On November 21, 2008, Heritage Financial Corporation (the "Company") entered into a Letter Agreement, which incorporates by reference the Securities Purchase Agreement - Standard Terms (the "Purchase Agreement"), with the United States Department of the Treasury ("Treasury"), pursuant to which the Company issued and sold to the Treasury (i) 24,000 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Preferred Stock") and
(ii) a warrant (the "Warrant") to purchase 276,074 shares of the Company's common stock, par value $1.00 per share (the "Common Stock"), for an aggregate purchase price of $3.6 million in cash. The description of the Purchase Agreement contained or incorporated herein is a summary and is qualified in its entirety by reference to the full text of the Purchase Agreement attached as Exhibit 10.1 hereto, which is incorporated herein by reference.

The Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Company may not redeem the Preferred Stock during the first three years following the investment by Treasury, except with the proceeds from a "Qualified Equity Offering" (as defined in the Articles of Amendment described in Item 5.03 and attached as Exhibit 3.1 hereto). After three years, the Company may, at its option, redeem the Preferred Stock at it liquidation preference plus accrued and unpaid dividends. The Preferred Stock is generally non-voting. The description of the Preferred Stock contained herein is a summary and is qualified in its entirety by reference to the full text of the Articles of Amendment, which are attached as Exhibit 3.1 hereto and incorporated herein by reference.

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an initial per share exercise price of $13.04. The Warrant provides for the adjustment of the exercise price and the number of shares of Common Stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of Common Stock, and upon certain issuances of Common Stock at or below a specified price relative to the initial exercise price. If the Company receives aggregate gross cash proceeds of not less than $3.6 million from Qualified Equity Offerings on or prior to December 31, 2009, the number of shares of Common Stock issuable pursuant to Treasury's exercise of the Warrant will be reduced by one half of the original number of shares, taking into account all adjustments, underlying the Warrant. Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant. During the term of the Warrant, if at any time the shares of Common Stock of the Company are no longer listed or admitted to trading on a national securities exchange (other than in connection with certain business combinations), the Treasury may cause the Company to exchange all or a portion of the Warrant for another economic interest of the Company (determined by the Treasury in consultation with the Company) classified as permanent equity under U.S. GAAP with an equivalent fair market value. The description of the Warrant contained herein is a summary and is qualified in its entirety by reference to the full text of the Warrant Certificate, which is attached as Exhibit 4.2 hereto and incorporated herein by reference.

The Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). Upon the request of Treasury at any time, the Company has agreed to promptly enter into a deposit arrangement pursuant to which the Preferred Stock may be deposited and depositary shares ("Depositary . . .

The information set forth under Item 1.01 is incorporated by reference into this Item 3.02.

The issuance and sale of the Preferred Stock and the Warrant is exempt from registration pursuant to Section 4(2) of the Securities Act. The Company has not engaged in general solicitation or advertising with regard to the issuance and sale of such securities and has not offered securities to the public in connection with this issuance and sale.

Pursuant to the terms of the Purchase Agreement, upon issuance of the Preferred Stock, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its Junior Stock (as defined below) and Parity Stock (as defined below) will be subject to restrictions, including a restriction against increasing dividends from the Company's last quarterly cash dividend per share ($0.14) declared on the Common Stock as of November 21, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Preferred Stock and (b) the date on which the Preferred Stock has been redeemed in whole or Treasury has transferred all of the Preferred Stock to third parties.

In addition, pursuant to the Articles of Amendment described in Item 5.03 below, the ability of the Company to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of its Junior Stock and Parity Stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on its Preferred Stock.

"Junior Stock" means the Common Stock and any other class or series of stock of the Company the terms of which expressly provide that it ranks junior to the Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Company. "Parity Stock" means any class or series of stock of the Company the terms of which do not expressly provide that such class or series will rank senior or junior to the Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Company (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

The information concerning executive compensation set forth under Item 1.01 is incorporated by reference into this Item 5.02.

The Company has filed Articles of Amendment (the "Articles of Amendment") with the Washington Secretary of State for the purpose of amending its Restated Articles of Incorporation, as amended, to fix the designations, preferences, limitations and relative rights of the Preferred Stock. The Articles of Amendment are effective as of November 18, 2008. The Preferred Stock has a liquidation preference of $1,000 per share. The Articles of Amendment are attached as Exhibit 3.1 hereto and is incorporated by reference herein.

On November 21, 2008 Heritage Financial Corporation issued a press release announcing the completion of the sale of securities under the U.S. Treasury Capital Purchase Program. A copy of the press release is attached at Exhibit 99.1.

(a) Financial statements - not applicable

(b) Pro forma financial information - not applicable

(c) Shell company transactions- not applicable

(d) Exhibits:

The following exhibits are being filed herewith and this list shall constitute the exhibit index:

EXHIBIT NO.         DESCRIPTION OF EXHIBIT

    3.1             Articles of Amendment for the Preferred Stock

    4.1             Form of Certificate for the Preferred Stock

    4.2             Warrant for Purchase of Shares of Common Stock

   10.1             Letter Agreement, dated November 21, 2008, including the
                    Securities Purchase Agreement - Standard Terms, between the
                    Company and United States Department of the Treasury

   99.1             Press Release