UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ______)

Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]

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Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-12

Jefferson Bancshares, Inc.
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(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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[Jefferson Bancshares, Inc. Letterhead]

December 1, 2003

Dear Shareholder:

You are cordially invited to attend the first annual meeting of
shareholders of Jefferson Bancshares, Inc. We will hold the meeting in the
Independence Room of Jefferson Federal Bank at 120 Evans Avenue, Morristown,
Tennessee, on Thursday, January 8, 2004 at 2:00 p.m., local time.

The notice of annual meeting and proxy statement appearing on the
following pages describe the formal business to be transacted at the meeting.
During the meeting, we will also report on the operations of the Company.
Directors and officers of the Company, as well as a representative of Craine,
Thompson & Jones, P.C., the Company's independent auditors, will be present to
respond to appropriate questions of shareholders.

It is important that your shares are represented at this meeting, whether
or not you attend the meeting in person and regardless of the number of shares
you own. To make sure your shares are represented, we urge you to complete and
mail the enclosed proxy card. If you attend the meeting, you may vote in person
even if you have previously mailed a proxy card.

We look forward to seeing you at the meeting.

Sincerely,

/s/ Anderson L. Smith

Anderson L. Smith
PRESIDENT AND CHIEF EXECUTIVE OFFICER

JEFFERSON BANCSHARES, INC.
120 EVANS AVENUE
MORRISTOWN, TENNESSEE 37814
(423) 586-8421

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

On Thursday, January 8, 2004, Jefferson Bancshares, Inc. will hold its
annual meeting of shareholders in the Independence Room of Jefferson Federal
Bank at 120 Evans Avenue, Morristown, Tennessee. The meeting will begin at 2:00
p.m., local time. At the meeting, shareholders will consider and act on the
following:

1. The election of two directors to serve for a term of one year, two
directors to serve for a term of two years and three directors to
serve for a term of three years;

2. The approval of the Jefferson Bancshares, Inc. 2004 Stock-Based
Incentive Plan;

3. The ratification of the appointment of Craine, Thompson & Jones,
P.C. as independent auditors for the Company for the fiscal year
ending June 30, 2004; and

4. Such other business that may properly come before the meeting.

NOTE: The Board of Directors is not aware of any other business to come
before the meeting.

The Board of Directors set November 13, 2003 as the record date for the
meeting. This means that owners of Jefferson Bancshares, Inc. common stock at
the close of business on that date are entitled to receive notice of the meeting
and to vote at the meeting and any adjournment or postponement of the meeting.

Please complete and sign the enclosed form of proxy, which is solicited by
the Board of Directors, and mail it promptly in the enclosed envelope. The proxy
will not be used if you attend the meeting and vote in person.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ Jane P. Hutton

Jane P. Hutton
CORPORATE SECRETARY

Morristown, Tennessee
December 1, 2003

IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.

JEFFERSON BANCSHARES, INC.
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PROXY STATEMENT
----------------------------------

This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Jefferson Bancshares, Inc. ("Jefferson
Bancshares" or the "Company") to be used at the annual meeting of shareholders
of the Company. Jefferson Bancshares is the holding company for Jefferson
Federal Bank ("Jefferson Federal"). The annual meeting will be held in the
Independence Room of Jefferson Federal at 120 Evans Avenue, Morristown,
Tennessee on Thursday, January 8, 2004, at 2:00 p.m., local time. This proxy
statement and the enclosed proxy card are being first mailed to shareholders of
record on or about December 1, 2003.

GENERAL INFORMATION ABOUT VOTING

WHO CAN VOTE AT THE MEETING

You are entitled to vote your Jefferson Bancshares common stock if the
records of the Company show that you held your shares as of the close of
business on November 13, 2003. As of the close of business on November 13, 2003,
a total of 8,385,517 shares of Jefferson Bancshares common stock were
outstanding. Each share of common stock has one vote. The Company's Charter
provides that record holders of the Company's common stock who beneficially own,
either directly or indirectly, in excess of 10% of the Company's outstanding
shares are not entitled to any vote in respect of the shares held in excess of
the 10% limit.

ATTENDING THE MEETING

If you are a beneficial owner of Jefferson Bancshares common stock held by
a broker, bank or other nominee (I.E., in "street name"), you will need proof of
ownership to be admitted to the meeting. A recent brokerage statement or letter
from a bank or broker are examples of proof of ownership. If you want to vote
your shares of Jefferson Bancshares common stock held in street name in person
at the meeting, you will have to get a written proxy in your name from the
broker, bank or other nominee who holds your shares.

VOTE REQUIRED

The annual meeting will be held only if there is a quorum present. A
quorum exists if a majority of the outstanding shares of common stock entitled
to vote are represented at the meeting. If you return valid proxy instructions
or attend the meeting in person, your shares will be counted for purposes of
determining whether there is a quorum, even if you abstain from voting. Broker
non-votes also will be counted for purposes of determining the existence of a
quorum. A broker non-vote occurs when a broker, bank or other nominee holding
shares for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received voting instructions from the beneficial owner.

In voting on the election of directors, you may vote in favor of all
nominees, withhold votes as to all nominees, or withhold votes as to specific
nominees. There is no cumulative voting for the election of directors. Directors
must be elected by a plurality of the votes cast at the annual meeting. This
means that the nominees receiving the greatest number of votes will be elected.
Votes that are withheld and broker non-votes will have no effect on the outcome
of the election.

In voting to approve the Jefferson Bancshares, Inc. 2004 Stock-Based
Incentive Plan and the ratification of the appointment of Craine, Thompson &
Jones, P.C. as independent auditors of the Company, you may vote in favor of the
proposal, vote against the proposal or abstain from voting. The approval of the
2004 Stock-Based Incentive Plan and the ratification of the selection of Craine,
Thompson & Jones, P.C. as the Company's independent auditor will be decided by
the affirmative vote of a majority of the votes cast at the annual meeting. On
these matters, abstentions and broker non-votes will have no effect on the
voting.

VOTING BY PROXY

The Board of Directors of Jefferson Bancshares is sending you this proxy
statement for the purpose of requesting that you allow your shares of Jefferson
Bancshares common stock to be represented at the annual meeting by the persons
named in the enclosed proxy card. All shares of Jefferson Bancshares common
stock represented at the meeting by properly executed and dated proxies will be
voted according to the instructions indicated on the proxy card. If you sign,
date and return a proxy card without giving voting instructions, your shares
will be voted as recommended by the Company's Board of Directors. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES FOR DIRECTOR, FOR APPROVAL
OF THE JEFFERSON BANCSHARES, INC. 2004 STOCK-BASED INCENTIVE PLAN AND FOR
RATIFICATION OF CRAINE, THOMPSON & JONES, P.C. AS INDEPENDENT AUDITORS.

If any matters not described in this proxy statement are properly
presented at the annual meeting, the persons named in the proxy card will use
their own best judgment to determine how to vote your shares. This includes a
motion to adjourn or postpone the annual meeting in order to solicit additional
proxies. If the annual meeting is postponed or adjourned, your Jefferson
Bancshares common stock may be voted by the persons named in the proxy card on
the new annual meeting date as well, unless you have revoked your proxy. The
Company does not know of any other matters to be presented at the annual
meeting.

You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Corporate Secretary of
the Company in writing before your common stock has been voted at the annual
meeting, deliver a later dated proxy or attend the meeting and vote your shares
in person. Attendance at the annual meeting will not in and of itself constitute
revocation of your proxy.

If your Jefferson Bancshares common stock is held in "street name," you
will receive instructions from your broker, bank or other nominee that you must
follow in order to have your shares voted. Your broker, bank or other nominee
may allow you to deliver your voting instructions via the telephone or the
Internet. Please see the instruction form provided by your broker, bank or other
nominee that accompanies this proxy statement.

IF YOU HAVE ANY QUESTIONS ABOUT VOTING, PLEASE CONTACT OUR PROXY SOLICITOR,
REGAN & ASSOCIATES, AT (800) 737-3426.

PARTICIPANTS IN JEFFERSON FEDERAL'S ESOP AND 401(K) PLAN

If you participate in the Jefferson Federal Bank Employee Stock Ownership
Plan (the "ESOP") or if you hold shares through the Jefferson Federal Savings
Bank Employees' Savings & Profit Sharing Plan and Trust (the "401(k) Plan"), you
will receive a voting instruction form for each plan that reflects all shares
you may vote under the plans. Under the terms of the ESOP, the ESOP trustee
votes all shares held by the ESOP, but each ESOP participant may direct the
trustee how to vote the shares of common stock allocated to his or her account.
The ESOP trustee, subject to the exercise of its fiduciary duties, will vote all
unallocated shares of Company common stock held by the ESOP and allocated shares
for which no voting instructions are received in the same proportion as shares
for which it has received timely voting instructions. Under the terms of the
401(k) Plan, a participant is entitled to direct the trustee as to the shares in
the Jefferson Bancshares, Inc. Stock Fund credited to his or her account. The
trustee will vote all shares for which no directions are given or for which
instructions were not timely received in the same proportion as shares for which
the trustee received voting instructions. The deadline for returning your voting
instructions to each plan's trustee is December 31, 2003.

CORPORATE GOVERNANCE

GENERAL

The Company periodically reviews its corporate governance policies and
procedures to ensure that the Company meets the highest standards of ethical
conduct, reports results with accuracy and transparency and maintains full
compliance with the laws, rules and regulations that govern the Company's
operations. As part of this periodic corporate governance review, the Board of
Directors reviews and adopts best corporate governance policies and practices
for the Company.

CORPORATE GOVERNANCE POLICIES AND PROCEDURES

Jefferson Bancshares has adopted a corporate governance policy to govern
certain activities. The corporate governance policy sets forth:

(1) the duties and responsibilities of each director;

(2) the composition, responsibilities and operation of the board of
directors;

(3) the establishment and operation of board committees;

(4) succession planning;

(5) appointing an independent lead director and convening executive
sessions of independent directors;

(6) the Board of Directors' interaction with management and third
parties; and

(7) the evaluation of the performance of the Board of Directors and of
the chief executive officer.

CODE OF ETHICS AND BUSINESS CONDUCT

The Company has adopted a Code of Ethics and Business Conduct that is
designed to ensure that the Company's directors, executive officers and
employees meet the highest standards of ethical conduct. The Code of Ethics and
Business Conduct requires that the Company's directors, executive officers and
employees avoid conflicts of interest, comply with all laws and other legal
requirements, conduct business in an honest and ethical manner and otherwise act
with integrity and in the Company's best interest. Under the terms of the Code
of Ethics and Business Conduct, directors, executive officers and employees are
required to report any conduct that they believe in good faith to be an actual
or apparent violation of the Code.

As a mechanism to encourage compliance with the Code of Ethics and
Business Conduct, the Company has established procedures to receive, retain and
treat complaints received regarding accounting, internal accounting controls or
auditing matters. These procedures ensure that individuals may submit concerns
regarding questionable accounting or auditing matters in a confidential and
anonymous manner. The Code of Ethics and Business Conduct also prohibits the
Company from retaliating against any director, executive officer or employee who
reports actual or apparent violations of the Code.

MEETINGS OF THE BOARD OF DIRECTORS

The Company and Jefferson Federal conduct business through meetings and
activities of their Boards of Directors and their committees. During the fiscal
year ended June 30, 2003, the Board of Directors of the Company held one (1)
regular meeting and one (1) special meetings and the Board of Directors of
Jefferson Federal held twelve (12) regular meetings and seven (7) special
meetings. No director attended fewer than 75% of the total meetings of the
Boards of Directors and committees on which he served.

COMMITTEES OF THE BOARD OF DIRECTORS OF JEFFERSON BANCSHARES

AUDIT/COMPLIANCE COMMITTEE. The Audit/Compliance Committee, consisting of
Messrs. Jack E. Campbell (Chairman), Terry M. Brimer and William T. Hale, is
responsible for ensuring that Jefferson Bancshares is maintaining reliable
accounting policies and financial reporting processes, ensuring that the
internal auditing department is adequate, and reviewing the work of Jefferson
Bancshares' independent accountants and internal auditing department to
determine its effectiveness. This committee met five (5) times during the fiscal
year ended June 30, 2003. The Audit/Compliance Committee charter is attached to
this proxy statement as Appendix B.

COMPENSATION COMMITTEE. The Compensation Committee, consisting of Messrs.
Terry M. Brimer (Chairman), Jack E. Campbell and John F. McCrary, Jr. is
responsible for determining annual grade and salary levels for employees and
establishing personnel policies. This committee met four (4) times during the
fiscal year ended June 30, 2003.

NOMINATING COMMITTEE. The Nominating Committee, consisting of Messrs. H.
Scott Reams (Chairman), Terry M. Brimer, Jack E. Campbell, William T. Hale and
William F. Young, is responsible for the annual selection of management's
nominees for election as directors and developing and implementing policies and
practices relating to corporate governance, including implementation of and
monitoring adherence to Jefferson Bancshares' corporate governance policy. This
committee met once to select management's nominees for election as directors at
this annual meeting.

DIRECTORS' COMPENSATION

DIRECTORS' FEES. Jefferson Federal pays a fee to each of its directors of
$800 per month for each regular board meeting attended plus a fee of $200 for
attendance at special meetings of the board. The Chairman receives an additional
fee of $1,000 per month. Members of committees receive an additional fee of $100
per meeting attended. Directors of Jefferson Bancshares receive a retainer of
$1,000 per quarter.

STOCK OWNERSHIP

The following table provides information as of November 13, 2003 about the
persons, other than directors and executive officers, known to the Company to be
the beneficial owners of more than 5% of the Company's outstanding common stock.
A person may be considered to beneficially own any shares of common stock over
which he or she has, directly or indirectly, sole or shared voting or investment
power.

PERCENT OF
NUMBER OF COMMON STOCK
NAME AND ADDRES SHARES OWNED OUTSTANDING
- -------------- ---------- -----------

Jefferson Federal Bank 670,089 8.0%
Employee Stock Ownership Plan
120 Evans Avenue
Morristown, Tennessee 37814

The following table provides information as of November 13, 2003 about the
shares of Jefferson Bancshares common stock that may be considered to be
beneficially owned by each director, each nominee for director and all directors
and executive officers of the Company as a group. A person may be considered to
beneficially own any shares of common stock over which he or she has, directly
or indirectly, sole or shared voting or investment power. Unless otherwise
indicated, each of the named individuals has sole voting power and sole
investment power with respect to the shares shown.

NUMBER OF SHARES PERCENT OF
NUMBER OF THAT MAY BE ACQUIRED COMMON
SHARES OWNED WITHIN 60 DAYS BY STOCK
NAME (EXCLUDING OPTIONS) EXERCISING OPTIONS OUTSTANDING(1)
- ----- ------------------- ------------------- --------------

Dr. Terry M. Brimer............. 95,028(2) 6,399 1.2%
Dr. Jack E. Campbell............ 56,808(3) 6,399 *
William T. Hale................. 82,964(4) 4,266 1.0
John F. McCrary, Jr............. 147,950 - (5) -
H. Scott Reams.................. 98,747(6) 6,399 1.3
Anderson L. Smith............... 28,875(7) 10,665 *
William F. Young................ 82,107(8) 4,266 1.0
All directors and executive officers
as a group (10 persons)...... 629,421 53,325 8.1%

- ---------------------
* Less than 1% of the shares of the Company common stock outstanding.

(1) Based on 8,385,517 shares of Company common stock outstanding and entitled
to vote as of the close of business on November 13, 2003, plus the number of
shares that may be acquired within 60 days by each individual (or group of
individuals) by exercising stock options.
(2) Includes 17,469 shares held jointly with his wife, 36,500 shares held by his
wife and 2,000 shares held by his son.
(3) Includes 54,249 shares held jointly with his wife.
(4) Includes 25,000 shares held by his wife.
(5) Mr. McCrary exercised his options to purchase 6,399 shares of common stock
on November 6, 2003.
(6) Includes 80,138 shares held jointly with his wife, 12,500 shares held by
401(k), 1,500 shares held by IRA and 2,050 shares held by his wife.
(7) Includes 10,853 shares held jointly with his wife, 2,314 shares held by
401(k) and 15,000 shares held by IRA.
(8) Includes 22,370 shares held by his wife, 14,180 shares held by his wife's
IRA and 16,077 shares held by IRA.

PROPOSAL 1 -- ELECTION OF DIRECTORS

The Company's Board of Directors consists of seven members. All of the
directors are independent under the current listing standards of the Nasdaq
Stock Market, Inc., except for Mr. Smith and Mr. McCrary. Mr Smith is not
independent because he is an employee of Jefferson Bancshares and Jefferson
Federal and Mr. McCrary is not independent because he receives a salary from
Jefferson Bancshares and Jefferson Federal for his service as Chairman of the
Board of Directors. Pursuant to Tennessee law, all seven directors will be
elected at the annual meeting to serve for a one, two or three- year term, or
until their respective successors have been elected and qualified. The nominees
to serve for a one-year term, or until their respective successors have been
elected and qualified, are Dr. Terry M. Brimer and H. Scott Reams. The nominees
for election to serve for a two-year term, or until their respective successors
have been elected and qualified, are William T. Hale and John F. McCrary, Jr.
The nominees to serve for a three-year term, or until their respective
successors have been elected and qualified, are Dr. Jack E. Campbell, Anderson
L. Smith and William F. Young. All of the nominees are currently directors of
the Company and Jefferson Federal. Following the election of directors at the
annual meeting, the Board will be divided into three classes with three-year
staggered terms, with one-third of the directors elected each year.

The Board of Directors intends that the proxies solicited by it will be
voted for the election of the nominees named above. If any nominee is unable to
serve, the persons named in the proxy card would vote your shares to approve the
election of any substitute proposed by the Board of Directors. Alternatively,
the Board of Directors may adopt a resolution to reduce the size of the Board.
At this time, the Board of Directors knows of no reason why any nominee might be
unable to serve.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL NOMINEES.

Information regarding the nominees for election at the annual meeting is
provided below. Unless otherwise stated, each nominee has held his current
occupation for the last five years. The age indicated for each individual is as
of June 30, 2003. The indicated period of service as a director includes service
as a director of Jefferson Federal. There are no family relationships among
directors or executive officers of Jefferson Bancshares.

BOARD NOMINEES FOR ELECTION OF DIRECTOR

DR. TERRY M. BRIMER is the President and majority owner of Midtown Drug
Company, Morristown, Tennessee. Age 56. Director since 1977.

H. SCOTT REAMS is a Partner in the law firm of Taylor, Reams, Tilson and
Harrison of Morristown, Tennessee. Age 55. Director since 1982.

WILLIAM T. HALE is the Executive Vice President and General Manager of
PFG-Hale, Inc., a wholesale food distributor. Age 52. Director since 2000.

JOHN F. MCCRARY, JR. is Chairman of the Board of Directors of Jefferson
Bancshares and Jefferson Federal. Mr. McCrary is a real estate broker and part
owner of Masengill-McCrary Realtors Company and Masengill-McCrary-Gregg Company,
an insurance agency, both located in Morristown, Tennessee. Age 78. Director
since 1963.

ANDERSON L. SMITH has served as the President and Chief Executive Officer
of Jefferson Federal and Jefferson Bancshares since January 2002 and March 2003,
respectively. Prior to joining Jefferson Federal, Mr. Smith was President,
Consumer Financial Services - East Tennessee Metro, First Tennessee Bank
National Association. Age 55. Director since 2002.

DR. JACK E. CAMPBELL is the President of Walters State Community College,
Morristown, Tennessee. Age 65. Director since 1979.

WILLIAM F. YOUNG is the President and Chief Executive Officer of Young's
Furniture Manufacturing Company, Inc., of Whitesburg, Tennessee. Age 64.
Director since 2000.

PROPOSAL 2 -- RATIFICATION OF THE JEFFERSON BANCSHARES, INC. 2004
STOCK-BASED INCENTIVE PLAN

The Board of Directors of the Company is presenting for shareholder
approval the Jefferson Bancshares, Inc. 2004 Stock-Based Incentive Plan (the
"Incentive Plan"), in the form attached to this proxy statement as Appendix A.
The purpose of the Incentive Plan is to attract and retain qualified personnel
in key positions, provide officers, employees and non-employee directors of the
Company and Jefferson Federal with a proprietary interest in the Company as an
incentive to contribute to the success of the Company, promote the attention of
management to other shareholders' concerns, and reward employees for outstanding
performance. The following is a summary of the material terms of the Incentive
Plan which is qualified in its entirety by the complete provisions of the
Incentive Plan attached to this proxy statement as Appendix A.

GENERAL

The plan authorizes the granting of options to purchase common stock of
the Company and awards of restricted shares of common stock. Subject to certain
adjustments to prevent dilution of awards to participants, the number of shares
of common stock reserved for awards under the Incentive Plan is 978,250 shares
of Jefferson Bancshares common stock, consisting of 698,750 shares reserved for
stock options and 279,500 shares reserved for restricted stock awards. All
employees and non-employee directors of the Company and its affiliates are
eligible to receive awards under the Incentive Plan. The Incentive Plan is
administered by a committee (the "Committee") consisting of members of the Board
of Directors who are not employees of the Company or its affiliates. Authorized
but unissued shares or shares previously issued and reacquired by the Company
may be used to satisfy awards under the Incentive Plan. If authorized but
unissued shares are used to satisfy restricted stock awards and the exercise of
options granted under the Incentive Plan, it will result in an increase in the
number of shares outstanding and will have a dilutive effect on the holdings of
existing shareholders. The Company may

establish a trust under which the trustee will purchase, with contributions from
the Company or Jefferson Federal, previously issued shares to fund the Company's
obligation for restricted stock awards. As of the date of this proxy statement,
no awards have been granted under the Incentive Plan.

TYPES OF AWARDS

GENERAL. The Incentive Plan authorizes the grant of awards in the form of:
(1) options intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code (options that provide certain tax benefits to the
recipients upon compliance with applicable requirements, but which do not result
in tax deductions to the Company); (2) options that do not so qualify (options
that do not provide the same income tax benefits to recipients, but which may
provide tax deductions to the Company), referred to as "non-statutory stock
options;" and (3) grants of restricted shares of stock. Each type of award may
be subject to certain vesting or service requirements or other conditions
imposed by the Committee.

OPTIONS. Subject to the terms of the Incentive Plan, the Committee has the
authority to determine the amount of options granted to any individual and the
date or dates on which each option will become exercisable and any other
conditions applicable to an option. The exercise price of all options will be
determined by the Committee but will be at least 100% of the fair market value
of the underlying common stock at the time of grant. The exercise price of any
option may be paid in cash, common stock, or any combination of cash and common
stock. The term of options will be determined by the Committee, but in no event
will an option be exercisable more than ten years from the date of grant (or
five years from the date of grant for a 10% owner with respect to incentive
stock options).

All options granted under the plan to officers and employees may, at the
discretion of the Committee, qualify as incentive stock options to the extent
permitted under Section 422 of the Internal Revenue Code. Under certain
circumstances, incentive stock options may be converted into non-statutory
stock options. In order to qualify as incentive stock options under Section 422
of the Internal Revenue Code, the option must generally be granted only to an
employee, must not be transferable (other than by will or the laws of descent
and distribution), the exercise price must not be less than 100% of the fair
market value of the common stock on the date of grant, the term of the option
may not exceed ten years from the date of grant, and no more than $100,000 of
options may become exercisable for the first time in any calendar year.
Notwithstanding the foregoing requirements, incentive stock options granted to
any person who is the beneficial owner of more than 10% of the outstanding
voting stock of the Company may be exercised only for a period of five years
from the date of grant and the exercise price must be at least equal to 110% of
the fair market value of the underlying common stock on the date of grant. Each
non-employee director of the Company or its affiliates, as well as employees,
will be eligible to receive non-statutory stock options.

Unless otherwise determined by the Committee, upon termination of an
option holder's services for any reason other than death, disability or
termination for cause, all then exercisable options will remain exercisable for
a period of time following termination (three months in the case of termination
from service in general and one year in the cases of death, disability or
retirement) and all unexercisable options will be canceled. In the event of the
death or disability of an option holder, all unexercisable options held by the
option holder will become fully exercisable and remain exercisable. In the event
of a change in control, all unvested options become fully vested and remain
exercisable for the term of the option regardless of termination of employment
or service. In the event of termination for cause, all exercisable and
unexercisable options held by the option holder will be canceled. Unless
otherwise determined by the Committee, in the event of a participant's
retirement, the participant may exercise only

those stock options that were immediately exercisable by the participant at the
date of retirement and only for a period of one year from the date of retirement
or, if sooner, until the expiration of the term of the stock option.

Under current generally accepted accounting principles, compensation
expense is generally not recognized with respect to the granting of stock
options.

RESTRICTED STOCK AWARDS. Subject to the terms of the plan, the Committee
has the authority to determine the amounts of restricted stock awards granted to
any individual and the dates on which restricted stock awards granted will vest
or any other conditions which must be satisfied prior to vesting.

Stock award recipients may also receive amounts of cash and stock
dividends or other distributions (if any) with respect to shares awarded in the
form of restricted stock regardless of vesting. In addition, prior to vesting,
recipients of restricted stock awards may also direct the voting of shares of
common stock granted to them.

Unless otherwise determined by the Committee, upon termination of the
services of a holder of a stock award for any reason other than death,
disability, retirement or termination for cause, all the holder's rights in
unvested restricted stock awards will be canceled. In the event of the death or
disability of the holder of the stock award or upon the occurrence of a change
in control, all unvested restricted stock awards held by such individual will
become fully vested. In the event of termination for cause of a holder of a
stock award, all unvested stock awards held by such individual will be canceled.
Unless otherwise determined by the Committee, in the event of a participant's
retirement, any stock awards in which the participant has not become vested as
of the date of retirement shall be forfeited and any rights the participant had
to such unvested stock awards shall become null and void.

TAX TREATMENT

OPTIONS. An option holder will generally not be deemed to have recognized
taxable income upon grant or exercise of any incentive stock option, provided
that shares transferred in connection with the exercise are not disposed of by
the optionee for at least one year after the date the shares are transferred in
connection with the exercise of the option and two years after the date of grant
of the option. If these holding periods are satisfied, upon disposal of the
shares, the aggregate difference between the per share option exercise price and
the fair market value of the common stock is recognized as income taxable at
capital gains rates. No compensation deduction may be taken by the Company as a
result of the grant or exercise of incentive stock options, assuming these
holding periods are met.

In the case of the exercise of a non-statutory stock option, an option
holder will be deemed to have received ordinary income upon exercise of the
option in an amount equal to the aggregate amount by which the fair market value
of the common stock exceeds the exercise price of the option. In the event
shares received through the exercise of an incentive stock option are disposed
of prior to the satisfaction of the holding periods (a "disqualifying
disposition"), the exercise of the option will essentially be treated as the
exercise of a non-statutory stock option, except that the option holder will
recognize the ordinary income for the year in which the disqualifying
disposition occurs. The amount of any ordinary income recognized by an optionee
upon the exercise of a non-statutory stock option or due to a disqualifying
disposition will be a deductible expense of the Company for federal income tax
purposes.

RESTRICTED STOCK AWARDS. When shares of common stock, as restricted stock
awards, are distributed upon vesting, the recipient recognizes ordinary income
equal to the fair market value of such shares at the date of distribution plus
any dividends on such shares.

ALTERNATE OPTION PAYMENTS

Subject to the terms of the Incentive Plan, the Committee has discretion
to determine the form of payment for the exercise of an option. The Committee
may indicate acceptable forms in the award agreement covering such options or
may reserve its decision to the time of exercise. No option is to be considered
exercised until payment in full is accepted by the Committee. Any shares of
common stock tendered in payment of the exercise price of an option will be
valued at the fair market value of the common stock on the date prior to the
date of exercise.

AMENDMENTS

Subject to certain restrictions contained in the plan, the Board of
Directors or the Committee may amend the plan in any respect, at any time,
provided that no amendment may affect the rights of the holder of an award
without his or her permission and such amendment must comply with applicable law
and regulation.

ADJUSTMENTS

In the event of any change in the outstanding shares of common stock of
the Company by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares, or
other similar corporate change, or other increase or decrease in such shares
without receipt or payment of consideration by the Company, or in the event an
extraordinary capital distribution is made, including the payment of an
extraordinary dividend, the Committee may make such adjustments to previously
granted awards, to prevent dilution, diminution or enlargement of the rights of
the holder; provided, however, that in the case of an extraordinary dividend,
any adjustment shall be subject to required approval by the Office of Thrift
Supervision. All awards under this plan will be binding upon any successors or
assigns of the Company.

NONTRANSFERABILITY

Unless determined otherwise by the Committee, awards under the plan will
not be transferable by the recipient other than by will or the laws of intestate
succession or pursuant to a domestic relations order. With the consent of the
Committee, a recipient may permit transferability or assignment for valid estate
planning purposes of a non-statutory stock option as permitted under the
Internal Revenue Code or federal securities laws and a participant may designate
a person or his or her estate as beneficiary of any award to which the recipient
would then be entitled, in the event of the death of the participant.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information about Company common stock that
may be issued upon exercise of options, warrants and rights under all of the
Company's equity compensation plans as of June 30, 2003. The Company does not
maintain any equity compensation plans that have not been approved by
shareholders.

NUMBER OF SECURITIES WEIGHTED-AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE
EXERCISE OF OUTSTANDING OUTSTANDING OPTIONS, FOR FUTURE ISSUANCE
OPTIONS, WARRANTS AND WARRANTS AND RIGHTS UNDER EQUITY
RIGHTS COMPENSATION
PLANS (EXCLUDING
SECURITIES REFLECTED IN
COLUMN (A))

PLAN CATEGORY (A) (B) (C)
- ----------------- ----------------------- --------------------- ------------------------

EQUITY COMPENSATION
PLANS APPROVED BY
SECURITY HOLDERS 70,389 $4.07 -

EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS - - -

TOTAL 70,389 $4.07 -

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE JEFFERSON
BANCSHARES, INC. 2004 STOCK-BASED INCENTIVE PLAN.

PROPOSAL 3 -- RATIFICATION OF AUDITORS

The Audit/Compliance Committee of the Board of Directors has appointed
Craine, Thompson & Jones, P.C. to be the Company's independent auditors for the
2004 fiscal year, subject to ratification by shareholders. A representative of
Craine, Thompson & Jones, P.C. is expected to be present at the annual meeting
to respond to appropriate questions from shareholders and will have the
opportunity to make a statement should he or she desire to do so.

If the ratification of the appointment of the auditors is not approved by
a majority of the votes cast by shareholders at the annual meeting, the
Audit/Compliance Committee will consider other independent auditors.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF INDEPENDENT AUDITORS.

AUDIT FEES

The following table sets forth the fees billed to the Company for the
fiscal year ending June 30, 2003 by Craine, Thompson & Jones, P.C.:

2003 2002
------- --------

Audit fees ......................$29,915 $31,340
Audit Related Fees...............$ - $ -
Tax fees (1).....................$ 4,470 $ 2,600
All other fees (2) $72,563 $ -
-----------------------------------
(1) Consists of tax filing and tax related compliance and other advisory
services.
(2) Includes fees for assistance with securities filings other than
periodic reports, services related to the conversion of Jefferson
Federal from the mutual holding company to the stock holding company
form of organization and other services.

The Audit/Compliance Committee believes that the provision of non-audit
services by Craine, Thompson & Jones, P.C. are compatible with maintaining
Craine, Thompson & Jones, P.C.'s independence.

REPORT OF THE AUDIT/COMPLIANCE COMMITTEE

The Audit/Compliance Committee of the Company's Board of Directors is
comprised of three (3) non-employee directors and operates under a written
charter adopted by the Board of Directors, a copy of which is attached to this
proxy statement as Appendix B. The Board of Directors has determined that each
Audit/Compliance Committee member is independent in accordance with the listing
standards of the Nasdaq Stock Market, Inc.

The Company's management is responsible for the Company's internal control
over financial reporting. The independent auditors are responsible for
performing an independent audit of the Company's consolidated financial
statements and issuing an opinion on the conformity of those financial
statements with generally accepted accounting principals. The Audit/Compliance
Committee oversees the Company's internal control over financial reporting on
behalf of the Board of Directors.

In this context, the Audit/Compliance Committee has met and held
discussions with management and the independent auditors. Management represented
to the Audit/Compliance Committee that the Company's consolidated financial
statements were prepared in accordance with generally accepted accounting
principles, and the Audit/Compliance Committee has reviewed and discussed the
consolidated financial statements with management and the independent auditors.
The Audit/Compliance Committee discussed with the independent auditors matters
required to be discussed by Statement on Auditing Standards No. 61
(Communication With Audit Committees), including the quality, not just the
acceptability, of the accounting principles, the reasonableness of significant
judgments, and the clarity of the disclosures in the financial statements.

In addition, the Audit/Compliance Committee has received the written
disclosures and the letter from the independent auditors required by the
Independence Standards Board Standard No. 1

(Independence Discussions With Audit Committees) and has discussed with the
independent auditors the auditors' independence from the Company and its
management. In concluding that the auditors are independent, the
Audit/Compliance Committee considered, among other factors, whether the
non-audit services provided by the auditors were compatible with its
independence.

The Audit/Compliance Committee discussed with the Company's independent
auditors the overall scope and plans for their audit. The Audit/Compliance
Committee meets with the independent auditors, with and without management
present, to discuss the results of their examination, their evaluation of the
Company's internal control over financial reporting, and the overall quality of
the Company's financial reporting process.

In performing all of these functions, the Audit/Compliance Committee acts
only in an oversight capacity. In its oversight role, the Audit/Compliance
Committee relies on the work and assurances of the Company's management, which
has the primary responsibility for financial statements and reports, and of the
independent auditors who, in their report, express an opinion on the conformity
of the Company's financial statements to generally accepted accounting
principles. The Audit/Compliance Committee's oversight does not provide it with
an independent basis to determine that management has maintained appropriate
accounting and financial reporting principles or policies, or appropriate
internal control over financial reporting designed to assure compliance with
accounting standards and applicable laws and regulations. Furthermore, the
Audit/Compliance Committee's considerations and discussions with management and
the independent auditors do not assure that the Company's financial statements
are presented in accordance with generally accepted accounting principles, that
the audit of the Company's financial statements has been carried out in
accordance with generally accepted auditing standards or that the Company's
independent auditors are in fact "independent."

In reliance on the reviews and discussions referred to above, the
Audit/Compliance Committee recommended to the Board of Directors, and the Board
has approved, that the audited consolidated financial statements be included in
the Company's Annual Report on Form 10-K for the year ended June 30, 2003 for
filing with the Securities and Exchange Commission. The Audit/Compliance
Committee has appointed, subject to shareholder ratification, the selection of
the Company's independent auditors for the fiscal year ended June 30, 2004.

THE AUDIT/COMPLIANCE COMMITTEE OF THE BOARD OF DIRECTORS
OF JEFFERSON BANCSHARES, INC.

DR. JACK E. CAMPBELL (CHAIRMAN)
DR. TERRY M. BRIMER
WILLIAM T. HALE

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following information is furnished for Mr. Anderson L. Smith, our
current President and Chief Executive Officer. No other executive officers of
Jefferson Federal or the Company received a salary and bonus of $100,000 or more
during the year ended June 30, 2003.

LONG-TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
----------------------------------------- -----------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
POSITIONS YEAR ($) ($) ($)(1) ($) (#) ($)
- ------------------- ----- ------ ------- ------------- ----------- ---------- ------------

Anderson L. Smith..... 2003 $165,000 $104,750 $16,000 $ - $ - $19,891(4)
President and Chief 2002 120,577 - 7,000 3,674(3) 10,665 82,325
Executive Officer

- ----------------------------------
(1) Represents Board of Directors' fees.
(2) Amount differs from that reported in the Company's Annual Report on Form
10-K as a result of the inclusion of bonus payments made in August 2003 that
were earned with respect to the year ended June 30, 2003.
(3) The dollar amount represents the market value of 708 shares on the date of
grant. The stock award was vested on the date of grant.
(4) Includes life, medical and dental insurance premiums that Jefferson Federal
paid on his behalf of $4,291, automobile allowance of $12,000, and taxable
fringe benefits of $3,600.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUE AT FISCAL YEAR
END

The following table provides for Mr. Smith information regarding the
exercise of options during the year ended June 30, 2003 and unexercised stock
options as of June 30, 2003.

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME SHARES DOLLAR OPTIONS AT FISCAL YEAR END(1)
- ---- ACQUIRED VALUE -------------------------- -------------------------
ON EXECISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------- -------- ----------- ------------- ----------- -------------

Anderson L. Smith.... - - 10,665 - $65,910 -

- -----------------------------------
(1) Value of unexercised in-the-money stock options equals the market value
($11.37) of shares covered by in-the-money options on June 30, 2003 less
the option exercise price. Options are in-the-money if the market value of
shares covered by the options is greater than the exercise price of $5.19.

EMPLOYMENT AGREEMENT. Effective June 25, 2003, Anderson L. Smith entered
into a three-year employment agreement with Jefferson Federal and Jefferson
Bancshares. Under the employment agreement, the base salary for Mr. Smith is
$165,000, which amount may be increased at the discretion of the Board of
Directors. The employment agreement provides Mr. Smith with a bonus program that
enables him to earn up to 50% of his base salary, on an annual basis. The amount
of the bonus is determined by specific performance standards and a formula
agreed to by Mr. Smith and Jefferson

Federal annually. Commencing on the first year anniversary date of the
employment agreement, and continuing on each anniversary thereafter, the
disinterested members of the Board of Directors may extend the agreement for an
additional year so that the remaining term of the agreement is 36 months, unless
Mr. Smith gives notice of termination. The agreement is terminable by Jefferson
Federal or Jefferson Bancshares at any time, with or without cause, and by Mr.
Smith at any time, with or without cause, or for Good Reason (as defined in the
employment agreement). If Mr. Smith is terminated from employment without cause
or he elects to terminate the agreement following an event constituting Good
Reason, Jefferson Federal would be required to honor the terms of the agreement
through the expiration of the current term, including payment of current cash
compensation and continuation of employee benefits.

The employment agreement also provides for severance payments and other
benefits in the event Mr. Smith is terminated without cause or he elects to
terminate the agreement with Good Reason in connection with any change in
control of Jefferson Bancshares or Jefferson Federal. The maximum present value
of the severance benefits under the employment agreement is 2.99 times Mr.
Smith's annual compensation during the five-year period preceding the effective
date of the change in control ("base amount"). The employment agreement provides
that the value of the maximum benefit is to be distributed in the form of a lump
sum cash payment within ten calendar days of the termination of Mr. Smith's
employment. Also, upon such event, Mr. Smith is entitled to receive, for a
36-month period following the termination of his employment, any employee
benefits in which he participated. Section 280G of the Internal Revenue Code
provides that severance payments that equal or exceed three times the
individual's base amount 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 the payment in excess
of the base amount, and we would not be entitled to deduct such amount.

The employment agreement restricts Mr. Smith's right to compete against us
for a period of two years from the date of termination of the agreement.

SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM. We maintain the Jefferson
Federal Supplemental Executive Retirement plan to provide for supplemental
retirement benefits with respect to the ESOP. The plan provides participating
executives with benefits otherwise limited by other provisions of the Internal
Revenue Code or the terms of the ESOP loan. Specifically, the plan provides
benefits to eligible individuals (those designated by our Board of Directors)
that cannot be provided under the ESOP as a result of the limitations imposed by
the Internal Revenue Code, but that would have been provided under the ESOP but
for such limitations. In addition to providing for benefits lost under
tax-qualified plans as a result of limitations imposed by the Internal Revenue
Code, the plan provides supplemental benefits to designated individuals upon a
change of control before the complete scheduled repayment of the ESOP loan.
Generally, upon such an event, the supplemental executive retirement plan will
provide the individual with a benefit equal to what the individual would have
received under the ESOP had he or she remained employed throughout the term of
the ESOP loan less the benefits actually provided under the ESOP on behalf of
such individual. An individual's benefits under the supplemental executive
retirement plan generally become payable upon the change in control of Jefferson
Federal or Jefferson Bancshares. The plan provides for Mr. Smith's
participation. The Board of Directors may designate other officers as
participants in future years.

We may utilize a grantor trust in connection with the supplemental
executive retirement plan in order to set aside funds that can be used to
ultimately pay benefits under the plan. The assets of the grantor trust would be
subject to the claims of our general creditors in the event of our insolvency
until paid to the individual according to the terms of the supplemental
executive retirement plan.

REPORT OF THE COMPENSATION COMMITTEE

The following is a report of the Compensation Committee of the Board of
Directors regarding executive compensation.

COMPENSATION POLICIES

The Compensation Committee bases its executive compensation policy on the
same principles that guide the Company in establishing all of its compensation
programs. The Company designs programs to attract, retain and motivate highly
talented individuals at all levels of the organization while balancing the
interests of stockholders. The compensation program for executives consists of
three key elements:
o Annual base salary;
o Performance based annual bonus; and
o Long-term stock incentive compensation.

In 2003, the board of directors approved the 2004 stock-based incentive
plan, which is to be approved by shareholders at the Annual Meeting.

COMPONENTS OF EXECUTIVE COMPENSATION

BASE SALARY. Salary levels for all employees, including executive
officers, are set so as to reflect the duties and levels of responsibilities
inherent in the position and to reflect competitive conditions in the banking
business in the Company's market area. Comparative salaries paid by other
financial institutions are considered in establishing the salary for a given
position. The Compensation Committee utilizes the Compensation Survey and the
Salary and Benefits Survey compiled by the America's Community Bankers and the
Tennessee Bankers Association, respectively, as well as other surveys prepared
by trade groups and independent benefits consultants. Base salaries for all
employees, including the executive officers, are reviewed annually by the
Compensation Committee, which takes into account the competitive level of pay as
reflected in the surveys consulted. In setting base salaries, the Compensation
Committee also considers a number of factors relating to the particular
executive, including individual performance, job responsibilities, level of
experience, ability and knowledge of the position. These factors are considered
subjectively in the aggregate and none of the factors is accorded a specific
weight.

BONUS. During fiscal 2003, bonuses were awarded to executive officers
based on the Compensation Committee's recognition of the individual
contributions made by executive officers that enabled the Company to perform
well both financially and operationally despite the very difficult economic
environment and based on competitive levels of compensation at similar
companies. Cash bonuses are paid pursuant to a Management Incentive Plan which
focuses on components such as asset quality, financial performance and strategy.
Goals are weighted differently at each level.

LONG-TERM INCENTIVE COMPENSATION. Under the Company's 1995 Jefferson
Federal Savings and Loan Association Stock Option Plan (the "1995 Stock Option
Plan"), 1995 Management

Recognition and Development Plan, and 2004 Stock-Based Incentive Plan, the
Compensation Committee is authorized, in its discretion, to grant stock options
and restricted stock awards in such proportions and upon such terms and
conditions as the Compensation Committee may determine, subject to regulatory
limits. All stock options granted have an exercise price equal to the fair
market value of the Company's common stock at the time of grant and are
exercisable within a ten-year period. In order to assure the retention of high
level executives and to tie the compensation of those executives to the creation
of long term value for stockholders, the Compensation Committee requires that
stock options granted under the 1995 Stock Option Plan vest proportionately over
a five-year period. It is anticipated that awards under the 2004 Stock-Based
Incentive Plan will be made on similar terms.

The awards of restricted stock to executive officers and other key
employees represent shares of Jefferson Bancshares common stock that the
recipient cannot sell or otherwise transfer until the applicable restriction
period lapses. Restricted stock awards are also intended to increase the
ownership of executives in the Company, thereby further integrating the
compensation of the executive with the creation of long term value for
stockholders. The Compensation Committee has provided that restricted stock
awards granted under the 1995 Management Recognition and Development Plan vest
in equal portions over five years. It is anticipated that awards under the 2004
Stock-Based Incentive Plan will be made on similar terms.

ANDERSON L. SMITH - CHIEF EXECUTIVE OFFICER COMPENSATION

Jefferson Federal and Mr. Smith entered into an employment agreement
effective June 25, 2003. The terms of Mr. Smith's employment agreement are set
forth under "Executive Compensation" in this proxy statement. In determining Mr.
Smith's cash compensation for fiscal 2003, the board focused on the Company's
financial performance during the year, the number of initiatives begun, expanded
or completed by the Company since Mr. Smith's employment began, competitive
levels of compensation for CEOs managing operations of similar size, complexity
and performance level and the importance of retaining a President and Chief
Executive Officer with the strategic, financial and leadership skills to ensure
the Company's continued growth into the foreseeable future. Under the Management
Incentive Plan adopted for the year ended December 31, 2002, Mr. Smith was
eligible for a maximum cash bonus of 50% of his base salary. In February 2003,
Mr. Smith received approximately 77% of his maximum payout, or $63,500.
Additionally, under the Management Incentive Plan adopted for the six months
ended June 30, 2003, Mr. Smith was eligible for a maximum payout of $41,250,
which he received in August 2003. The Committee believes that Mr. Smith's total
compensation package for 2003 will be slightly above the median of total
compensation for CEOs in the peer group, based on data obtained via the 2003
Tennessee Bankers Association Salary and Benefits Survey and the America's
Community Bankers Compensation Survey.

The Compensation Committee of the Board of Directors
of Jefferson Bancshares

Dr. Terry M. Brimer (Chairman)
Dr. Jack E. Campbell
John F. McCrary, Jr.

PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return on
Jefferson Bancshares common stock with the cumulative total return on the Nasdaq
Index (U.S. Companies) and with the SNL Thrift Index. Total return assumes the
reinvestment of all dividends.

[GRAPHIC OMITTED]

PERIOD ENDING
---------------------------------------------
6/30/98 6/30/99 6/30/00 6/30/01 6/30/02 6/30/03
------- ------ ------ ------- ------ ------

Jefferson Bancshares, Inc...... $100.00 $ 56.67 $ 47.82 $ 47.46 $100.00 $160.52
NASDAQ - Total US.............. 100.00 143.67 212.43 159.39 78.60 87.64
SNL NASDAQ Thrift Index........ 100.00 86.56 68.02 110.49 150.29 177.20

THE REPORT OF THE AUDIT/COMPLIANCE COMMITTEE, THE REPORT OF THE
COMPENSATION COMMITTEE, AND THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED
INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE
THIS PROXY STATEMENT INTO ANY FILING UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, EXCEPT TO THE
EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE,
AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.

OTHER INFORMATION RELATING TO DIRECTORS AND EXECUTIVE OFFICERS

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 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 Securities and Exchange Commission.
Executive officers, directors and greater than 10% shareholders are required by
regulation to furnish the Company with copies of all Section 16(a) reports they
file.

Based solely on the Company's review of the copies of the reports it has
received and written representations provided to it from the individuals
required to file the reports, the Company believes that each of its executive
officers, directors and greater than 10% beneficial owners has complied with the
applicable reporting requirements for transactions in the Company's common stock
during the year ended June 30, 2003.

TRANSACTIONS WITH MANAGEMENT

LOANS TO OFFICERS AND DIRECTORS. The recently enacted Sarbanes-Oxley Act
generally prohibits loans by Jefferson Bancshares to its executive officers and
directors. However, the Sarbanes-Oxley Act contains a specific exemption from
such prohibition for loans by Jefferson Federal to its executive officers and
directors in compliance with federal banking regulations. Federal regulations
require that all loans or extensions of credit to executive officers and
directors of insured institutions must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and must not involve more than the
normal risk of repayment or present other unfavorable features. Jefferson
Federal is therefore prohibited from making any new loans or extensions of
credit to executive officers and directors at different rates or terms than
those offered to the general public, except for loans made pursuant to programs
generally available to all employees. Notwithstanding this rule, federal
regulations permit Jefferson Federal to make loans to executive officers and
directors at reduced interest rates if the loan is made under a benefit program
generally available to all other employees and does not give preference to any
executive officer or director over any other employee. Jefferson Federal has
adopted a policy of offering employees residential mortgage loans at a discount
of 1/2% to published rates and personal consumer loans at a discount of 1% to
published rates. Jefferson Federal gives employees a discount of 50% on closing
fees.

In addition, loans made to a director or executive officer in an amount
that, when aggregated with the amount of all other loans to the person and his
or her related interests, are in excess of the greater of $25,000 or 5% of
Jefferson Federal's capital and surplus, up to a maximum of $500,000, must be
approved in advance by a majority of the disinterested members of the Board of
Directors.

The aggregate amount of loans by Jefferson Federal to its executive
officers and directors was $893,000 at June 30, 2003, or approximately .91% of
stockholders' equity at June 30, 2003. These loans were performing according to
their original terms at June 30, 2003.

OTHER TRANSACTIONS. H. Scott Reams is a partner in the law firm of Taylor,
Reams, Tilson & Harrison of Morristown, Tennessee. We pay a monthly retainer of
$500 to the law firm. In fiscal 2003, Jefferson Federal paid a total of $41,978
in legal fees to Mr. Reams' firm. John F. McCrary, Jr. is part

owner of Masengill-McCrary-Gregg Company, from which we purchase insurance. For
the fiscal year ended June 30, 2003, we paid approximately $9,725 in current and
pre-paid premiums to Masengill- McCrary-Gregg Company. We believe that the fees
paid to Mr. Reams' and Mr. McCrary's firms were based on normal terms and
conditions as would apply to other clients of the firms.

SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS AND NOMINATIONS

The Company must receive proposals that shareholders seek to include in
the proxy statement for the Company's next annual meeting no later than August
3, 2004. If next year's annual meeting is held on a date more than 30 calendar
days from January 8, 2005, a shareholder proposal must be received by a
reasonable time before the Company begins to print and mail its proxy
solicitation for such annual meeting. Any shareholder proposals will be subject
to the requirements of the proxy rules adopted by the Securities and Exchange
Commission.

The Company's Bylaws provide that in order for a shareholder to make
nominations for the election of directors or proposals for business to be
brought before the annual meeting, a shareholder must deliver notice of such
nominations and/or proposals to the Corporate Secretary not less than 90 days
prior to the date of the annual meeting; however, if less than 100 days' notice
of the annual meeting is given to shareholders, such notice must be delivered
not later than the close of the tenth day following the day on which notice of
the annual meeting was mailed to shareholders or public disclosure of the
meeting date. A copy of the Bylaws may be obtained from the Company.

MISCELLANEOUS

The Company will pay the cost of this proxy solicitation. The Company will
reimburse brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Jefferson Bancshares common stock. In addition to
soliciting proxies by mail, directors, officers and regular employees of the
Company may solicit proxies personally or by telephone without receiving
additional compensation. Regan & Associates, a proxy solicitation firm, will be
paid a fee of $4,500, plus out of pocket expenses to assist the Company.

The Company's Annual Report to Shareholders has been mailed to persons who
were shareholders as of the close of business on November 13, 2003. Any
shareholder who has not received a copy of the Annual Report may obtain a copy
by writing to the Corporate Secretary of the Company. The Annual Report is not
to be treated as part of the proxy solicitation material or as having been
incorporated in this proxy statement by reference.

A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, WITHOUT EXHIBITS, FOR
THE YEAR ENDED JUNE 30, 2003, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, WILL BE FURNISHED WITHOUT CHARGE TO PERSONS WHO WERE SHAREHOLDERS AS
OF THE CLOSE OF BUSINESS ON NOVEMBER 13, 2003 UPON WRITTEN REQUEST TO JANE P.
HUTTON, CORPORATE SECRETARY, JEFFERSON BANCSHARES, INC., 120 EVANS AVENUE,
MORRISTOWN, TENNESSEE 37814.

If you and others who share your address own your shares in "street name,"
your broker or other holder of record may be sending only one annual report and
proxy statement to your address. This practice, known as "householding," is
designed to reduce our printing and postage costs. However, if a shareholder
residing at such an address wishes to receive a separate annual report or proxy
statement in the future, he or she should contact the broker or other holder of
record. If you own your shares in "street

name" and are receiving multiple copies of our annual report and proxy
statement, you can request householding by contacting your broker or other
holder of record.

Whether or not you plan to attend the annual meeting, please vote by
marking, signing, dating and promptly returning the enclosed proxy card in the
enclosed envelope.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ Jane P. Hutton

Jane P. Hutton
CORPORATE SECRETARY

Morristown, Tennessee
December 1, 2003

APPENDIX A

JEFFERSON BANCSHARES, INC.
2004 STOCK-BASED INCENTIVE PLAN

1. DEFINITIONS.
------------

(a) "Affiliate" means any "parent corporation" or "subsidiary corporation"
of the Holding Company, as such terms are defined in Sections 424(e) and 424(f)
of the Code.

(b) "Award" means, individually or collectively, a grant under the Plan of
Non-Statutory Stock Options, Incentive Stock Options and Stock Awards.

(d) "Bank" means Jefferson Federal Bank, a federally-chartered savings
bank.

(e) "Board of Directors" means the board of directors of the Holding
Company.

(f) "Change in Control" shall be deemed to occur, for purposes of this
Plan, on the earliest of:

(i) Merger: The Holding Company merges into or consolidates with
another corporation, or merges another corporation into the
Holding Company, and as a result less than a majority of the
combined voting power of the resulting corporation immediately
after the merger or consolidation is held by persons who were
stockholders of the Holding Company immediately before the merger
or consolidation;

(ii) Acquisition of Significant Share Ownership: a report on Schedule
13D or another form or schedule (other than Schedule 13G) is
filed or is required to be filed under Sections 13(d) or 14(d) of
the Securities Exchange Act of 1934, if the schedule discloses
that the filing person or persons acting in concert has or have
become the beneficial owner of 25% or more of a class of the
Holding Company's voting securities, but this clause (ii) shall
not apply to beneficial ownership of Holding Company voting
shares held in a fiduciary capacity by an entity of which the
Holding Company directly or indirectly beneficially owns 50% or
more of its outstanding voting securities;

(iii) Change in Board Composition: during any period of two consecutive
years, individuals who constitute the Holding Company's Board of
Directors at the beginning of the two-year period cease for any
reason to constitute at least a majority of the Holding Company's
Board of Directors; provided, however, that for purposes of this
clause (iii) each director who is first elected by the board (or
first nominated by the board for election by stockholders) by a
vote of at least two-thirds of the directors who were directors
at the beginning of the period shall be deemed to have been a
director at the beginning of the two-year period; or

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(iv) Sale of Assets: Holding Company sells to a third party all or
substantially all of the Holding Company's assets.

(g) "Code" means the Internal Revenue Code of 1986, as amended.

(h) "Committee" means the Board of Directors or a committee designated
by the Board of Directors, pursuant to Section 2 of the Plan, to administer the
Plan.

(i) "Common Stock" means the common stock of the Holding Company, par
value $.01 per share.

(j) "Date of Grant" means the effective date of an Award.

(k) "Disability" means any mental or physical condition with respect to
which the Participant qualifies for and receives benefits for under a long-term
disability plan of the Holding Company or an Affiliate, or in the absence of
such a long-term disability plan or coverage under such a plan, "Disability"
shall mean a physical or mental condition which, in the sole discretion of the
Committee, is reasonably expected to be of indefinite duration and to
substantially prevent the Participant from fulfilling his or her duties or
responsibilities to the Holding Company or the Bank.

(l) "Effective Date" means the date that Plan is approved by
shareholders.

(m) "Employee" means any person employed by the Holding Company or the
Bank. Directors who are employed by the Holding Company or the Bank shall be
considered Employees under the Plan.

(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

(o) "Exercise Price" means the price at which a Participant may purchase
a share of Common Stock pursuant to an Option.

(p) "Fair Market Value" means the market price of Common Stock,
Determined by the Committee as follows:

(i) If the Common Stock was traded on the date in question on The
Nasdaq Stock Market, then the Fair Market Value shall be equal
to the closing price reported for such date;

(ii) If the Common Stock was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the
closing price reported by the applicable composite
transactions report for such date; and

(iii) If neither of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate. Whenever
possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in The Wall
--------
Street Journal. The Committee's determination of Fair Market
--------------
Value shall be conclusive and binding on all persons.

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(q) "Incentive Stock Option" means a stock option granted to a
Participant, pursuant to Section 7 of the Plan, that is intended to meet the
requirements of Section 422 of the Code.

(r) "Holding Company" means Jefferson Bancshares, Inc., a Tennessee
corporation.

(s) "Non-Statutory Stock Option" means a stock option granted to a
Participant pursuant to the terms of the Plan but which is not intended to be
and is not identified as an Incentive Stock Option or a stock option granted
under the Plan which is intended to be and is identified as an Incentive Stock
Option but which does not meet the requirements of Section 422 of the Code.

(t) "Option" means an Incentive Stock Option or Non-Statutory Stock
Option.

(u) "Outside Director" means a member of the board(s) of directors of
the Holding Company or the Bank who is not also an Employee of the Holding
Company or the Bank.

(v) "Participant" means any person who holds an outstanding Award.

(w) "Plan" means this Jefferson Bancshares, Inc. 2004 Stock-Based
Incentive Plan.

(x) "Retirement" with respect to an Employee Participant means
termination of employment (other than a Termination for Cause) upon or after
attaining age 59 1/2. However, "Retirement" will not be deemed to have occurred
for purposes of this Plan if a Participant continues to serve as a consultant to
or on the Board of Directors of the Holding Company or its Affiliates even if
such Participant is receiving retirement benefits under any retirement plan of
the Bank. With respect to an Outside Director Participant, "Retirement" means
the termination of service from the Board of Directors of the Holding Company or
its Affiliates (other than a Termination for Cause), except that an Outside
Director Participant shall not be deemed to have "retired" for purposes of the
Plan in the event he continues to serve as a consultant to the Board or as an
advisory director or director emeritus.

(y) "Stock Award" means an Award granted to a Participant pursuant to
Section 8 of the Plan.

(z) "Termination for Cause" means termination because of a Participant's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or material breach of any provision of any employment
agreement between the Holding Company and/or any subsidiary of the Holding
Company and a Participant.

(aa) "Trust" means a trust established by the Board of Directors in
connection with this Plan to hold Common Stock or other property for the
purposes set forth in the Plan.

(bb) "Trustee" means any person or entity approved by the Board of
Directors or its designee(s) to hold any of the Trust assets.

2. ADMINISTRATION.
--------------

(a) The Committee shall administer the Plan. The Committee shall consist
of the Board of Directors of the Holding Company in accordance with the
disinterested administration requirements of Rule 16b-3 promulgated by the
Securities and Exchange Commission. The Board of Directors may also

A-3

appoint one or more separate committees of the Board of Directors, each composed
of one or more directors of the Holding Company or the Bank who need not be
disinterested, that may grant Awards and administer the Plan with respect to
Employees and Outside Directors who are not considered officers or directors of
the Holding Company under Section 16 of the Exchange Act.

(b) The Committee shall (i) select the Employees and Outside Directors who
are to receive Awards under the Plan, (ii) determine the type, number, vesting
requirements and other features and conditions of such Awards, (iii) interpret
the Plan and Award Agreements in all respects and (iv) make all other decisions
relating to the operation of the Plan. The Committee may adopt such rules or
guidelines as it deems appropriate to implement the Plan. The Committee's
determinations under the Plan shall be final and binding on all persons.

(c) Each Award shall be evidenced by a written agreement ("Award
Agreement") containing such provisions as may be required by the Plan and
otherwise approved by the Committee. Each Award Agreement shall constitute a
binding contract between the Holding Company or the Bank and the Participant,
and every Participant, upon acceptance of an Award Agreement, shall be bound by
the terms and restrictions of the Plan and the Award Agreement. The terms of
each Award Agreement shall be in accordance with the Plan, but each Award
Agreement may include any additional provisions and restrictions determined by
the Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular and
at a minimum, the Committee shall set forth in each Award Agreement: (i) the
type of Award granted; (ii) the Exercise Price of any Option; (iii) the number
of shares subject to the Award; (iv) the expiration date of the Award; (v) the
manner, time, and rate (cumulative or otherwise) of exercise or vesting of such
Award; and (vi) the restrictions, if any, placed upon such Award, or upon shares
which may be issued upon exercise of such Award. The Chairman of the Committee
and such other directors and officers as shall be designated by the Committee is
hereby authorized to execute Award Agreements on behalf of the Holding Company
or an Affiliate and to cause them to be delivered to the recipients of Awards.

(d) The Committee may delegate all authority for: (i) the determination of
forms of payment to be made by or received by the Plan and (ii) the execution of
any Award Agreement. The Committee may rely on the descriptions,
representations, reports and estimates provided to it by the management of the
Holding Company or the Bank for determinations to be made pursuant to the Plan.

3. TYPES OF AWARDS.
---------------

The following Awards may be granted under the Plan:

(a) Non-Statutory Stock Options.
(b) Incentive Stock Options.
(c) Stock Awards.

4. STOCK SUBJECT TO THE PLAN.
-------------------------

Subject to adjustment as provided in Section 13 of the Plan, the number of
shares reserved for Awards under the Plan is 978,250. Subject to adjustment as
provided in Section 13 of the Plan, the number of shares reserved hereby for
purchase pursuant to the exercise of Options granted under the Plan is 698,750.
The number of the shares reserved for Stock Awards is 279,500. The shares of
Common Stock issued under the Plan may be either authorized but unissued shares
or authorized shares previously issued and acquired or reacquired by the Trustee
or the Holding Company, respectively. To the extent

A-4

that Options and Stock Awards are granted under the Plan, the shares underlying
such Awards will be unavailable for any other use including future grants under
the Plan except that, to the extent that Stock Awards or Options terminate,
expire or are forfeited without having vested or without having been exercised,
new Awards may be made with respect to these shares.

5. ELIGIBILITY.
-----------

Subject to the terms of the Plan, all Employees and Outside Directors
shall be eligible to receive Awards under the Plan.

6. NON-STATUTORY STOCK OPTIONS.
---------------------------

The Committee may, subject to the limitations of the Plan and the
availability of shares of Common Stock reserved but not previously awarded under
the Plan, grant Non-Statutory Stock Options to eligible individuals upon such
terms and conditions as it may determine to the extent such terms and conditions
are consistent with the following provisions:

(a) Exercise Price. The Committee shall determine the Exercise Price of
--------------
each Non-Statutory Stock Option. However, the Exercise Price shall
not be less than 100% of the Fair Market Value of the Common Stock
on the Date of Grant.

(b) Terms of Non-Statutory Stock Options. The Committee shall determine
------------------------------------
the term during which a Participant may exercise a Non-Statutory
Stock Option, but in no event may a Participant exercise a
Non-Statutory Stock Option, in whole or in part, more than ten (10)
years from the Date of Grant. The Committee shall also determine the
date on which each Non-Statutory Stock Option, or any part thereof,
first becomes exercisable and any terms or conditions a Participant
must satisfy in order to exercise each Non-Statutory Stock Option.
The shares of Common Stock underlying each Non-Statutory Stock
Option may be purchased in whole or in part by the Participant at
any time during the term of such Non-Statutory Stock Option, or any
portion thereof, once the Non-Statutory Stock Option becomes
exercisable.

(c) Non-Transferability. Unless otherwise determined by the Committee in
-------------------
accordance with this Section 6(c), an individual may not transfer,
assign, hypothecate, or dispose of a Non-Statutory Stock Option in
any manner, other than by will or the laws of intestate succession.
The Committee may, however, in its sole discretion, permit transfer
or assignment of a Non-Statutory Stock Option, if it determines that
the transfer or assignment is for valid estate planning purposes and
is permitted under the Code and Rule 16b-3 of the Exchange Act. For
purposes of this Section 6(c), a transfer for valid estate planning
purposes includes, but is not limited to, transfers:

(i) to a revocable inter vivos trust, as to which an individual is both
settlor and trustee;

(ii) for no consideration to: (1) any member of the individual's
Immediate Family; (2) a trust solely for the benefit of members of
the individual's Immediate Family; (3) any partnership whose only
partners are members of the individual's Immediate Family; or (4)
any limited liability corporation or other corporate entity whose
only members or equity owners are members of the individual's
Immediate Family; or

(iii) a transfer to the Jefferson Federal Foundation.

A-5

For purposes of this Section 6(c), "Immediate Family" includes, but is not
necessarily limited to, an individual's parents, grandparents, spouse, children,
grandchildren, siblings (including half brothers and sisters), and individuals
who are family members by adoption. Nothing contained in this Section 6(c) shall
be construed to require the Committee to approve the transfer or assignment of
any Non-Statutory Stock Option, in whole or in part. Receipt of the Committee's
approval to transfer or assign a Non-Statutory Stock Option, in whole or in
part, does not mean that the Committee must approve a transfer or assignment of
any other Non-Statutory Stock Option, or portion thereof. The transferee or
assignee of any Non-Statutory Stock Option shall be subject to all terms and
conditions applicable to the Option immediately prior to transfer or assignment,
and shall remain subject to any other conditions proscribed by the Committee
with respect to the Option.

(d) Termination of Employment or Service (General). Unless otherwise
----------------------------------------------
determined by the Committee, upon the termination of a Participant's employment
or other service for any reason other than Retirement, Disability or death, a
Change in Control, or Termination for Cause, the Participant may exercise only
those Non-Statutory Stock Options that were immediately exercisable by the
Participant at the date of such termination and only for a period of three (3)
months following the date of such termination or, if sooner, until the
expiration of the term of the Option.

(e) Termination of Employment or Service (Retirement). In the event of a
-------------------------------------------------
Participant's Retirement, the Participant may exercise only those Non-Statutory
Stock Options that were immediately exercisable by the Participant at the date
of Retirement and only for a period of one (1) year from the date of Retirement
or, if sooner, until the expiration of the term of the Option; PROVIDED,
HOWEVER, that upon the Participant's Retirement, the Committee, in its
discretion, may determine that all unvested Options shall continue to vest in
accordance with the Award Agreement the Participant is immediately engaged in by
the Holding Company or an Affiliate as a consultant or advisor or continues to
serve the Holding Company or an Affiliate as a director, advisory director or
director emeritus.

(f) Termination of Employment or Service (Disability or Death). Unless
----------------------------------------------------------
otherwise determined by the Committee, in the event of the termination of a
Participant's employment or other service due to Disability or death, all
Non-Statutory Stock Options held by such Participant shall immediately become
exercisable and remain exercisable for a period one (1) year following the date
of such termination, or, if sooner, until the expiration of the term of the
Option.

(g) Termination of Employment or Service (Termination for Cause). Unless
------------------------------------------------------------
otherwise determined by the Committee, in the event of a Participant's
Termination for Cause, all rights with respect to the Participant's
Non-Statutory Stock Options shall expire immediately upon the effective date of
such Termination for Cause.

(h) Acceleration Upon a Change in Control. Upon a Change in Control, all
-------------------------------------
Non-Statutory Stock Options held by a Participant as of the date of the Change
in Control shall immediately become exercisable and shall remain exercisable
until the expiration of the term of the Option, regardless of whether the
Participant is employed or in service with the Bank or the Holding Company.

(i) Payment. Payment due to a Participant upon the exercise of a
-------
Non-Statutory Stock Option shall be made in the form of shares of Common Stock.

A-6

7. INCENTIVE STOCK OPTIONS.
-----------------------

The Committee may, subject to the limitations of the Plan and the
availability of shares of Common Stock reserved but unawarded under this Plan,
grant Incentive Stock Options to an Employee upon such terms and conditions as
it may determine to the extent such terms and conditions are consistent with the
following provisions:

(a) Exercise Price. The Committee shall determine the Exercise Price of
--------------
each Incentive Stock Option. However, the Exercise Price shall not be less than
100% of the Fair Market Value of the Common Stock on the Date of Grant;
PROVIDED, HOWEVER, that if at the time an Incentive Stock Option is granted, the
Employee owns or is treated as owning, for purposes of Section 422 of the Code,
Common Stock representing more than 10% of the total combined voting securities
of the Holding Company ("10% Owner"), the Exercise Price shall not be less than
110% of the Fair Market Value of the Common Stock on the Date of Grant.

(b) Amounts of Incentive Stock Options. To the extent the aggregate Fair
----------------------------------
Market Value of shares of Common Stock with respect to which Incentive Stock
Options that are exercisable for the first time by an Employee during any
calendar year under the Plan and any other stock option plan of the Holding
Company or an Affiliate exceeds $100,000, or such higher value as may be
permitted under Section 422 of the Code, such Options in excess of such limit
shall be treated as Non-Statutory Stock Options. Fair Market Value shall be
determined as of the Date of Grant with respect to each such Incentive Stock
Option.

(c) Terms of Incentive Stock Options. The Committee shall determine the
--------------------------------
term during which a Participant may exercise an Incentive Stock Option, but in
no event may a Participant exercise an Incentive Stock Option, in whole or in
part, more than ten (10) years from the Date of Grant; PROVIDED, HOWEVER, that
if at the time an Incentive Stock Option is granted to an Employee who is a 10%
Owner, the Incentive Stock Option granted to such Employee shall not be
exercisable after the expiration of five (5) years from the Date of Grant. The
Committee shall also determine the date on which each Incentive Stock Option, or
any part thereof, first becomes exercisable and any terms or conditions a
Participant must satisfy in order to exercise each Incentive Stock Option. The
shares of Common Stock underlying each Incentive Stock Option may be purchased
in whole or in part at any time during the term of such Incentive Stock Option
after such Option becomes exercisable.

(d) Non-Transferability. No Incentive Stock Option shall be transferable
-------------------
except by will or the laws of descent and distribution and is exercisable,
during his or her lifetime, only by the Employee to whom the Committee grants
the Incentive Stock Option. The designation of a beneficiary does not constitute
a transfer of an Incentive Stock Option.

(e) Termination of Employment (General). Unless otherwise determined by
-----------------------------------
the Committee, upon the termination of a Participant's employment or other
service for any reason other than Retirement, Disability or death, a Change in
Control, or Termination for Cause, the Participant may exercise only those
Incentive Stock Options that were immediately exercisable by the Participant at
the date of such termination and only for a period of three (3) months following
the date of such termination, or, if sooner, until the expiration of the term of
the Option.

(f) Termination of Employment (Retirement). In the event of a
--------------------------------------
Participant's Retirement, the Participant may exercise only those Non-Statutory
Stock Options that were immediately exercisable by the Participant at the date
of Retirement and only for a period of one (1) year from the date of Retirement

A-7

or, if sooner, until the expiration of the term of the Option; PROVIDED,
HOWEVER, that upon the Participant's Retirement, the Committee, in its
discretion, may determine that all unvested Options shall continue to vest in
accordance with the Award Agreement the Participant is immediately engaged in by
the Holding Company or an Affiliate as a consultant or advisor or continues to
serve the Holding Company or an Affiliate as a director, advisory director or
director emeritus. Any Option originally designated as an Incentive Stock Option
shall be treated as a Non-Statutory Stock Option to the extent the Option does
not otherwise qualify as an Incentive Stock Option pursuant to Section 422 of
the Code.

(g) Termination of Employment (Disability or Death). Unless otherwise
-----------------------------------------------
determined by the Committee, in the event of the termination of a Participant's
employment or other service due to Disability or death, all Incentive Stock
Options held by such Participant shall immediately become exercisable and remain
exercisable for a period one (1) year following the date of such termination,
or, if sooner, until the expiration of the term of the Option.

(h) Termination of Employment (Termination for Cause). Unless otherwise
-------------------------------------------------
determined by the Committee, in the event of an Employee's Termination for
Cause, all rights under such Employee's Incentive Stock Options shall expire
immediately upon the effective date of such Termination for Cause.

(i) Acceleration Upon a Change in Control. Upon a Change in Control, all
-------------------------------------
Incentive Stock Options held by a Participant as of the date of the Change in
Control shall immediately become exercisable and shall remain exercisable until
the expiration of the term of the Option, regardless of whether the Participant
is employed or in service with the Bank or the Holding Company.

(j) Payment. Payment due to a Participant upon the exercise of an
-------
Incentive Stock Option shall be made in the form of shares of Common Stock.

(k) Disqualifying Dispositions. Each Award Agreement with respect to an
--------------------------
Incentive Stock Option shall require the Participant to notify the Committee of
any disposition of shares of Common Stock issued pursuant to the exercise of
such Option under the circumstances described in Section 421(b) of the Code
(relating to certain disqualifying dispositions) within 10 days of such
disposition.

8. STOCK AWARDS.
------------

The Committee may make grants of Stock Awards, which shall consist of the
grant of some number of shares of Common Stock, to a Participant upon such terms
and conditions as it may determine to the extent such terms and conditions are
consistent with the following provisions:

(a) Grants of the Stock Awards. Stock Awards may only be made in whole
--------------------------
shares of Common Stock. Stock Awards may only be granted from shares reserved
under the Plan and available for award at the time the Stock Award is made to
the Participant.

(b) Terms of the Stock Awards. The Committee shall determine the dates on
-------------------------
which Stock Awards granted to a Participant shall vest and any terms or
conditions which must be satisfied prior to the vesting of any Stock Award or
portion thereof. Any such terms or conditions shall be determined by the
Committee as of the Date of Grant.

(c) Termination of Employment or Service (General). Unless otherwise
----------------------------------------------
determined by the Committee, upon the termination of a Participant's employment
or service for any reason other than Retirement, Disability or death, a Change
in Control, or Termination for Cause, any Stock Awards in

A-8

which the Participant has not become vested as of the date of such termination
shall be forfeited and any rights the Participant had to such Stock Awards shall
become null and void.

(d) Termination of Employment or Service (Retirement). In the event of a
-------------------------------------------------
Participant's Retirement, any Stock Awards in which the Participant has not
become vested as of the date of Retirement shall be forfeited and any rights the
Participant had to such unvested Stock Awards shall become null and void;
PROVIDED, HOWEVER, that upon the Participant's Retirement, the Committee, in its
discretion, may determine that all unvested Stock Awards shall continue to vest
in accordance with the Award Agreement if the Participant is immediately engaged
by the Holding Company or an Affiliate as a consultant or advisor or continues
to serve the Holding Company or an Affiliate as a director, advisory director,
or director emeritus.

(e) Termination of Employment or Service (Disability or Death). Unless
----------------------------------------------------------
otherwise determined by the Committee, in the event of a termination of the
Participant's service due to Disability or death all unvested Stock Awards held
by such Participant shall immediately vest as of the date of such termination.

(f) Termination of Employment or Service (Termination for Cause). Unless
------------------------------------------------------------
otherwise determined by the Committee, in the event of the Participant's
Termination for Cause, all Stock Awards in which the Participant had not become
vested as of the effective date of such Termination for Cause shall be forfeited
and any rights such Participant had to such unvested Stock Awards shall become
null and void.

(g) Acceleration of Vesting Upon a Change in Control. Upon a Change in
------------------------------------------------
Control, all Stock Awards held by a Participant as of the date of the Change in
Control shall immediately vest and any further restrictions shall lapse.

(h) Issuance of Certificates. Unless otherwise held in Trust and
------------------------
registered in the name of the Trustee, the Holding Company shall cause to be
issued a stock certificate to each Stock Award recipient, registered in the name
of the Stock Award recipient, evidencing such shares; provided, that the Holding
Company shall not cause such a stock certificate to be issued unless it has
received a stock power duly endorsed in blank with respect to such shares. Each
such stock certificate shall bear the following legend:

"The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions (including forfeiture provisions and restrictions against
transfer) contained in the Jefferson Bancshares, Inc. 2004
Stock-Based Incentive Plan and Award Agreement entered into between
the registered owner of such shares and Jefferson Bancshares, Inc.
or its Affiliates. A copy of the Plan and Award Agreement is on file
in the office of the Corporate Secretary of Jefferson Bancshares,
Inc., 120 Evans Avenue, Morristown, Tennessee."

Such legend shall not be removed until the Participant becomes vested in such
shares pursuant to the terms of the Plan and Award Agreement. Each certificate
issued pursuant to this Section 8(h), in connection with a Stock Award, shall be
held by the Holding Company or the Bank, unless the Committee determines
otherwise.

A-9

(i) Non-Transferability. Except to the extent permitted by the Code, the
-------------------
rules promulgated under Section 16(b) of the Exchange Act or any successor
statutes or rules:

A. The recipient of a Stock Award shall not sell, transfer,
assign, pledge, or otherwise encumber shares subject to the
Stock Award until full vesting of such shares has occurred.
For purposes of this section, the separation of beneficial
ownership and legal title through the use of any "swap"
transaction is deemed to be a prohibited encumbrance.

B. Unless determined otherwise by the Committee and except in the
event of the Participant's death or pursuant to a domestic
relations order, a Stock Award is not transferable and may be
earned in his or her lifetime only by the Participant to whom
it is granted. Upon the death of a Participant, a Stock Award
is transferable by will or the laws of descent and
distribution. The designation of a beneficiary shall not
constitute a transfer.

C. If a recipient of a Stock Award is subject to the provisions
of Section 16 of the Exchange Act, shares of Common Stock
subject to such Stock Award may not, without the written
consent of the Committee (which consent may be given in the
Award Agreement), be sold or otherwise disposed of within six
(6) months following the date of grant of the Stock Award.

(j) Treatment of Dividends. Participants are entitled to receive all cash
----------------------
and stock dividends or other distributions declared and paid with respect to
shares underlying a Stock Award. The Committee shall determine when the
dividends or other distributions will be distributed to Participants.

(k) Voting of Stock Awards. Participants are entitled to vote or to
----------------------
direct the Trustee to vote, as the case may be, all shares of Common Stock
underlying a Stock Award subject to the rules and procedures adopted by the
Committee for this purpose and in a manner consistent with the Trust agreement.

(l) Payment. Payment due to a Participant upon the redemption of a Stock
-------
Award shall be made in the form of shares of Common Stock.

9. METHOD OF EXERCISE OF OPTIONS.
-----------------------------

Subject to any applicable Award Agreement, any Option may be exercised by
the Participant in whole or in part at such time or times, and the Participant
may make payment of the Exercise Price in such form or forms permitted by the
Committee, including, without limitation, payment by delivery of cash, Common
Stock or other consideration (including, where permitted by law and the
Committee, Awards) having a Fair Market Value on the day immediately preceding
the exercise date equal to the total Exercise Price, or by any combination of
cash, shares of Common Stock and other consideration, including exercise by
means of a cashless exercise arrangement with a qualifying broker-dealer, as the
Committee may specify in the applicable Award Agreement.

10. RIGHTS OF PARTICIPANTS.
----------------------

No Participant shall have any rights as a shareholder with respect to any
shares of Common Stock covered by an Option until the date of issuance of a
stock certificate for such Common Stock.

A-10

Nothing contained herein or in any Award Agreement confers on any person any
right to continue in the employ or service of the Holding Company or an
Affiliate or interferes in any way with the right of the Holding Company or an
Affiliate to terminate a Participant's services.

11. DESIGNATION OF BENEFICIARY.
--------------------------

A Participant may, with the consent of the Committee, designate a person
or persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by and
delivered to the Holding Company and may be revoked in writing. If a Participant
fails effectively to designate a beneficiary, then the Participant's estate will
be deemed to be the beneficiary.

12. DILUTION AND OTHER ADJUSTMENTS.
------------------------------

In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, or in the event an
extraordinary capital distribution is made, the Committee may make such
adjustments to previously granted Awards, to prevent dilution, diminution, or
enlargement of the rights of the Participant, including any or all of the
following:

(a) adjustments in the aggregate number or kind of shares of Common
Stock or other securities that may underlie future Awards under the
Plan;

(b) adjustments in the aggregate number or kind of shares of Common
Stock or other securities underlying Awards already made under the
Plan;

No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All Awards under
this Plan shall be binding upon any successors or assigns of the Holding Company
and the Bank.

13. TAXES.
-----

Whenever, under this Plan, cash or shares of Common Stock are to be
delivered upon exercise or payment of an Award or any other event with respect
to rights and benefits hereunder, the Committee shall be entitled to require as
a condition of delivery (i) that the Participant remit an amount sufficient to
satisfy all federal, state, and local withholding tax requirements related
thereto, (ii) that the withholding of such sums come from compensation otherwise
due to the Participant or from any shares of Common Stock due to the Participant
under this Plan or (iii) any combination of the foregoing; PROVIDED, HOWEVER,
that no amount shall be withheld from any cash payment or shares of Common Stock
relating to an Award which was transferred by the Participant in accordance with
this Plan. Furthermore, Participants may direct the Committee to instruct the
Trustee to sell shares of Common Stock to be delivered upon the payment of an
Award to satisfy tax obligations.

A-11

14. NOTIFICATION UNDER SECTION 83(b).
--------------------------------

The Committee may, on the Date of Grant or any later date, prohibit a
Participant from making the election described below. If the Committee has not
prohibited such Participant from making such election, and the Participant
shall, in connection with the exercise of any Option, or the grant of any Stock
Award, make the election permitted under Section 83(b) of the Code, such
Participant shall notify the Committee of such election within 10 days of filing
notice of the election with the Internal Revenue Service, in addition to any
filing and notification required pursuant to regulations issued under the
authority of Section 83(b) of the Code.

15. AMENDMENT OF THE PLAN AND AWARDS.
--------------------------------

(a) Except as provided in paragraph (c) of this Section 15, the Board of
Directors may at any time, and from time to time, modify or amend the Plan in
any respect, prospectively or retroactively; PROVIDED, HOWEVER, that provisions
governing grants of Incentive Stock Options shall be submitted for shareholder
approval to the extent required by law, regulation or otherwise. Failure to
ratify or approve amendments or modifications by shareholders shall be effective
only as to the specific amendment or modification requiring such ratification or
approval. Other provisions of this Plan will remain in full force and effect. No
such termination, modification or amendment may adversely affect the rights of a
Participant under an outstanding Award without the written permission of such
Participant.

(b) Except as provided in paragraph (c) of this Section 15, the Committee
may amend any Award Agreement, prospectively or retroactively; PROVIDED,
HOWEVER, that no such amendment shall adversely affect the rights of any
Participant under an outstanding Award without the written consent of such
Participant.

(c) In no event shall the Board of Directors amend the Plan or shall the
Committee amend an Award Agreement in any manner that has the effect of:

(i) Allowing any Option to be granted with an Exercise Price below
the Fair Market Value of the Common Stock on the Date of
Grant.

(ii) Allowing the Exercise Price of any Option previously granted
under the Plan to be reduced subsequent to the Date of Award.

16. EFFECTIVE DATE OF PLAN.
----------------------

The Incentive Plan shall become effective upon shareholder approval.

17. TERMINATION OF THE PLAN.
-----------------------

The right to grant Awards under the Plan will terminate upon the earlier
of: (i) ten (10) years after the Effective Date; or (ii) the issuance of a
number of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards is equivalent to the maximum number of shares
reserved under the Plan as set forth in Section 4 hereof. The Board of Directors
has the right to suspend or terminate the Plan at any time, provided that no
such action will, without the consent of a Participant, adversely affect a
Participant's vested rights under a previously granted Award.

A-12

18. APPLICABLE LAW.
--------------

The Plan will be administered in accordance with the laws of the State of
Tennessee.

19. COMPLIANCE WITH FEDERAL REGULATIONS.
-----------------------------------

This Plan will comply with the requirements set forth in 12 CFR 563b-500.

A-13

APPENDIX B

JEFFERSON BANCSHARES, INC.
AUDIT/COMPLIANCE COMMITTEE CHARTER

ORGANIZATION

The primary function of the Audit/Compliance Committee (the "Audit
Committee") of the Board of Directors (the "Board") of Jefferson Bancshares,
Inc. (the "Company ") is to review: the integrity of the financial reports and
other financial information provided by the Company to any governmental body or
the public, including any certification, report, opinion or review performed by
the Company's independent accountants; the Company's compliance with legal and
regulatory requirements; the independent accountant's qualifications and
independence; the performance of the Company's internal audit functions, its
independent accountants and system of internal controls and disclosure
procedures regarding finance, accounting, legal compliance and ethics that
management and the Board have established; the Company's auditing, accounting
and financial reporting processes generally; and the preparation of information
required by the Securities and Exchange Commission rules to be included in the
Comany's annual proxy statement.

The Audit Committee will be comprised of three or more directors as
determined by the Board each of whom shall satisfy the definition of independent
director as defined in any qualitative listing requirements for Nasdaq Stock
Market, Inc. issuers and any applicable Securities and Exchange Commission rules
and regulations. All members of the Audit Committee must be financially literate
at time of appointment, meaning they must have the ability to read and
understand fundamental financial statements, including the Company's balance
sheet, income statement and cash flow statement. In addition, at least one
member of the Audit Committee shall have past employment in finance or
accounting, requisite professional certification in accounting, or any other
comparable experience or background which results in the individual's financial
sophistication, including having been a chief executive officer, chief financial
officer or other senior officer with financial oversight responsibilities. The
members of the Audit Committee will be elected by the Board on an annual basis.

RESPONSIBILITIES

In carrying out its responsibilities, the Audit Committee believes its
policies and procedures should remain flexible, in order to best react to
changing conditions and to ensure to the directors and shareholders that the
corporate accounting and reporting practices of the Company are in accordance
with all requirements and are of the highest quality. To fulfill its
responsibilities and duties the Audit Committee shall:

1. Provide an open avenue of communication between management, the
independent auditor, internal audit department and the Board.

2. Meet four times per year or more frequently as circumstances may require.
A quorum of the Audit Committee shall be declared when a majority of the
appointed members of the Audit Committee are in attendance.

3. The Audit Committee shall meet with the independent auditors and
management at least quarterly to review the Company's financial
statements. In meetings attended by the independent auditors or by
regulatory examiners, a portion of the meeting will be reserved for the
Audit Committee to meet in closed session with these parties.

B-1

4. Keep written minutes shall for all meetings.

5. Review with the independent auditor and internal audit department the work
to be performed by each to assure completeness of coverage, reduction of
redundant efforts and the effective use of audit resources.

6. Review all significant risks or exposures to the Company found during
audits performed by the independent auditor and internal audit department
and ensure that these items are discussed with management. From these
discussions, assess and report to the Board regarding how the findings
should be addressed.

7. Review recommendations from the independent auditor and internal auditing
department regarding internal controls and other matters relating to the
accounting policies and procedures of the Company.

8. Following each meeting of the Audit Committee, the chairman of the
committee will submit a record of the meeting to the Board including any
recommendations that the Committee may deem appropriate.

9. Ensure that the independent auditor discusses with the Audit Committee
their judgments about the quality, not just the acceptability, of the
Company's accounting principles as applied in the financial reports. The
discussion should include such issues as the clarity of the Company's
financial disclosures and degree of aggressiveness or conservatism of the
Company's accounting principles and underlying estimates and other
significant decisions made by management in preparing the financial
disclosures.

10. Review the Company's audited annual financial statements and the
independent auditor's opinion regarding such financial statements,
including a review of the nature and extent of any significant changes in
accounting principles.

11. Arrange for the independent auditor to be available to the full Board at
least annually to discuss the results of the annual audit and the audited
financial statements that are a part of the annual report to shareholders.

12. Review with management, the independent auditor, internal audit department
and legal counsel, legal and regulatory matters that may have a material
impact on the financial statements.

13. Review with management and the independent auditor all interim financial
reports filed pursuant to the Securities Exchange Act of 1934.

14. Generally discuss earnings press releases and financial information as
well as earnings guidance provided to analysts and rating agencies.

15. Select the independent auditor, considering independence and
effectiveness, and be ultimately responsible for their compensation,
retention and oversight (including resolution of disagreements between
management and the auditor regarding financial reporting) for the purpose
of preparing or issuing an audit report or related work, and each such
registered public accounting firm shall report directly to the audit
committee. The Audit Committee should confirm the independence of the
independent auditor by requiring them to disclose in writing all

B-2

relationships that, in the auditor's professional judgment, may reasonably
be thought to bear on the ability to perform the audit independently and
objectively.

16. Review the performance of the independent auditor.

17. Review the activities, organizational structure and qualifications of the
internal audit department. The Audit Committee should also review and
concur in the appointment, replacement, reassignment, or dismissal of the
manager of the internal audit department.

18. Be authorized to retain independent counsel and other advisors as it deems
necessary to carry out its duties. In connection therewith, the Audit
Committee shall be provided appropriate funding, as determined by the
Audit Committee, for payment to such counsel and other advisors. In
addition, the Audit Committee shall be provided funding for ordinary
administrative expenses of the Audit Committee.

19. Have in place procedures for (1) receiving, retaining and treating
complaints regarding accounting, internal accounting controls, or auditing
matters, and (2) the confidential, anonymous submission by employees of
concerns regarding questionable accounting or auditing matters.

20. Approve, in advance, all permissible non-audit services to be completed by
the independent auditor. Such approval process will ensure that the
independent auditor does not provide any non-audit services to the Company
that are prohibited by law or regulation.

21. Set clear hiring policies for hiring employees or former employees of the
independent auditors.

22. Review and approve all related-party transactions.

In addition to the responsibilities presented above, the Audit Committee
will examine this Charter on an annual basis to assure that it remains adequate
to address the responsibilities that the Committee has. Further, the Committee
will disclose in each annual proxy statement to it's shareholders whether it
satisfied the responsibilities during the prior year in compliance with the
Charter, and will disclose a copy of the Charter triennially either in the
annual report to shareholders or proxy statement.

Adopted October 23, 2003.

B-3

|X| PLEASE MARK VOTES
AS IN THIS EXAMPLE

JEFFERSON BANCSHARES, INC.

ANNUAL MEETING OF SHAREHOLDERS
JANUARY 8, 2004
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD
OF DIRECTORS

The undersigned hereby appoints Dr. Jack E. Campbell and H. Scott Reams, each of
them, with full power of substitution, to act as proxy for the undersigned and
to vote all shares of common stock of Jefferson Bancshares, Inc. that the
undersigned is entitled to vote at the annual meeting of shareholders, to be
held on January 8, 2004 at 2:00 p.m. local time, in the Independence Room of
Jefferson Federal Bank at 120 Evans Avenue, Morristown, Tennessee and at any and
all adjournments thereof, as indicated on this proxy card.

1. The election as directors of all nominees VOTE
listed (except as marked to the contrary FOR WITHHELD EXCEPTIONS
below). /_/ /_/ /_/

DR. TERRY M. BRIMER, H. SCOTT REAMS, WILLIAM T. HALE, JOHN MCCRAY, JR.,
DR. JACK E. CAMPBELL, ANDERSON L. SMITH AND WILLIAM F. YOUNG

INSTRUCTION: To withhold authority to vote for any individual nominee, mark the
"EXCEPTIONS" box and write that nominee's name on the line provided below.

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

FOR AGAINST ABSTAIN
2. The approval of the Jefferson Bancshares, /_/ /_/ /_/
Inc. 2004 Stock-Based Incentive Plan.

FOR AGAINST ABSTAIN
3. The ratification of the appointment of /_/ /_/ /_/
Craine, Thompson & Jones, P.C. as
independent auditors of Jefferson
Bancshares, Inc. for the year ending June 30, 2004.

YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
PROPOSALS 1, 2 AND 3.

THIS PROXY, WHEN PROPERLY EXECUTED AND RETURNED, WILL BE VOTED AS DIRECTED BY
THE UNDERSIGNED SHAREHOLDER. IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL
BE VOTED "FOR" ALL OF THE PROPOSALS LISTED. THIS PROXY ALSO CONFERS
DISCRETIONARY AUTHORITY TO VOTE WITH RESPECT TO THE ELECTION OF ANY PERSON AS
DIRECTOR WHERE THE NOMINEES ARE UNABLE TO SERVE OR FOR GOOD CAUSE WILL NOT SERVE
AND WITH RESPECT TO ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE ANNUAL
MEETING OR ANY ADJOURNMENT THEREOF.

------------------------------------
Please be sure to sign and date Date
this Proxy in the box below.
- ------------------------------------------------------------------------

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

DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE-PAID ENVELOPE PROVIDED.
JEFFERSON BANCSHARES, INC.

- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
The above signed acknowledges receipt from the Company prior to the execution
of this proxy of a notice of annual meeting of shareholders and of a proxy
statement and of the annual report to shareholders.
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
- --------------------------------------------------------------------------------
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED
BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.

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

Jefferson Federal Bank Letterhead

Dear ESOP Participant:

On behalf of the Board of Directors, I am forwarding to you a BLUE vote
authorization form and a Notice and Proxy Statement for the Annual Meeting of
Shareholders of Jefferson Bancshares, Inc. to be held on January 8, 2004. As an
ESOP participant you are entitled to instruct Eastern Bank (the "ESOP Trustee")
how to vote the shares of Jefferson Bancshares, Inc. common stock ("Common
Stock") allocated to your account in the ESOP. As of November 13, 2003, the
record date for shareholders entitled to vote at the Annual Meeting, no shares
of Common Stock held in the ESOP Trust had been allocated to participants'
accounts. However, for the sole purpose of providing the ESOP Trustee with
voting instructions, you will be deemed to have one share of Common Stock
allocated to your account. To direct the ESOP Trustee how to vote the share of
Common Stock deemed allocated to your ESOP account, please complete and sign the
enclosed BLUE vote authorization form and return it in the enclosed postage-paid
envelope no later than December 31, 2003. The unallocated shares of Common Stock
held in the ESOP Trust and the shares for which timely instructions are not
received will be voted by the ESOP Trustee in a manner calculated to most
accurately reflect the instructions the ESOP Trustee receives from participants
regarding the shares of Common Stock deemed allocated to their accounts,
subject to the Employee Retirement Income Security Act of 1974.

Your vote will not be revealed, directly or indirectly, to any officer,
employee or director of Jefferson Bancshares, Inc. or Jefferson Federal Bank.

Sincerely,

/s/ Anderson L. Smith

Anderson L. Smith
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Name:____________________
Shares: 1 share

VOTE AUTHORIZATION FORM

I understand that Eastern Bank, the ESOP Trustee, is the holder of record
and custodian of all shares of Jefferson Bancshares, Inc. (the "Company") common
stock under the Jefferson Federal Bank Employee Stock Ownership Plan. I
understand that my voting instructions are solicited on behalf of the Company's
Board of Directors for the Annual Meeting of Shareholders to be held on January
8, 2004.

You are to vote my share as follows:

(1) The election as directors of all nominees listed (except as marked to the
contrary below).

Dr. Terry M. Brimer, H. Scott Reams, William T. Hale, John F. McCrary, Jr.,
Dr. Jack E. Campbell, Anderson L. Smith and William F. Young

VOTE
FOR WITHHELD EXCEPTIONS
--- -------- ----------

/_/ /_/ /_/

INSTRUCTION: To withhold authority to vote for any individual nominee, mark the
"EXCEPTIONS" box and write that nominee's name on the line provided below.

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

(2) The approval of the Jefferson Bancshares, Inc. 2004 Stock-Based Incentive
Plan.

FOR AGAINST ABSTAIN
--- ------- -------

/_/ /_/ /_/

(3) The ratification of the appointment of Craine, Thompson & Jones, P.C. as
independent auditors of Jefferson Bancshares, Inc. for the year ending
June 30, 2004.

FOR AGAINST ABSTAIN
--- ------- -------

/_/ /_/ /_/

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2 AND 3.

The ESOP Trustee is hereby authorized to vote the share deemed allocated
to me in its trust capacity as indicated above.

------------------------- ----------------------------
Date Signature

PLEASE DATE, SIGN AND RETURN THIS FORM IN THE ENCLOSED POSTAGE-PAID ENVELOPE NO
LATER THAN DECEMBER 31, 2003.

Jefferson Federal Bank Letterhead

Dear 401(k) Plan Participant:

On behalf of the Board of Directors, I am forwarding to you a GREEN vote
authorization form and a Notice and Proxy Statement for the Annual Meeting of
Shareholders of Jefferson Bancshares, Inc. to be held on January 8, 2004. As a
holder of Jefferson Bancshares, Inc. common stock under the Jefferson Federal
Bank Employees' Savings & Profit Sharing Plan and Trust (the "401(k) Plan"), you
are entitled to direct the Bank of New York (the "Stock Fund Trustee") how to
vote the shares of Jefferson Bancshares, Inc. common stock ("Common Stock")
credited to your account as of November 13, 2003, the record date for
shareholders entitled to vote at the Annual Meeting. To do so, please complete
and sign the enclosed GREEN vote authorization form and return it in the
accompanying postage-paid envelope by December 31, 2003.

The Stock Fund Trustee will vote all shares of Common Stock for which no
directions are given or for which timely instructions were not received in a
manner calculated to most accurately reflect the instructions received from
participants regarding shares of Common Stock credited to their 401(k) Plan
accounts.

Your vote will not be revealed, directly or indirectly, to any officer,
employee or director of Jefferson Bancshares, Inc. or Jefferson Federal Bank.

Sincerely,

/s/ Anderson L. Smith

Anderson L. Smith
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Name:
------------------------
Shares:
-----------------------

VOTE AUTHORIZATION FORM
-----------------------

I understand that the Bank of New York, the Stock Fund Trustee, is the
holder of record and custodian of all shares of Jefferson Bancshares, Inc. (the
"Company") common stock credited to me under the Jefferson Federal Bank 401(k)
Plan. I understand that my voting instructions are solicited on behalf of the
Company's Board of Directors for the Annual Meeting of Shareholders to be held
on January 8, 2004.

You are to vote my shares as follows:

(1) The election as directors of all nominees listed (except as marked to the
contrary below).

Dr. Terry M. Brimer, H. Scott Reams, William T. Hale, John F. McCrary, Jr.,
Dr. Jack E. Campbell, Anderson L. Smith and William F. Young

VOTE
FOR WITHHELD EXCEPTIONS
--- -------- ----------

/_/ /_/ /_/

INSTRUCTION: To withhold authority to vote for any individual nominee, mark the
"EXCEPTIONS" box and write that nominee's name on the line provided below.

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

(2) The approval of the Jefferson Bancshares, Inc. 2004 Stock-Based Incentive
Plan.

FOR AGAINST ABSTAIN
--- ------- -------

/_/ /_/ /_/

(3) The ratification of the appointment of Craine, Thompson & Jones, P.C. as
independent auditors of Jefferson Bancshares, Inc. for the year ending
June 30, 2004.

FOR AGAINST ABSTAIN
--- ------- -------

/_/ /_/ /_/

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2 AND 3.

The Stock Fund Trustee is hereby authorized to vote the shares credited to
me in its trust capacity as indicated above.

------------------------- ----------------------------
Date Signature

PLEASE DATE, SIGN AND RETURN THIS FORM IN THE ENCLOSED POSTAGE-PAID ENVELOPE NO
LATER THAN DECEMBER 31, 2003.