2002 as part of the Bank's then strategy to maintain cashflows that would be available for reinvestment in about a twelve month time frame. The increase in loans is attributed to a slow down in prepayments due to an increase in rates compared to the same period one year ago and also due to the Bank purchasing $310.0 million loans during fiscal year 2004. During the third quarter of fiscal year 2004, management changed its strategy of using funds from the repayments and maturity of interest-earning assets to purchase mortgage loans rather than mortgage-related securities. The reason for the change in strategy was due to the yields on mortgage loans being more favorable than the yields on mortgage-related securities. At June 30, 2004, the Bank had commitments to purchase $357.6 million mortgage loans, $8.3 million fixed-rate and $349.3 million adjustable-rate, at a weighted average rate of 4.78% which are expected to be funded before the end of fiscal year 2004.

Since September 30, 2003, deposits have decreased $63.8 million to $4.17 billion at June 30, 2004. There has been growth in all deposit categories except certificates of deposit. The pace at which the certificate balance was decreasing started to slow during the second quarter of fiscal year 2004 and then the balance began increasing during the third quarter. However, the total decrease in certificates during fiscal year 2004 more than offset the growth in all other deposit categories.

In December 2003, the Bank entered into interest rate swaps of $800.0 million to hedge an equal amount of FHLB advances. The interest rate swaps are designated as fair value hedges and the Bank accounts for the hedges using the shortcut method. Gains/losses in the fair value of the interest rate swaps are offset by a gain/loss on the hedged FHLB advances. At June 30, 2004, the negative fair value adjustment on the interest rate swaps was an unrealized loss of $20.0 million which is reflected in accounts payable and accrued expenses. The carrying amount of the FHLB advances was reduced by an identical amount which explains the FHLB advance balance decrease from September 30, 2003 to June 30, 2004.

During March 2004, the Company issued $53.6 million of Debentures to Capitol Federal Financial Trust I. This transaction increased the Company's borrowings and cash.

The following table presents selected balance sheet data for the Company at the dates indicated.

Assets.  Total assets of the Company decreased $135.5 million from $8.58 billion at September 30, 2003 to $8.45 billion at June 30, 2004. The decrease was primarily due to a $359.1 million decrease in investment securities and a decrease in mortgage-related securities of $53.6 million, partially offset by an increase of $229.3 million in loans receivable and an increase in cash and cash equivalents of $59.7 million.

• Mortgage-related securities decreased from $2.94 billion at September 30, 2003 to $2.89 billion at June 30, 2004. The decrease in the balance was due primarily to the amount of maturities and repayments during fiscal year 2004. The funds from the maturities and repayments were not entirely reinvested into mortgage-related securities. Rather, the funds were used to purchase mortgage loans primarily during the current quarter.

The following table provides a summary of the activity in our portfolio of mortgage-related securities for the periods presented. The yields and WAL for purchases are presented as recorded at the time of purchase. The yields and WAL for the beginning and ending balances are as of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The $23.8 million change in the valuation on AFS securities between June 30, 2004 and March 31, 2004 is a result of the rising interest rate environment. The rate for a par priced security is now higher than par priced securities purchased in previous quarters. The result of this change in market rates is a decrease in the fair value on our AFS securities.

• Investment securities, which consist of agency bonds, decreased from $1.02 billion at September 30, 2003 to $663.4 million at June 30, 2004. The following table provides a summary of the activity of investment securities for the periods presented. The yields and WAL for purchases are presented as recorded at the time of purchase. The yields and WAL for the beginning and ending balances are as of the period presented. The increase in the WAL from March 31, 2004 to June 30, 2004 is a result of the increased unlikelihood that the callable agency bonds will be called prior to maturity due to the increase in interest rates.